2025-10-31 22:23:26
Warren Buffett once said that the most important investment you can make is in yourself. I can’t agree more.
The financial industry is full of jargon, opacity and ivory-tower attitude which prevents practicioners from scaling up their knowledge of markets fast.
When I started my research firm The Macro Compass, my main objective was education: breaking down financial concepts in plain English for you all.
I have recently stepped up that effort with my two macro courses:
The Bond Market Course
The Monetary Mechanics Course
Analysts and PMs from the top 10 hedge funds in the world went through it, and this is the feedback they are sharing with me:
But here is the kicker for you guys: this time, I am slashing prices down by 50% for the first 50 buyers!
Instead of paying EUR 998 for both courses, you’ll pay EUR 499 .
Buy one, get two courses!
The offer is valid for the next 48 hours, and only for the first 50 buyers.
Be quick and take advantage of this exclusive offer before it sells out.
Once purchased, the courses can be watched at any time and the supporting slides and material can be downloaded.
For more information on the courses, you can visit this dedicated page.
And now, to today’s macro research piece.
Nov 5th will be a key date for markets: the Supreme Court will start hearing arguments on Trump’s IEEPA tariffs.
And while markets don’t seem particularly focused on this event, I believe it’s crucial to be prepared for it.
The pie chart above shows why the Supreme Court ruling will be crucial.
If the Supreme Court strikes down IEEPA tariffs as unconstitutional, around 55% of the US tariff income would be wiped out from the 2026 budget and US companies would be eligible for a refund for the 2025 tariffs paid under the IEEPA regime.
In numbers, we are talking about a $150-200bn annualized in tariff income lost for the US.
Now, you all know that from a strict monetary perspective US tariffs act like a tax.
Data is uncontroversial there: tariffs are being paid by US consumers and corporates (mostly corporates), which is akin to an increase in corporate tax rate that reduces companies’ margins.
If the Supreme Court undoes IEEPA tariffs, this would be the equivalent of a ~200bn fiscal stimulus:
The chart above shows the inflation-adjusted primary deficit spending in the US (read: money printing).
In 2025, the US government has injected $626 billion in the US economy – this is a much lower pace than 2023-2024. The slowdown in US primary deficit spending is mostly due to tariffs.
Revert the IEEPA tariffs, and the US will be going back to the glorious money printing days of 2024 at least.
So, what are the odds that the Supreme Court will strike down Trump’s IEEPA tariffs?
Prediction platforms suggest 60-65% odds, although volumes are quite small:
We can actually get an idea of the real market-implied odds by looking at another market: the newly set-up ‘’Tariff Refund Trade’’ that certain banks are allowing hedge funds to invest in.
According to Bloomberg:
‘’ Wall Street banks are arranging bets on President Donald Trump’s tariffs being struck down by the Supreme Court — long-shot trades that could pay off handsomely for hedge funds betting against the legality of the administration’s flagship policy.
Jefferies Financial Group Inc. and Oppenheimer & Co. are among firms brokering the deals, matching investors with companies that have paid tariffs to import goods into the US, according to people with knowledge of the matter and correspondence seen by Bloomberg News. …
In the trades, the importing companies essentially sell to investors any future rights to claim refunds on their tariff bills, which could come if the nation’s top court sides with an ongoing legal challenge to Trump’s tariffs. The companies sell at a discount to their expected refunds, meaning investors would reap the upside in a ruling favorable to them. The banks arranging the deals take a cut. …
For example, a hedge fund might pay somewhere between 20 to 40 cents for each dollar of claims they could get back in refunds, giving them an upside of several times their bet, according to the correspondence and some of the people, who asked not to be identified discussing potential terms. Most of the trades range in size from $2 million to $20 million, with few over $100 million, one of the people said.’’
It would seem like hedge funds are paying ~30% on average upfront for the trade, which would imply roughly the same probability that tariffs are deemed unconstitutional.
But companies are cashing in months in advance the US government refund that would come if IEEPA tariffs are shut down, so we need to make an adjustment for that.
This cross-check says the real market-implied odds of tariffs deemed unconstitutional are closer to the 40-45% area, while prediction platform sit around 60-65%.
Call it 50-50: a coin toss.
Now, let’s assume the Supreme Court strikes IEEPA tariffs down.
Can we say with 100% certainty that this will be akin to a ~200bn fiscal stimulus?
Not so fast.
