Ep.108 Real Conversations: Market Risks + Opportunities | Mike Green & Mike Taylor w/ Keith McCullough
Dec 12, 2023
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Credit card delinquency and national debt are increasing. The economy is due for a correction. Keith McCullough is joined by Mike Green and Mike Taylor to discuss market risks and opportunities for 2023. They explore the lack of buying protection by institutional investors and the significance of liquidity in the market. They also analyze the impact of fund flows on market dynamics and discuss early signs of a recession and hedging strategies.
Institutional investors are focused on reducing hedging costs through put spreads and are not actively buying protection.
There is a dispersion of performance among mega-cap stocks, leading to portfolio rotations and reassessment of market risks.
Concerns about liquidity and potential risks in the market due to expanded liquidity and the use of zero-data expiry options for hedging short-term events.
Deep dives
Lack of interest in buying protection
Institutional investors are showing an extraordinary lack of interest in buying protection, with most protection being bought in the form of put spreads. This trend is driven by a desire to reduce the cost of hedging and keep up with the market's upward momentum.
Rotations and the dispersion of mega-cap stocks
There is a significant dispersion of performance among mega-cap stocks, with a select number of stocks outperforming while many others are underperforming. This has led to a rotation in portfolios as investors reevaluate their exposure to mega-caps and consider the risks associated with the wider market.
Liquidity and potential risks
There are concerns about liquidity and the potential risks associated with it in the market. The expansion of liquidity, fueled by factors such as Treasury borrowing, has driven down volatility and created an environment where investors are not seeing the potential risks. Additionally, the use of zero-data expiry options has allowed investors to hedge short-term events without creating significant positioning for systemic risks. However, there are concerns about the ability of the market to absorb volatility if it were to emerge.
The Impact of Government Spending and Liquidity Dynamics
The podcast episode discusses the impact of government spending and liquidity dynamics on the economy. It emphasizes the significant increase in government spending and highlights the potential consequences of this excessive spending. The speaker mentions the consequences of relying on government job growth, the reliability of economic models, and the potential for downward revisions to non-farm payrolls. The discussion also covers the role of the Federal Reserve in providing liquidity through various measures, such as issuing bills and adjusting capital requirements for banks. It concludes by noting the challenges posed by the upcoming reduction in government spending and the potential difficulty of funding the massive debt accumulated by the government.
The Potential Recession and Challenges Ahead
The second part of the podcast episode focuses on the possibility of a recession and the challenges that lie ahead. It highlights indicators such as job cuts, increased withdrawal rates from 401(k) accounts, and the impact on stocks and valuations. The conversation touches on the relationship between the labor cycle, stock market flows, and the effects of economic downturns on different investment strategies. The speaker suggests hedging strategies for investors and recommends focusing on companies with pricing power and strong buyback programs. Finally, the episode raises concerns about the future of the market, particularly with regard to the massive government debt, difficult comps in government spending, and the likelihood of a difficult financial situation for the next government administration.
Credit card delinquency and interest rates are soaring. The national debt has surpassed $33.7 trillion. The S&P 500 remains afloat only because of a handful of mega-cap tech stocks. When Apple, Google and the rest of the Magnificently Manipulated 7 falter, the Mother of All Bubbles is bound to burst.
Nearly all underlying economic data suggests the economy is due for a correction. As we've seen in recessions past, investors who aren't proactively prepared are in for a world of hurt.
In this new Real Conversations webcast, Hedgeye CEO Keith McCullough is joined by Mike Taylor, hedge fund manager and PM of PINK Shares and Mike Green, chief strategist at Simplify Asset Management.
This conversation between pros will include valuable insights going into the home stretch of 2023 and a new year filled with potential turmoil.
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The Call @ Hedgeye is a live webcast that pulls back the curtain on the decision-making process of a world-class hedge fund. Our team of 40+ equity analysts join Hedgeye CEO Keith McCullough weekdays at 7:45am ET to discuss key market developments, trends and our high-conviction long and short investing ideas. You will not get this granular level of insight anywhere else. CLICK HERE to check out our product page.
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