The Dangerous Risk Building In Stocks

LIVESTREAM/PROPIETARY REPORT

The livestream today broke down the dangerous risk building in US equities, WHY record valuations make stocks hypersensitive to macro liquidity, and HOW the yen carry trade sits underneath the entire rally.

Main takeaways from the macro playbook section:

• The S&P 500 is trading at some of the highest valuations in history, but high valuations alone do not cause crashes. Crashes come from asset liability mismatches when positioning gets too aggressive, so the valuation level is a sensitivity reading, not a sell signal.

• Decomposing index returns shows the majority of S&P moves over the last two years, and especially year-to-date, came from valuation expansion rather than earnings. Valuations are driven by macro liquidity, the quantity of money in the system and the price of money, which is WHY the pullback earlier this year was valuation contraction and a buying opportunity, not an earnings event.

• At these valuation levels the system is hypersensitive: a small contraction in macro liquidity that would barely register in a normal regime can now produce a 10% index move in either direction, because the base of money supporting prices is so excessive.

• Tech is the entire market. The S&P is up nearly 20% over six months and 11 points of that came from tech alone, yet everyone staring at NVIDIA and GPU credit risk is missing the bigger macro liquidity question. NVIDIA's pullbacks have been driven by the market and the sector, not its fundamentals, and compute financialization, with NVIDIA moving to guarantee residual GPU value and own the market around its own product, only deepens the monopoly.

• The carry trade is the quantity of money channel feeding this market. A falling yen has funded yen-denominated leverage into US equities, and Aussie yen and peso yen grinding higher confirm capital is moving out the risk curve. If the carry trade unwinds, it does not matter how strong CapEx or NVIDIA earnings are: even a modest pop in the yen can drive a 10% equity drawdown, and the 2024 unwind took the Nikkei down 27% peak to trough.

• Cross asset covariance is falling, which means the market is shaking off every shock, but the tails are compressing. VIX rising alongside ES making new highs is short covering and hedges getting cooked, and it signals the probability of an extreme move is increasing even as the index melts up.

You can find the free recording on the Equity Risk Playbook here in the YouTube video:

The member section connects this framework to the live regime and positioning, with the recording linked at the bottom of this report.

Macro Decks From today's stream:

• All slide decks by Jaymes: LINK

Tomorrow's Livestream: WHEN WILL THE BOND MARKET STOP CRASHING?

The thirty-year just auctioned at 5.21%, the highest yield in a quarter century, and the question now is WHEN the bond market stops crashing. The stream will map the drivers of the long-end selloff, what a durable bottom in bonds actually requires, and the signals that mark capitulation.

Paid subscribers can join the livestream with this link (the first half will be free and streamed to Twitter and YouTube, where the second half will only be available on Substack for paid subscribers):

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Proprietary Report On The Dangerous Risk Building In Stocks