Trump can also set tariffs under Section 232, 301 and 122.
Section 232 covers the sectorial tariffs under commerce authority, and Section 301 the ‘’fentanyl-like’’ tariffs under USTR authority – both fall under the executive (President) powers, not the Congress.
Section 122 also falls under Presidential powers, and it would allow Trump to go for global 15% tariffs for 150 days before Congress would have to approve.
I am saying this because while the Supreme Court might strike down IEEPA tariffs, the Trump administration has seven Section 232 sectoral investigations ending by January 2026 and could come up with more Section 301 or blanket Section 122 tariffs to offset the Supreme Court decision.
Nevertheless, we are going into a coin-flip decision and markets might find reasons to celebrate a Supreme Court decision to strike down IEEPA tariffs – but Trump has weapons to counter such decisions.
In general, bear in mind the following:
- The US will add $400bn in primary spending through the OBBB next year;
- Germany will kickstart a large fiscal spending program;
- The new Japanese PM Takaichi is working on an additional budget to increase fiscal spending;
- Korea, Canada, Sweden and Australia are expanding primary fiscal spending by 1% of GDP;
- Debt-funded AI capex might total $300bn next year
Regardless of the Supreme Court decision, the global money printing machine will accelerate.
2025-10-08 18:19:53
Hi everyone - this is Alf, the CIO of my macro hedge fund Palinuro Capital.
I hope you’re having a great day.
Before we start, do you want to be on the distribution list of my macro hedge fund?
Every two weeks, you will receive an update on the macro themes we are watching and the track record at Palinuro Capital.
If you are a hedge fund allocator and you want to be added to the distribution list, click on the link below:
Add me to the distribution list for Alf’s macro hedge fund Palinuro Capital
And now, to today’s macro research piece.
My macro models have been suggesting a bi-modal framework to approach markets for the near future: Run It Cold Now (growth < expectations, and dovish Fed) and Run It Hot Later (growth up, inflation risk premia up, but no Fed hawkishness).
My Run It Cold Now theory has been increasingly vindicated by labor market data, and markets are often busy trading what’s in front of them rather than looking through a potential reacceleration in 2026.
This is why it’s vital to figure out:
1. How early/late do we sit within the ‘’Run It Cold Now’’ period;
2. How much has the market priced in by now;
3. Consequently: is it still worth getting engaged in Run It Cold trades, or shall we look at Run It Hot Later ideas already?
As a reminder, my macro models suggest tariffs will act as a fiscal tightening mechanism until year-end.
By early 2026, the OBBB fiscal impulse will offset and Trump’s new initiatives alongside lowered Fed Funds and private money creation should propel a Run It Hot Later period.
First, some evidence that US labor demand is really weak: extrapolating benchmark revisions from April 2025 onwards, the US has been consistently shedding jobs!
To get a broader perspective on the labor market we can rely on unrevised data which incorporates demand and supply for labor: for example, unemployment rate and its important subcomponents.
The chart below shows the number of long-term (27+ weeks) unemployed Americans as a percentage of the total labor force. At 1.14%, this number is already as high as in 2002 or summer 2008 – in both cases, a recession was already visibly hitting America:
Why is US labor demand so weak?
Due to tariffs, the US is going through a slowdown of its primary fiscal impulse: the 2025 primary fiscal deficit sits almost 20 bps below last year and markedly below the 2023 pace.
Tariffs are effectively acting as a tax on US companies and consumers:
This seems to be confirmed by ‘’the best economist Druckenmiller knows’‘: the internals of the stock market.
The chart below shows (in white) the ratio between an index of the 5 largest US payroll processors companies and the equal-weight SPX, plotted against 2-year Treasury yields (in green).
If there are no new jobs, the largest payroll processors companies in the US will suffer - and indeed, their stocks are trading very weak.
This is an example of how the internals of the stock market suggest the US labor market is very weak, and that the Fed will be soon called to ease more:
The US economy is ‘‘running cold’’ now, yet stock markets are roaring and risk sentiment remains very aggressive - why?
The private sector money printer is going BRRRR, led by AI.
The chart below shows the big-tech announced capex spending as a % of their EBITDA – it’s already over 65% on average, exceeding the AT&T spending of 1998. To keep up this pace next year, companies will have to resort to debt-funded AI capex:
AI Capex mechanically adds to US GDP even before we get to talk about the ROI.
