Market Structure is Distorting Reality as Inflation Builds

implicit

explicit

implicit

credit markets down

Blockworks 1.0
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Quinn 7.0

Market Structure is Distorting Reality as Inflation Builds | Weekly Roundup

dxy

Quinn mentions watching the dollar breaking out to new highs as a potential breaking point that could cause major credit problems, and that the Bank of Japan intervened to prevent a breakout (causing the yen to squeeze). He says to watch the dollar and oil, as they're 'not out of the woods.' This implies a view that dollar strength is a near-term risk/possibility they are monitoring closely.

metals

This is wartime allocation of capital... It just favors scarce resources you can't print. Leading up to this, it was gold and metals. Speaker3 (host) makes this explicit statement summarizing the scarce resource theme. Quinn earlier mentions playing 'long short from the metals longs to the energy longs,' indicating a bullish metals view as part of his macro trade. The discussion includes gold producer cash flows being huge and gold as a potential hedge against 'wacky policy' like coupon cuts on treasuries.

4 calls

-15

consistently off direction or weak follow-through

ndx

Quinn states he has been 'short tech and related things the whole way down.' He discusses capital leaving tech for 'real things' like transports and industrial metals, referencing a chart showing tech vs. transports ratio at a low similar to 2000. His inflationary, higher-yield environment is 'really bad for risk assets' and equity multiples, which disproportionately hurts high-multiple tech.

wti

I see sustained higher for longer commodity prices... We're not going back to $60 maybe it goes to $80. You know, that's probably a great dip to buy. Quinn's core thesis is that oil is in an inflationary corridor, suppressed prices prevent supply response, and the complex is a scarce resource. He loaded up on front-month oil based on the war not ending. The 'higher for longer' view is secular, not just a spike.

5 calls

-21

consistently off direction or weak follow-through

yields

Multiple speakers connect persistent oil-driven inflation to higher yields. Speaker1 explicitly states the curve flattening shows investors expect restrictive policy longer, and the 'real problem' is a bear steepening scenario. Speaker3 is 'really suspect of yields' due to incoming cost-push inflation. Quinn's thesis that 'inflation is really bad for risk assets because it sends bond yields higher' provides the directional link.

Quinn

My conviction has waned in terms of near-term direction. The market is so hedged and has degrossed so much that shorting here is tough. I think April's the best chance for a bounce.

Shows charts on extreme CTA deleveraging, elevated implied volatility, low Nasdaq members above 50-day MA, and high put demand. Says he trimmed positions after being short for months due to fatigue.
Quinn

I don't think the medium-term picture is pretty at all. Trump said there's a month left of the war, which probably means more. I just don't see where the incremental selling comes from.
Quinn

The inflation outlook is totally being slept on for what oil prices are doing. Oil prices aren't high enough for demand destruction, but they're high enough for inflation.

Argues that suppressing oil keeps it in an inflationary corridor without triggering the demand destruction that would force central bank action.
Quinn

If you let the market find natural prices, you get a supply response. But if you suppress prices, there's no production response. Look at rig counts—no uptick.
Quinn

You can't control inflation when the cat's out of the bag like this.
Quinn

I see sustained higher for longer commodity prices. We're not going back to $60 oil. The whole complex is now a scarce thing you have to put a premium on.

Also sees conflict not going away. Credit problems will emerge as consumers get hit by higher prices (demand destruction) and a negative wealth effect from falling asset prices.
Quinn

I don't really see a good case to be made for financials here. Or small caps and cyclicals. Without Fed accommodation and follow-through, it's dicey.

Notes we went from many cuts priced to almost hikes priced, and a doubling of oil price kills any nascent reacceleration.
Quinn

The incentives here point to inflation. And inflation is really bad for risk assets because it sends bond yields higher and equity multiples lower.

Says regardless of politics, the direction is paved: they will stimulate and try to support markets, leading to inflation.
Amazon is putting on a 3.5% fuel surcharge. If oil was $150, maybe people wouldn't buy as much, but at $100, we get the surcharge. This will flow into inflation.

speaker2
A buddy who runs a landscape company is putting a surcharge on oil. This is going to factor into inflation, which makes me really suspect of yields.

References a BTIG chart showing how much US Treasury yields have risen across the curve since the war began.

speaker3
All the short-dated yields (2yr, 5yr) have risen much more than the long end (10yr, 30yr). The curve has flattened, meaning investors see policy restrictive longer, hurting growth.

The real problem is what happens in June at the next Fed meeting: you get policy response into the election with oil still elevated, inflation pushing through, then you cut and stimulate, causing a bear steepening. Bonds are awful here.

speaker1
This is wartime allocation of capital. This isn't just about Iran. It's about what's been building for years. It just favors scarce resources you can't print.

Leading up to this, it was gold and metals. Now it's oil and energy. Soon it might be food. These are things you need. If everybody's piled into gold, it trades like equities because countries might need to spend their gold to get oil.

speaker3

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