YouSaid · the spoken record

Andy Constan

lines on the record: 74
first: 2024-05-06
most recent: 2024-05-06
sittings or episodes: 1
sources: podcast

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“Okay, that sounds like a bet. Now, if this is really A through X, A through V? Yeah, A through V of other risks, the question is, do I have any edge on those? And I made, let's assume I don't. And so then the question becomes, does anybody... Because if nobody has any edge, then A through V are just random. They create risk, but they don't create negative alpha. And so That still may be an interesting bet if you have a seventy percent chance on three variables and a coin flip on 23 variables.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Because they're going to rally. And so right now, as I mentioned, two-year notes offer almost free bet that the Fed's going to cut interest rates. And so I can put on two-year notes long and benefit when there's interest rates. And so I've Constructed a portfolio that does that. That's the objective in trading macro. It's not making a single bet. But to be honest, that's part of the risk. You know, if you can't diversify away all of your risk, and so you have to expect risk that could go either way. And so let's say I had a 70% chance, which is too high, 70 chance that my X and Y and Z factors were going to generate a positive PNL for me.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Well, I mean, I think the most important thing is that you just have to start with knowing what A through Z is, what drives prices, what drives the asset you're talking about, and then you have to diversify so that you aren't betting only a single one of those things when you need to bet on all of them, you diversify by having some alternative. And so I never ever have a single asset in my portfolio. I would never make a bet that's that concentrated. My bets tend to have a bunch of things going on that tend to say, well, what's the environment I'm betting on as a macro investor? And for instance, right now, as I said, I'm short long-term bonds and long two year bonds and short stocks. portfolio is more diversified. And so I'm not just betting on being short stock. If they cut interest rates, I'm going to be in trouble.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“banheck.com slash hodlfg and now back to the interview Far, we've talked almost exclusively about the plumbing, not just Federal Reserve, quantitative easing, quantitative tightening, but specifically the treasury, how much duration they're putting out into the market when they issue. When you trade the S&P 500 futures, let's say, you're trading not just on that, you're trading on expectations of growth and inflation, you're trading on Apple earnings. How do you sort of trade on something that trades on so many different factors? Do you have to focus on everything? In other words, how do you sort of find your edge? Because if I only trade Apple, all that matters is Apple earnings, right? For example, today, but there's so many things that impact the S&P. How do you, for example, know, okay, I have a view about X and X is going to impact the stock market in Y direction. However, there's A through W is also going to affect it. How do you sort of refine that?”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Yes. And by the way, they were very, very rich even last summer. Had a negative 35 basis point term premium the last summer, and they had a negative 20 basis point term premium in February before the, sorry, in January before the QRA. So the term premium has expanded quite a bit. And you've seen that as yields have increased.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“So term premia is basically how much you're rewarded for taking on. So now long term bonds are not as ridiculously expensive where you have a negative term premium as 2021, for example, but they're still historically expensive. Is that what you're saying”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Some anti growth benefit and so diversify a stock portfolio. But as a standalone investment, by the way, I think stocks as a standalone investment don't offer that same excess return versus cash that they have. Assets cheapened a lot, and then when they decided to stop, even though they weren't cheap, assets rallied back to rich levels. And so right now we're at a level where I think are we going to get back to the pre-quantitative easing decades where term premiums were in the one to two percent range, it's possible. If so, you know assuming Fed funds are four-ish percent, you're talking about a five, five and a half percent 10-year note. And that's where I think we're headed.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“It's four and a half. And so there's a method of extracting the excess return to cash that assets have called term premium. And so if term premiums are one at 150 basis points, then that should generate over time the historical return on treasuries of a point two five sharp ratio. Now current term premiums are a made up number. It's just an estimate. But current term premiums, which were extremely negative at the end of the middle of winter, are now positive 25 basis points, but they still have 125 basis points more to Rich in before bonds become a really interesting alternative in your portfolio relative to cash. Now they already provide”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Well, I'll take you back to history. It generally is the case that the excess return for bonds over cash generates a call it twenty five basis point sharp ratio, meaning you have a certain amount of risk in the bond. It changes every, you know, the changes in price, and you have excess return over cash. And that excess return over cash has been about a 0.25 sharp ratio. And so if you think of a 10-year note as having 6% price annual price volatility to get a sharp ratio of 0.25, you need 1.5% excess return over cash. Now, cash currently is yielding 53, but the path of cash for the next ten years is not quite that high.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“And so I would expect bond yields to rise, bond prices to fall over the course of the, you know, really, I don't see any unwind of this. Bond prices are just not that attractive as a core holding at these levels. And so I think it's going to take a meaningful price dislocation before bonds become more in more demand than there is supply.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Flows, but they took nine months, and for instance, if you were to say, hey, you know, COVID, three trillion of quantitative easing, six trillion, it turns out, of quantitative easing is being telegraphed to us. Stocks are at, I don't know, call it 2,300, 2,400, whatever the lows were. You know, we should pay $4,800 for stocks. That's not how it works. It took two years for us to make our high, even though that quantitative easing was going to work. It was going to push up assets. And anyone who saw it did get long, but there was just not enough ammunition to get people to get the prices rallying as much as they ended up rallying. And so I think what's happening here is we're having a slow dripping oversupply of treasuries that are going to take a long time to absorb and are going to keep a headwind on bond price rally.