But the biggest issue with AI Capex is that it doesn’t really add jobs for the median American for now, and hence we are left with two economies: a hot AI-related economy, and a broader labor market struggling under the fiscal tightening induced by tariffs.
The stock market is not the economy, and the gigantic AI capex effort coupled with large global fiscal stimulus programs continues to support risk sentiment.
Our global real-economy money printing index is very strong.
We tracked the YTD pace of inflation-adjusted $ money creation around the world, and this year we have scored an impressive 5.77% increase in real-economy money printing around the world.
This comes after 3 weak years led by the gigantic Chinese housing deleveraging, and the YTD pace in 2025 is in line with the ‘’concerted global growth’’ pace of 2017.
The global pace and acceleration is quite robust, and its mainly driven by China which has restated its credit engines after 2-3 years of robust housing deleveraging.
Despite being crippled by tariffs (e.g. a large tax), US money creation is accelerating led by the AI-related debt-funded capex spending on data centers.
And money printing is only set to accelerate going forward.
From a fiscal standpoint, we are 100% sure that from early 2026 we will see:
- Germany adding to money creation via a large increase in primary spending;
- The US OBBB kicking in with its fiscal stimulus offsetting tariffs money destruction;
- Korea, Sweden, and many other countries kickstarting deficit spending programs
We might be looking into a scenario where the Fed cuts rates but global money printing accelerates.
If we dust off my TMC Quadrant Asset Allocation Model, that puts us in the top-right quadrant:
In short, historically the best asset allocation for such an environment involves selling IOUs and paper assets, and buying tangible risk assets.
Basically:
Sell USDs and bonds,
Buy stocks and assets linked to nominal growth
The most painful outcome for institutional investors would be an equity rotation towards EM/Value + a commodity rally.
These are very underowned asset classes, and they could rally right when standard portfolio hedges such as USD and bonds would fail to deliver.
And the Market Gods enjoy inflicting the proverbial Pain Trade every now and then…
Thanks for reading!
Before you go, do you want to be on the distribution list of my macro hedge fund?
Every two weeks, you will receive an update on the macro themes we are watching and the track record at Palinuro Capital.
If you are a hedge fund allocator and you want to be added to the distribution list, click on the link below:
Add me to the distribution list for Alf’s macro hedge fund Palinuro Capital
2025-08-25 17:10:35
Hi everyone - this is Alf, the CIO of my macro hedge fund Palinuro Capital. I hope you're having a great day.
Two quick announcements before we start.
1) I will be in Montreal on Sep 15-16 and NYC on Sep 17-18. If you are an allocator or involved in the hedge fund industry and want to meet, shoot me a message ([email protected]);
2) If you are a hedge fund allocator and you want to be on the distribution list of my hedge fund Palinuro Capital, click on the link below:
Add me to the distribution list for Alf's macro hedge fund Palinuro Capital
And now, to today's macro research piece.
‘’I compile statistics on my traders. My best trader makes money only 63 percent of the time. Most traders make money only in the 50 to 55 percent range. That means you’re going to be wrong a lot. If that’s the case, you better be sure your losses are as small as they can be, and that your winners are bigger.’’ – Steve Cohen.
This is a hard truth to accept for many macro investors: we will be right only about 50-55% of the times.
If your win rate is much higher than this, I suggest you extend the sample of trades you are analyzing or assess whether you are not trading macro but rather just selling optionality – short vol/option strategies have win rates as high as 90%+, but they wipe you out completely when you are wrong.
In the last 10 years, I scored a 52% long-term win rate on my directional macro trades. Once I realized that and given that the year-end P&L formula can be written as follows:
I knew I’d better make sure the size of my losses doesn’t get out of control.
This can be achieved in two ways: sizing trades correctly and designing a system that lets your winners run. We are going to talk about my approach to both angles in a second, but first another important remark.
To step up the win rate on macro trades from 50% to say 55% over a long period of time, you need to gain some edge over other macro investors.
What could that be?
- A data-driven approach with superior macro models
- The ability to assess the gigantic amount of cross-asset market signals via quantitative tools
- A particular edge in a niche market that you have learnt to navigate well over time
- Be less stupid than others
Macro models help a lot, but my ‘’don’t be stupid checklist’’ adds value too:
Points 1-3 keep my emotions in check and ground me to a more rational assessment of the trade.
Points 4-6 are about implementation.
A warning: short carry trades (and long options) are expensive to hold over time if nothing happens.
