Wk27 MacroTechnicals - The Price of Exceptionalism

While I don't have much to add to our ongoing discussions (other than how recent data/developments are confirming earlier views), I look back on what has been a rather interesting quarter which for the S&P500, would be their best quarter since 2020. Let's have a quick look to see how we got to where we are.

Wk19 - Sell in May and Go Away? Started building the bear thesis around a shifting macro regime (higher input costs, higher inflation, tighter fincon, peaking AI capex cycle)

Wk20 - Is This The Top? The rebound in growth expectations and valuations being back to pre-war levels was the fade

Wk21 - Bloody Car Crash Reluctantly agreed with Burry purely because hes cried wolf too many times, but the market was becoming too comfortable in ignoring increasingly obvious risks.

Wk22 - Bullish Optics, Bearish Reality Deal optimism masking bearishly strong macro undercurrents

Wk23 - Dispersion Trap Highlighting positioning risks

Wk24 - Trimmed Gets Mean Warsh stuck before the job even began

Wk25 - Sticky Landing Thoughts on the 'market is wrong to price in hikes' debate and why inflation will prove sticky

Wk26 - No Breadth of Fresh Air Tightening regime eroding breadth and positioning risks a corrective leg.

I've predominantly held a bearish view on risk over that time and had to endure some painful periods, but thankfully those did pay off in the end, even if far less handsomely that I planned for. I've also had to trade against my views in some moments accepting the newsflow and price action for what it is. As I look back on the last two months, there is a sense of surprise of having fared quite well despite not having felt in total sync with the tape over the last few months.

Much of what has been discussed in those weekly notes remain very relevant today and likely to do so for the remainder of the year. Below is the US economic suprise index and continues to point in a strong uptrend that began a year ago.

For underlying inflation pressures to ease you need softer demand. But the US economy is running so hot that it is almost impossible to conceive of an outlook where inflation pressures ease organically. Interest rate hikes is the price of exceptionalism, and expectations for 1 hike later this year are very much justified. More on this later.

Before we dive into our usual program of reviewing all the major macro and technical developments to set up our strategies for the week ahead, I want to add this chart to our ongoing 'AI-concerns' discussion - Frontier models are not the only game in town - closed source US models made up 75% of token usage a year ago, to now just 30%.

Lower-cost options are now powerful enough to meet most compute/inference needs, and when the technology starts to become pervasive enough, the outlook for AI-related services becomes fiercely competitive. Valuation premiums and Capex ROIs would erode over time, which in turn would negatively impact the profitability of AI-related services and supply chains. In our current environment where an enormous amount of hot money is chasing a singular theme across many markets, the implication of this developing trend is massive, and one that would still appear somewhat underappreciated by the many.