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“As more and more people find out that information, there's enough capital that it can mute the entire move. And so at 16 minutes prior to that flow, the price already reflects the entire amount of the flow. This one's just too big, and it has been too big. And if you look at when quantitative tightening was announced in December of 2021 and then became widely known in the minutes in January 3rd of 2022, it took nine months quantitative tighting didn't even start, but it took nine, in fact, quantitative easing continued. And yet the market aggressively front ram that all the way to the lows. And then it turned out quantitative tightening wasn't quite as big as an influence as people thought. And so not surprisingly, you had a fairly major rally soon after that. And so those are huge.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Too high or buy if they think expectations are too low. And then the news comes out and we find out. This is a situation where the market for treasuries is so large and the quantity of treasuries that we're talking about is so large that there's no set of people that will make a bet that the supply will push bond yields up or down. They just can't preposition the news. And they can't really even preposition the flow. Like if you know $3 billion of S&Ps are going to be bought in the last 15 minutes of the trading day, you know, and you think you're the only one that knows that, you can make money by buying 60 in minutes early and selling one minute before the close. That's generally a solid way to make money.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Reduction of coupons and increase and spending of the Treasury General account. And, you know, that proved to be wrong. And they really delivered what was broadly expected. And so the question now becomes when something is delivered that's at expectations that shouldn't have a market impact. And I operate on that assumption in everything I do, so it's hard for me to argue an alternative case. We have Apple earnings, if they meet consensus, the stock shouldn't go anywhere. If they beat, it should go up. And if they underperform, it should go down. And what's priced in is an expectation of what they do. And the reason why is people position ahead of that based on their expectations. And they either sell if they think expectations are.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“There are two schools of thought. I had one, and I think most of the street was consistent with mine, which is they told us in February they were going to maintain coupon sizes at the current coupon auctions at the current level, which would have generated $1 trillion and $84 billion gross issuance. And that's what they did. But there was another school of thought that said, you know, this is an election year and the treasury already has $800 billion in their checking account, actually closer to a trillion at the time in their checking account. They're going to, they've spent it down to zero in the past. They're not going to issue any coupons at all, practically, and they're going to spend down their Treasury General account, which is their checking account. And that would, of course, have been very bullish assets, very stimulative to the economy, et cetera. And so there was this idea of a pump, a combination of”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, actually, so the first quarter was terrible. I think I was down 7% at my worst drawdown. I was short bonds, and that helped, but I was also short stocks way too early. And so I took a nice drawdown, but April's been just phenomenally good, and that's been a combination of stocks and bonds, some gold. And so that's just been a good performance.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Right. And we also was on a less popular show than yours, CMDC, with that same call. But, you know, since then, I've gotten bearish again and I've gotten bearish because I think that inflation is going to be require a set of steps before it will come back to target. And so asset prices are notably higher than they were. Bond prices less so. So I would describe my position as not quite as bearish bonds as I have been. But certainly not bullish. and equities quite bearish.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“No, I would say that firstly, I'm nothing like a perma bear. I started soon after the COVID lows was bullish for, I don't know, I guess all the way through early 2022, I actually overstayed my welcome a little bit, but was bullish for most of the time. And I've been bullish in calling bottoms June of 2023 too. And then again in September of 2022. And notably last October on Halloween, I said, you have to buy all assets.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, I mean, I think that's the important thing. I'm not calling for a recession. I think there has to be a set of things that happen, which is that script I've described that cause inflation to be killed. And in doing that, you risk a recession. But we're not having a recession today. We haven't had one for the last X number of years now. And so I'm not predicting, hey, we're about to have a recession, but the pricing already is way ahead of that. And so I think there's great opportunity to bet on the low odds that we have a recession soon for free, essentially.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“December of 2027, the total amount of cuts expected is one hundred twenty five basis points. We had one hundred seventy-five basis points priced in just for 2024 four months ago. So pricing has radically shifted on the front end. And so now there is essentially no possibility priced in for a deep recession. And so I'm no longer on higher for a longer island when the pricing when it's just gotten too rich and too crowded and you can't get a decent place.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“I left Tyre for Longer Island, which, you know, since you've known me, I've been saying that the interest rates were priced into markets that priced in cuts or not even enough hikes initially, but ultimately cuts were not going to be realized and that yields were going to be higher for longer, higher than what was priced. And that played out through now. And right now you look at yields and.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, right now, Barish on bonds and stocks, frankly, I'm bullish on two-year notes, but bearish on stocks and bonds at this stage.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“and the easing of financial conditions that occurred subsequent to Halloween caused the economy to come back. And so once again, we were hired for longer and the Fed has been backpedaling on rate cuts even through till yesterday. Then on February, we had another QRA, which significantly increased the amount of coupons. And really from end of 2023 on, bonds have been going in really only one direction, which is down in higher yields on long term bonds. So by the end of the quarter, end of the first quarter, bond yields had gone up enough I could declare Act two Act three were in that process now where equities are catching down to falling bond prices.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT
“Were in Act three where we started last July with this act when I wrote with a script when I wrote it, and we went quickly from Act one to Act two when the QRA came out in July and then quickly to Act III where equities caught down to falling bond prices and you started to see the economy weaken. Unfortunately, well, not unfortunately, it just happened at the end of Halloween, at Halloween, Jenny Yellen slowed the increase in coupons. Then the Fed was dovish and that reversed the play back to the beginning. And, you know, the end of the year, there was an expectation that the Fed was going to cut seven times in 2024. And, you know, that clearly.”
2024-05-06 · Forward Guidance · Andy Constan: The Bond Market Will Take The Stock Market Down With It · IDENTIFIED FROM THE TRANSCRIPT