A reminder: in very choppy markets, you can get quickly stopped out with linear trades even if your thesis proves to be correct – consider whether the market regime favors linear or option implementations.
Don’t be stupid: check whether the trade you are about to add is not just another expression of a trade you already have on – I have seen people blow up as the 10 trades they were running were just…the same trade.
But it’s point 7 that sticks out: sizing and risk management define most of your P&L at year-end.
Here is how I approach them through a practical example. Say you think that the S&P500 will keep marching higher over the next month: how many SPYs do you buy?
You could be in the right or left 50% of that distribution: when you pull the trigger, you don’t know that. And because you don’t know that, you want to standardize your ex-ante sizing.
One effective way to standardize the sizing of each tactical trade so that they don’t excessively weigh on your year-end P&L is to do volatility-adjusted sizing: let’s go through the SPY example.
You could be in the right or left 50% of that distribution: when you pull the trigger, you don’t know that. And because you don’t know that, you want to standardize your ex-ante sizing.
One effective way to standardize the sizing of each tactical trade so that they don’t excessively weigh on your year-end P&L is to do volatility-adjusted sizing: let’s go through the SPY example.
Let’s set our stop at 1.5 standard deviations, and our defined time horizon in this example will be 1 month. For the SPY, using a 5-year lookback the typical 1.5x monthly negative sigma event would be a -7.6% decline.
You can play around with the lookback period if you want more history and/or assign different weight to more recent periods if you think today’s vol regime is more relevant (grey boxes).
If returns are normally distributed, we will be stopped out 6.7% of the times in our defined time horizon. But as returns often follow other distributions, it’s good practice to check the actual empirical probability of being stopped out against the theoretical 6.7% probability (orange boxes).
Finally, define what’s the fixed % of AuM you are willing to lose on any given macro trade.
A fictitious $1 million trading account willing to lose max $20k per trade which is bullish on SPY with a 1- month horizon would buy 571 SPY shares at $437 and be stopped out at $402 (-7.6% = 1.5x sigma event) hence losing $20k (= 2% of AuM).
Congratulations, you just applied volatility-adjusted position sizing!
What are the advantages of this approach?
1) You remain agnostic to ‘’volatility luck’’: if you size all positions the same, being right/wrong on the most volatile assets will make/break your P&L at year-end and that’s all about luck. Don’t gamble.
2) You remain agnostic to your ‘’conviction’’ level: the truth is that ex-ante you don’t know when you’ll be in the right or wrong 50%, so why would you over or under size a trade based on your ex-ante conviction levels? You shouldn’t.
3) This approach is really flexible: you can use it as a day trader or as a tactical macro investor, you can set stops looser/tighter depending on your approach etc.
The truth is that this volatility-adjusted position sizing approach helps you avoid your ex-ante biases: you’ll be right ~50% of the times and don’t get to know on which trades – so, size appropriately.
Ok so now you have a data-driven macro approach, tools to help you digest action in global markets, and a ‘’don’t be stupid checklist’’ to help you push that 50% win rate higher plus a vol-adjusted position sizing system to avoid big losses by design.
How do you actually make money?
First, you place profit targets in an asymmetric way to your stop losses.
If your stop loss is at -1 standard deviation, your profit targets should be at over 1 sigma: if you are able to preserve a 50% win rate, that will help you making more money on winners than you lose on bad trades.
Most importantly though, you must have a system in place to let your winners run: the best hedge fund traders I know only score 2-3 outstanding trades per year which account for 80% of their yearly excellent P&L.
To improve the odds of achieving that, I use a trailing profit target strategy:
Say you set a stop at -1 sigma and first profit target at +1.5 sigma: when you hit the first target, you do not take profits – rather, you enter a trailing strategy.
Your new profit target becomes +2.5 sigma, and your new stop becomes 0. You hit 2.5 sigma?Great! Extend again: +3.5 sigma target, +1.5 sigma stop. And so on and so forth.
These rare but outsized gains make the difference at year-end.
In short, here is a sensible approach to tactical macro trading:
- You want to recognize you’ll be right only about 50-55% of the times;
- To skew the odds towards 55% you want to have a data-driven macro process, quantitative tools to screen markets and a ‘’don’t be stupid’’ checklist before pulling the trigger;
- You want to follow a volatility-adjusted sizing process as explained above;
- You want to religiously respect your stop losses and have a system in place to let your profits run.
