Pair Trades and Derivative Expressions for the Next Leg
Why capital is moving out the risk curve, where the short squeezes are setting up, and why real estate is breaking every 2008 comparison narrative
The tape came in today exactly the way I laid out on Friday. Russell is leading, the GS High Yield Debt Sensitivity index is at new highs, the most-shorted index is breaking out, gold and silver are consolidating for the next leg, and real estate is refusing to crack despite every “credit cycle is contracting” take on Twitter. Today, I walked through the full pair trade and derivative expression map for where capital is moving next, including the specific sector-by-sector short interest names in the Russell that are setting up for squeeze trades. Tomorrow I will go deeper into real estate in the macro context, because the XLRE setup right now is directly disproving the 2008 comparison narrative and creating a specific positioning opportunity across REITs, homebuilders, and commercial real estate.
LIVESTREAM RECORDING FROM TODAY:
Today’s Livestream: Main Talking Points
1. We are at all-time highs in human history for equity valuations, not just prices. That distinction determines everything. The S&P price-to-sales deviation bands show we are above the 2021 peak on valuation multiples (all charts in the slide deck below). The 2022 bear market was a valuation re-rating driven by inflation and Fed hiking, not a recession or earnings contraction. Post-2022 we have had both earnings expansion and valuation expansion stacking on top of each other. This is the setup where liquidity becomes the single most important variable to track, because valuation multiples at these levels are hyper-sensitive to any shift in the liquidity regime. The valuation level is not the sell signal. A change in liquidity is the sell signal.
2. The Goldman Sachs High Yield Debt Sensitivity Index just made new highs. That is the cleanest refutation of the “liquidity is contracting” narrative in the market. By definition, the companies with the most leverage and the highest sensitivity to high yield debt cannot be making new highs while liquidity is contracting. That is not a matter of interpretation. It is a matter of definition. Every take circulating on Twitter right now that says liquidity is contracting has been falsified by that single chart. Connect your view to price action or admit the view is wrong.
3. The Fed is pricing a full pause across April, June, July, and into September. The Z6 contract is at nine basis points of cuts for the year. That is functionally a hold. We went from 75bps of cuts priced, to 50, to 25, then into the capitulation where the market briefly priced hikes. Now we are back to 9bps of cuts, oscillating between a pause and 25bps. The Fed is threading the needle on supply-side inflation rather than hiking into it, which is exactly what allows capital to continue moving out the risk curve. How Warsh plays it when he comes in will determine whether this oscillates higher or lower from here.
4. The capex rotation has moved past Nvidia into second and third order beneficiaries. EQIX just ripped to new highs with barely a pullback. Nvidia has been lagging because the market already priced that leg. Capital is now moving into data center REITs, electrical equipment, utilities connected to the AI build-out, and the companies in the Russell that actually receive the capex transfer. The Russell is outperforming for a structural reason: the Mag 7 companies are spending nearly a trillion dollars of capex and they are not building data centers themselves. They are paying Russell-weighted companies to build them. That capital transfer is why the low-quality Russell 3000 stocks are bid, not short-squeeze mechanics alone.
5. The most-shorted index is on the verge of breaking out to new highs and setting up a 2021-style positioning unwind. The GS Most Shorted rolling index is printing higher highs. AMC has bid from the lows. GameStop has ticked up. I would not be surprised to see GameStop trade up to 30-35 dollars. This is not the 2021 cycle repeating with the same names. It is the same positioning mechanic playing out in the specific stocks that have been shorted into the current cycle, which means the Russell names with the highest short interest across consumer discretionary, communications, financials, technology, utilities, and industrials.
6. Cross-border flows are still the dominant liquidity channel. The G10 carry trade index just made another high. The global carry trade rising is capital moving out the risk curve on an international basis. Investors are borrowing in low-rate currencies, converting, and bidding risk assets. That is the structural force funding the melt-up beyond what US domestic liquidity alone could produce. This is why the DXY continues to bleed against EUR, GBP, AUD, and the peso. The EUR setup at these levels is one of the cleanest long entries I have flagged this cycle. Same with the pound, the Aussie, and the peso. EWW and EWZ still look like great opportunities on the equity side of that flow.
7. Gold and silver detached from real rates because global trade rebalancing took over as the dominant driver. In the prior regime, gold moved in lockstep with real interest rates. That relationship broke this cycle. The reason is that global trade rebalancing and FX flows are now structurally larger inputs to gold and silver than real rates alone. Gold did not bid on geopolitical risk during the Iran/Strait of Hormuz shock, which told me it had flipped its primary sensitivity to equity beta and the credit cycle. When the dollar topped and the capitulation finished, gold and silver bottomed exactly where the dollar rolled over. The setup from here is clean: DXY making new lows into Warsh, metal beta continuing to bid, and the entire metals complex melting up with equities rather than against them.
8. The Nikkei is in the same melt-up scenario as the US, and the DAX is the next setup to watch. The BOJ is allowing real rates to be negative and the Ministry of Finance is spending into one of the hottest economies Japan has ever had. Those factors alone are enough to keep the Nikkei in melt-up mode. The DAX and Euro Stocks have not made new all-time highs yet, but vol has crushed and call skew is rising. If any geopolitical risk gets expressed overnight in European indices, I am a buyer of any dip there. Same logic applies to the Nikkei on any consolidation.
Slide Deck and Playbooks
Slide deck from today:
All of the credit cycle research:
The Melt-Up Trigger: The Playbook For The Credit Cycle Melt Up
Cross-Border Flows, the Dollar Devaluation, and the Global Trade Rebalancing
All educational primers on credit risk, duration risk, the yield curve regime model, and the equity risk curve are free here:
![[FREE] Educational Primers On Every Aspect Of Macro & Markets](https://substackcdn.com/image/fetch/$s_!tfas!,w_140,h_140,c_fill,f_webp,q_auto:good,fl_progressive:steep,g_auto/https%3A%2F%2Fsubstack-post-media.s3.amazonaws.com%2Fpublic%2Fimages%2F69c49472-3d63-47f0-9b8c-2a682fa625f1_1024x1024.jpeg)
Real Estate, Mortgage Rates, and the Second Leg of the Credit Cycle
Tomorrow I map real estate in the full macro context. Why XLRE making new highs is refuting every 2008 comparison circulating right now, how the ITB and XLRE divergence tells you where capital is actually flowing, and how the real estate setup connects to the broader credit cycle melt-up through mortgage rate dynamics and household balance sheets.
TOMORROW’S LIVESTREAM: LINK
For Paid Subscribers: Tonight’s Positioning Report
Keep reading with a 7-day free trial
Subscribe to Capital Flows to keep reading this post and get 7 days of free access to the full post archives.