MEGACAPs Continue Higher & Debt Resolution Vote Upcoming
The MegaCap Tracker continues to demonstrate the strength of the top 8 Megacaps as a collective group they hit $11 Trillion in market cap, up nearly $900 Billion since we started tracking this crowded trade a few weeks ago! As we have noted here at Magnelibra the trade du jour of most hedge funds is clearly tilted in favor of these top 8 and the obvious hedge sales are the SP500 index as a whole, the Yen and of course US Treasuries as JPowell and Co. have clearly lost their minds.
Anyway we outlined in our last note the rational for the massive asset wealth concentration that we are seeing and it rests clearly on the hands of central bank interest hikes which are adding over $270 Billion a year in risk free interest via their RRP and IORB programs. We cannot fathom why the Central Bank continues to pay IORB when it has hiked rates over 500 basis points.
Not only that, but the US gov’t itself has seen its interest costs rise to nearly $1 Trillion dollars a year. Remember we live in a fiat fractional reserve system and scarcity is always going to provide an underlying bid for the US Dollar as you need US Dollars to pay back US Dollar denominated debt and considering the new trillions in interest, well, it will be interesting to see how out of line this whole system becomes.
Without further adieu, here is the MEGACAP Tracker for week ending May 26th 2023:
As you can see the options hedge took a hit on Friday with the large run up which did spill over into the SP500 which for the June Future was up 53.50 points to 4213.25 and in the case for our SPY options put the 418C about 2.5 ticks in the money. However overall the options hedges are still up money and considering the overall outperformance of the outright Megacaps, we are ok with the performance of the options and in fact we do not actually intend to generate positive alpha on the overall position in the options but rather they are demonstrating a hedge against a very crowded trade which we know will get hit with bouts of profit taking as we go higher and higher.
The overall tutorial premise here is to try and see if we can pin point turning points in the entire overall structure or if there are components that make up the whole that will give us a little more insight into whether or not any one of these shows early signs of profit taking.
We doubt we will see any such profit taking until the FRB decides to pivot and reduce already extremely high interest rates, that are driving main street consumers to take on more and more debt to afford the things it needs. As our last note stated it is the higher rates that hurt main street more than it does Wall Street now because of the QE-Lite programs that we outlined from RRP to IORB. Maybe the FRB is waiting for the debt ceiling debacle to get to this next cycle. We need to increase debt overall in order to fund the system, but if we don’t get the debt ceiling raised then money cannot be monetized and transferred, so that is our first key to the next cycle.
The recent debt talks are that an agreement has been reached and needs to be voted upon. Some of the details are that the $31.4T debt ceiling would be suspended until January 1 2025 and part of the deal comes with an end to the student loan debt relief by August of this year. Will see if this all passes and Magnelibra does feel once passed will be the initial stepping stone to reversing these rate hikes. We are not in the higher inflation for longer camp, rather we feel that what will transpire especially if there is a student loan repayment restart, that the economy will turn south quickly over the next 6 months. Which will finally force the FRBs hand and cut rates drastically!
So Magnelibra will keep an eye on the following:
Debt ceiling increase
Negative Non Farm Payroll print
Student Loan repayment restart
Actual FRB no hike, pause and softer economic rhetoric
We do not think you fade the MEGACAP strength, we feel that until these outlined 4 points start to transpire that the writing is still on the wall that the massive concentration of wealth will continue. Actually this reminds me of Matthew 13:12,
“For whoever has, to him more shall be given, and he will have an abundance; but whoever does not have, even what he has shall be taken away from him.”
We continue to see this time and time again, we see it in the asset inflation in both equities and in Real Estate. Real Estate clearly has its pockets of massive wealth and pricing that no matter what, no matter how bad the economy gets, the amount of money and investment capital that the wealthy have to deploy is basically unlimited.
Yes we said it, unlimited, interest rates DO NOT MATTER, economic downturn DOES NOT MATTER, we are talking about the kind of fiscal immunity that has probably never existed on this scale and we can blame the global central banks for this. Quantitative Easing is the magic wand that syphons all economic capital and capacity to a very few and it is within these very few that the golden arm of QE central banking that all the inflation resides.
The hierarchal structure is simple,
Global Central Bank Non zero sum players
0.1% Elite class a quasi Non zero sum player
Top 1% de-facto 2nd order effects Non Zero sum player
Top 10% a hybrid offshoot, top tier wealth class that has some residual economic risk
EVERYONE ELSE
This is why you see the massive wealth inequality that exists because it is designed to accomplish this very structure. We are looking at the charts and will do some analysis this week on the structures we are observing. Real quick, the US Dollar is showing some strength and it has not hurt the equities one bit, US Treasuries had a terrible week with the US 2Y note getting pounded and settled in at 4.585% up a massive 86bp since the 3.727% low at the beginning of this month!
We feel that this move has the chance to push to 4.78% where we would suspect resumption of support as the FRB is in our opinion, done raising rates despite the calls otherwise. Their AI data should be telling them that the insane risk free interest they are paying out is having an adverse affect on their inflation reduction goals and instead should be thinking about cutting rates and cutting drastically! Yes we know we are swimming against the tide, but as we outlined in our last note, its obvious who benefits from higher rates and who is actually getting killed!
In any case, thanks for reading, please share, like and think about supporting our work here!
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