Thanks for reading! Feel free to share this piece with a colleague or friend.
Before you go, remember that:
1) I will be in Montreal on Sep 15-16 and NYC on Sep 17-18. If you are an allocator or involved in the hedge fund industry and want to meet, shoot me a message ([email protected]);
2) If you are a hedge fund allocator and you want to be on the distribution list of my hedge fund Palinuro Capital, click on the link below:
Add me to the distribution list for Alf's macro hedge fund Palinuro Capital
2025-08-13 20:44:47
Hi everyone - this is Alf, the CIO of my macro hedge fund Palinuro Capital. I hope you're having a great day.
If you invest in hedge funds or you’re involved in the HF industry: do you want to be on the distribution list of my macro hedge fund? Every two weeks, you will receive an update on the macro themes we are watching and the track record at Palinuro Capital.
To be added to the distribution list, click on the link below:
Add me to the distribution list for Alf's macro hedge fund Palinuro Capital
And now, to today's macro research piece.
The US economy and markets might face a double negative whammy over the next 2 months: a large reduction of the fiscal impulse and the aggressive rebuild of the Treasury General Account (TGA).
A slowdown in real-economy money creation (primary deficits) could result in an economic slowdown, which will coincide with a drainage of bank reserves (TGA buildup) from markets.
Our US primary deficit tracker stands at 1.54% of GDP as per last week, already lagging behind the 2024 pace and way behind the 2023 staggering pace.
Tariffs came in at almost $30bn in July, and were this pace to continue we’d effectively face an additional $150bn of fiscal drag until the end of the year.
That alone means the US primary deficit might shrink by 15% from $1 trillion in 2024 to $850 billion in 2025:
As a reminder, primary deficit spending = money being injected in the real economy.
Literally, we are talking about money printing.
As step 1 the US government spends money (e.g. cuts taxes) which increases the bank account of households which receive an injection of net worth – they pay less taxes, hence their bank accounts are fatter. Bank deposits grow at commercial banks, which as a result see their reserves at the Fed grow too.
Step 2 describes the bond issuance pattern: the US government issues bonds to ‘’fund’’ deficits, and banks swap reserves for bonds at auctions.
This slide comes from my Monetary Mechanics course, in which I cover all the plumbing topics and variations you can ever imagine – take a look here if interested:
So the private sector will receive a smaller injection of wealth from the US government going forward.
Money creation will still happen, but at a reduced pace – but how should we think about the TGA rebuild?
When the government wants to rebuild its Treasury General Account, it issues bonds but not for the purpose of ‘’financing’’ money creation – rather simply to rebuild its coffers at the Fed (TGA).
As you can see from the T-Accounts at page 2, a TGA rebuild ends up with a reduction in bank reserves (steps 2 and 3) and no creation of money for the private sector.
TGA rebuilds are not uncommon, but as we sit at $421 billion now and the Treasury targets $850 billion by the end of September, the $400bn+ increase in 8 weeks would be one of the most aggressive TGA rebuilds over the last 10 years:
Bank reserves are currently sitting at $3.3 trillion, and given the ongoing QT and large TGA rebuild they could drop below $3 trillion soon. That would be the equivalent of less than 10% of nominal GDP:
The last time we experimented with bank reserves below 10% of nominal GDP was in 2018-2019, and this eventually led to pressures in the repo market in September 2019.
This excellent speech from Waller encapsulates how the Fed thinks about an adequate level of reserves.
A scarce level of bank reserves means US banks would be more reticent to engage in the repo market (lend reserves against Treasury collateral) and more conservative in their risk-taking.
As Waller stated in his speech: ‘’I think of ample reserves as the threshold below which banks would need to scramble to find safe, liquid funding, something that would drive up the federal funds rate and money market interest rates across the economy.’’
Also, the Fed can’t really do much to slow down the bank reserves destruction from the TGA rebuild.
Quantitative Tightening is running at $40bn/month, but $35 billion of QT is linked to mortgage-backed securities (MBS) which the Fed wants to get rid off from its balance sheet.
And the Reverse Repo (RRP) facility is only at $80 billion, so there is little left to drain there as an offset to the TGA rebuild.
If the Treasury really goes for a such a fast TGA rebuild alongside with the reduced fiscal impulse coming from tariffs, the US economy could face a soft patch right when bank reserves fall towards scarce levels leaving banks more reticent to provide repo funding and to oil the leveraged financial system.
