Impulses Driving Risk Appetite are Likely Transitory, feat. Aahan Menon

What this episode covers

Aahan Menon joined us to discuss Prometheus Research's investment framework, which is based on economic forecasting of growth, inflation, and liquidity. He emphasized the importance of market regime confirmation to mitigate the risk of being wrong in economic forecasting. HIGHLIGHTS: Aahan's background and founding of Prometheus Research [00:02:59] Aahan talks about his career journey and how his experiences led him to found Prometheus Research, a systematic macro research firm. Unique approach of Prometheus Research [00:03:27] Aahan explains how Prometheus Research provides real-time insights into the evolution of markets and the economy through a data-driven, rules-based process, and how they aim to help investors of all sizes navigate macroeconomic cycles. Navigating the tension between market and macroeconomic modeling [00:06:31] Discussion on how to navigate the tension between the market's forward-looking discounting mechanism and the utility of macroeconomic series. Opportunity set in macro investing [00:07:48] Explanation of how understanding the likely gap between a potential acceleration and what's discounted in terms of a linear path is the opportunity set in macro investing. Factors driving the forecast [00:19:33] Discussion on the factors driving the current forecast, including monetary tightening and debt service burdens. Housing activity and employment contraction [00:20:45] Discussion on the contractionary condition of the economy, the impact on the housing sector, and the potential for a recessionary condition. Softening of the labor market [00:26:34] The potential for a recessionary contraction despite historically low unemployment rates, and the projection of sub 2% unemployment rate by the end of the year. Employment and Inflation [00:34:25] Discussion on the recent pulse in employment and its impact on inflation, as well as the unlikelihood of it continuing in the future. Productivity and Economic Growth [00:37:42] Mention of a recent McKinsey paper on the potential impact of productivity increases on inflation and debt, and how it could affect economic growth. Retirements and Wealth [00:40:46] Discussion on the excess retirements due to windfalls and wealth, especially in housing, and the possibility of retirees returning to work. Labor Force and Profits [00:43:46] Analysis of the impact of labor force participation and employment growth on the economy, and the squeeze on profits due to businesses' own reinvestment. Recomposition of the economy [00:51:04] Explanation of the shift towards a services-oriented economy and the impact of income injection on the economy. Navigating the cycle [00:53:02] Discussion on navigating the cycle and the relative strength of cyclical sectors. Investment decisions [00:53:46] Explanation of how Prometheus Research's algorithmic work informs investment decisions. Investment Framework [00:54:22] Aahan explains the economic forecasting framework used by Prometheus Research, focusing on growth, inflation, and liquidity. They also discuss the challenges of forecasting and the importance of market regime confirmation. Portfolio Construction [00:56:02] Aahan discusses the timing tools used by Prometheus Research to create stable return streams that are impervious to any particular regime or auto-correlation structure. They also talk about the importance of managing volatility and risk in the current tightening liquidity environment. Current Positioning [00:57:57] Aahan shares Prometheus Research's current positioning, which includes a high level of cash and a focus on relative value trades such as being long the dollar and long T-bills. They also discuss potential trades, such as shorting the two-year and being long bonds. Term Structure Dynamics [01:17:01] Discussion on the impact of the Fed's manipulation of the term structure on asset prices and risk premia. Private sector credit creation and liquidity [01:20:42] Discussion on the impact of private sector credit creation and liquidity on the economy and financial markets. Improvement in banking and corporate activity [01:22:16] Analysis of the improvement in lending and issuance of commercial paper, high yield, and IG in 2022. Factors affecting liquidity creation [01:24:00] Explanation of the rush to issue commercial paper in anticipation of rate increases and the impact of nominal activity and inflation on liquidity creation. Pro-cyclical liquidity and economic activity [01:25:04] Discussion on the potential effects of quantitative tightening and responsible treasury policies. Where to find Aahan Menon: Prometheus Research Substack Where to find the RYA crew: Adam Butler on Linkedin Pierre Daillie on Linkedin