The Misunderstood Market: Stagflation and Macro Liquidity
What commodity vol, CPI internals, and Treasury repricing are telling you that consensus is missing
The Misunderstood Market: Stagflation and Macro Liquidity
Something is happening in the macro regime right now that most market participants are either ignoring or misreading. I spent today’s livestream walking through five interconnected themes that I think are getting underpriced. Below are the main talking points with all the charts and models. Scroll past those for what I am covering tomorrow and what is coming for paid subscribers tonight.
LIVESTREAM RECORDING FROM TODAY: LINK
Today’s Livestream: Main Talking Points (3 min read)
1. Crude implied vol is not telling the same story as spot. The spot price of WTI is back near highs, but call skew is not spiking the way it did on the first two moves up. Vol is elevated but the premium structure has changed. That matters because the positioning behavior around crude right now is connected to hedging activity. Large allocators who are long-duration or running inflation-sensitive portfolios are using crude calls to hedge geopolitical risk rather than expressing directional conviction on the barrel. That is a different signal than outright bullish crude positioning.
2. The WTI-Brent spread is now at its widest since 2008. This is not just a number. The spread between these two contracts maps physical market dislocations in real time. A spread this wide reflects a real supply and demand imbalance in how crude is priced across geographies. Traders watching this spread are watching something the spot price does not tell you.
3. CPI this week is a clearing event, and core is the variable that matters. Headline CPI is expected to come in at 3.4% year over year. Core is expected to accelerate from 2.5% to 2.7%. The question that will actually move markets is not whether headline comes in hot. Everyone already knows headline is going to be hot because of energy. The real question is how much of the crude price impulse is transmitting into core. That transmission rate determines how much optionality the Fed has for the rest of the year. If core comes in below expectations, a significant amount of hedging activity unwinds very fast.
4. Long-term inflation expectations are not rising. That is the key difference from 2022. In 2022, when the Fed was forced to hike aggressively, you had long-term inflation swaps moving up alongside short-term. That reflected a demand-driven inflationary impulse. Right now, one-year swaps have moved up with crude but five and ten-year swaps have barely moved. That is the structural reason why the Fed is not hiking this year even though the forward curve briefly priced a 25bps hike last week. The market corrected that quickly. Watch the Z6 contract. If it spikes back up toward that level this week, that is a fade.
5. Treasury vol is spiking but the setup is for a positioning unwind, not a continuation. 10Y futures vol has surged. That is not a breakout signal. It is a reflection of hedging pressure in the rates market ahead of CPI and whatever happens with the Iran situation tonight. The covariance between stocks, rates, and the dollar has been weakening over the last week. That weakening is the signal that the macro impulse is losing momentum. Mean reversion becomes the higher probability setup from here, not continuation of the regime.
6. EURUSD is pricing a lot of bad news that may not materialize. The Euro has sold off hard because Europe is a net energy importer. When crude spikes, Europe faces an inflation shock that the US does not face in the same way because the US is a net exporter. Put skew in EURUSD has blown out to extremes. If tonight does not produce further escalation and CPI does not come in catastrophically hot on core, the unwind in EURUSD positioning could be sharp. The pair is already showing signs of stabilization at these levels.
7. Real interest rates are the actual macro liquidity signal. One-year real rates have been falling. That is the single most important thing happening in the plumbing of the system right now because falling real rates inject liquidity even without a Fed cut. Five and ten-year real rates are still elevated but the short end is loosening. If this continues into a cleaner macro environment post-CPI, it creates the setup for a significant equity bid, particularly in rate-sensitive segments of the market.
8. The pair trade that makes sense here is long stocks, short bonds. The regime where stocks are down, rates are up, and the dollar is up only occurs about 10% of the time historically. We are in it now and the correlation structure is weakening. The long stocks short bonds trade captures the asymmetry in how these unwind. Gold long, bonds short is the other expression. Russell has been outperforming the S&P this week for a reason. The DAX is also worth watching for a long entry on any intraday dump into macro clearing events.
[SLIDE DECK]
Tomorrow: Capital Flows | Equity Dispersion and the Rotation - Mag7, Oracle, and OpenAI
Livestream: Daily at 11:30am EST - We are in such a critical time in the macro and AI endgame that I will be doing a livestream every day of the week at 11:30am EST.
The equity selloff is being read as recession risk-off. That is the wrong frame. Tomorrow I am walking through why this is a rotation and microstructure story, where the crowded positioning was coming into this move, and where the opportunity sits for the next 30 to 60 days.
TOMORROW’S LIVESTREAM: LINK
For Paid Subscribers: The Positioning Report
About an hour after I ended the livestream today, news came across the tape that unwound A TON of the geopolitical premium in the market.
This is exactly in line with the flows I have been laying out for paid subscribers, as well as my comments in the livestream today.
Last week, I made a very clear note that positioning was way too aggressive for the geopolitical risk premia in markets. I noted that the Russell was the best way to express this (link):
The Russell is now outperforming ES and NQ on the news. Understanding these flows are one of THE main things I will be covering in the livestream tomorrow:
As crude as fallen, gold and silver have bid in lockstep with the views I have been laying out in the subscriber chat:
Gold and silver are now bidding on geopolitical risk decreasing. Doesn’t make any sense? People said metals are supposed to bid on geopolitical risk? This is a very narrow view of the drivers of gold as well as the positioning premiums around it. This is going to be THE dynamic I explain below.
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