This potential plumbing issue alongside the net fiscal drag leaves me defensive on US economic growth prospects for the next 2-3 months at least.
This was it for today. Be nimble, and remain hungry for macro.
If you invest in hedge funds or you’re involved in the HF industry: do you want to be on the distribution list of my macro hedge fund? Every two weeks, you will receive an update on the macro themes we are watching and the track record at Palinuro Capital.
To be added to the distribution list, click on the link below:
Add me to the distribution list for Alf's macro hedge fund Palinuro Capital
2025-07-15 22:33:28
Amidst all the noise, markets haven’t had time to digest 5 key macro news:
1) Elon Musk announces formation of ‘’America Party’’
2) Speaker Mike Johnson: "We're gonna have a second reconciliation package in the fall, and a third in the spring of next year..."
3) President Trump: ‘’ “Stock markets are now at all-time high -- we’re going to maintain it, believe me.”
4) Bessent: We could appoint new Fed chair in January, nominating in October
5) OMB Director Vought sends official letter to Powell saying ''Chairman Jerome Powell has grossly mismanaged the Fed''
Musk’s America Party might as well cost the Republicans both the Senate and House in the 2026 mid-terms. That’s a big political risk for Trump.
The response from the Trump administration is very clear - run the economy hot. More fiscal stimulus with reconciliation bills on the table again, and dovish pressure on the Fed.
The interference with the Fed independence is increasing by the day, with clear attempts to find ''cause'' to fire Powell (e.g. ''gross misconduct'' mentioned by Vought).
If you run the economy hot with inflation already above target and force a dovish reaction function at the Fed, our asset allocation model moves towards the ''Everything Rally'' Quadrant:
Historically, the best asset mix for this scenario is to get rid of USDs and underweight long-end bonds and buy:
1) Assets denominated in USD that produce inflation-proof cash flows;
2) PPAs: Policymaking Protest Assets
Why do these assets perform well in such a macro environment?
Trump's plan with tariffs, fiscal and lower front-end real rates means that real growth remains ok as the tariff passthrough hits consumer spending, but rounds of fiscal stimulus preserve real purchasing power for consumer and capex for companies. It holds fine.
Nominal growth is instead more robust in the 4-5% area as inflation remains sticky due to tariffs and fiscal. And you make sure that real yields remain compressed.
Basically: you run it hot.
In such an environment, specific stock markets composed of companies with strong pricing power (e.g. tech) fare very well as it happened in 2003-2006 and 2013-2019 ''Run It Hot'' experiments. But the two prior experiments were run with inflation at or below target, no tariffs, no attacks on the Fed independence, and no hostile policymaking against the rest of the world.
Today, I believe a mix of such investments and PPAs (Policymaking Protest Assets) would work better.
PPAs are assets denominated in USD that represent a release valve against unorthodox policy mix such as forcing real rates too low vis-à-vis the level of nominal GDP, manipulating long-end yields via reducing issuance or encouraging banks to buy (SLR reform), or incentivizing foreign countries to diversify away from USD investments.
Gold and metals in general are the longest-standing PPAs, and needless to say Bitcoin is also a valid contender for PPA properties:
The questions we should all be asking ourselves are:
A) How long the USD am I in my portfolio? (Probably too much)
B) Do I have enough assets producing inflation-proof cash flows? (Probably not)
C) Do I have enough PPAs in my portfolio? Gold, metals, Bitcoin? (Probably not)
If you enjoyed this piece, please share it with a friend you know will enjoy it too.
For questions/remarks/grandma pizza recipes, feel free to drop me an email at [email protected]
Stay humble in markets,
Alf
2025-06-18 22:55:38
Hi everyone - this is Alf, the CIO of my macro hedge fund Palinuro Capital.
I hope you're having a great day.
Alongside with running my hedge fund, I work as a consultant and external advisor for some of the largest pension funds, asset managers, banks and funds in the world.
Arrangements are flexible: from access to my institutional research + daily access to me all the way to monthly or quarterly calls and sitting through your investment committees.
If you think I could add value to your firm, simply reach out at:
Please state your name, company, and how you think I could help.
And now, to today's macro research piece.
Let’s start this macro piece with a little game.
Below you find two tables representing 3 consecutive prints of core CPI in the US including its subcomponents: core goods and core services (with a separate mention for ‘’supercore’’ CPI).
Without using Bloomberg or Google, are you able to tell which 3-month core CPI streak belongs to the pre-pandemic period and which one to today?
I wasn’t, and some of the hedge fund PMs I asked the same question ended up making a mistake.
In both cases, core CPI MoM prints were averaging 0.15-0.20 which is broadly in line with the annual 2% inflation target and the subcomponents painted a picture of 0% goods inflation with core and super-core responsible for the quite muted inflationary pressures.
The answer: section 2 covers the Jun-Aug 2019 period, and section 1 shows Core CPI for Mar-May 2025.
I think we should take some time to reflect on this.
In early 2019, Powell pivoted dovish with a clear speech highlighting the tightening cycle was over and the Fed was all about accommodating financial conditions.
Core inflation averaged 0.2% MoM in summer (higher than today), unemployment rate was 3.7% (lower than today, and stable), and the Fed moved on to cut rates from 2.25% to 1.50% in Q3 2019.
Fast forward to today: the last 3 core inflation prints averaged 0.14% MoM with weaker services inflation, unemployment rate is steadily climbing up at 4.24%, and Fed Funds sit 200 bps above summer 2019.
The Fed might soon capitulate dovish.
Also, amidst this tariff noise it’s helpful to take a step back and remember core goods only represent ~20% of the core CPI basket.
The real action lies in services and housing (dis)inflation.
The guys at WisdomTree developed a real-time core inflation metric that uses actual housing inflation rather than the lagging shelter CPI metric:
Core CPI using real-time shelter inflation (blue) has been around 2% for 18 months already, but the lagging nature of shelter CPI (grey) pushed official core CPI higher limiting the ability for the Fed to cut.
The lagged disinflation in housing seems set to continue, which means the official core CPI measure might keep declining based on official shelter inflation dropping (it’s 35-40% of the core CPI basket: it matters).
Notice how using real-time shelter inflation works both ways.
The red circle highlights the mid-2021 period when the housing market was ultra hot but shelter inflation didn’t yet show up in the official core CPI – which tricked the Fed into mistakenly delaying the hiking cycle.
The opposite has happened in 2024, but the last 3 core CPI prints are now decisively dovish.
It’s time to follow the Fed very closely to grasp when the dovish turn might come.
The title of this piece is ‘’null komma null’’, a German expression which means 0.0 and we can say the excess inflation today compared to pre-pandemic periods is actually null komma null.
But there is another ‘’null komma null’’ which is crucial for markets and asset allocation.
A close friend, mentor and hedge fund PM recently had a chat with a German pension fund manager and asked him how much additional USD hedging they have done given the correlation break between EURUSD and risk assets.
‘’Null komma null’’. Nothing, no additional hedging has been done.
Basically, pension funds and insurance companies remain very long (and hurting) the US Dollar:
The reason is very simple: FX hedging costs are still high, and pension funds/insurance companies have return targets to meet.
Picture this: the standard return requirement for a pension fund is 6.5/7.0%, and if you are in Switzerland or Japan hedging your USDCHF and USDJPY exposure for the next 12 month costs 3.5-4.0%.
That’s quite a hefty negative carry to pay, and this deters pension funds managers from hedging.
But.
In a scenario where:
The Fed turns dovish and starts delivering cuts
USD hedging costs start to drop
The USD depreciates further, reminding foreign pension funds of their losing long USD position
We could see a fast acceleration in USD hedging demand from foreign whales around the world.
Such hedging activity would compound USD weakness very rapidly.
If such an outcome unravels, the market implications are pretty straightforward.
Short the denominator, long the numerator.
The US Dollar remains the denominator of most financial assets out there, and the combo of a dovish Fed turn + Trump policies + hedging activity would definitely ‘’weaken the denominator’’.
When it comes to the ‘’numerator’’ (i.e. what asset you go long vs the USD), my view is:
FX: prefer currencies potentially involved in hedging flows (EUR, CHF, JPY, AUD, CAD etc)
Equities: prefer sector/countries with high pricing power (tech, large cap) or commodity exporters
Commodities: long metals (gold, silver etc)
This was it for today, thanks for reading!
Alongside with running my hedge fund, I work as a consultant and external advisor for some of the largest pension funds, asset managers, banks and funds in the world.
Arrangements are flexible: from access to my institutional research + daily access to me all the way to monthly or quarterly calls and sitting through your investment committees.
If you think I could add value to your firm, simply reach out at:
Please state your name, company, and how you think I could help.