Central bank flows dominate markets. This may not come as a shock to many ZeroHedge readers but was refreshing to hear from two institutional heavyweights like Piper Sandler’s Michael “Kantro” Kantrowitz and Matt King (formerly Citi’s top global strategist and now runs Satori Insights), panelists at last night’s ZH Debate.
CB dominance and ever-forward-looking market participants has created a paradigm where bad news for the economy is good news for markets — because it means a sooner return of the Fed’s rescue liquidity. This was the perspective of the cautiously bullish Kantro. King, on the other hand, sees private capital flows as significant and credits them for buoying markets during the Fed’s most recent tightening cycle. Still, he does not like the direction flows are headed.
They talked Fed, Trump, tariffs, and analyzed a shit ton of charts.
Moderated by the great Ash Bennington of Real Vision, here are the key insights for those who missed it, and be sure to check out the full debate.
It’s All Money Flows: King
Citi’s King described his journey that ultimately led him to one answer: flows. Traditional financial indicators, he said, started to breakdown in the Obama-Bernanke years.
“About 2012, all my favorite fundamental indicators — in credit, in equities, for risk assets especially — basically broke down,” King said. “Interest rates didn’t seem to have the impact that they used to on either markets or, for that matter, the economy.”
After the shift, “markets seem to be driving the economy more than the conventional view of the economy driving markets.” King now follows a simple methodology: watch the Fed’s balance sheet.
“[Central banks are] where over the last 12 years or so, the biggest changes in money creation have been coming from,” King said. “I shouldn’t be able to explain market moves to the extent that I can just by looking at stupid line items on the central bank balance sheets… nevertheless, these reserves changes often correlated really well, both with the long term moves and with the short term moves.”
If that’s the case, why didn’t equities take a hit during the recent Fed tightening cycle (however short lived)? “Massive” private inflows in U.S. equities, King says.
“That influence from central bank money creation has, especially over the last year, been overshadowed by a massive rising tide of inflows to US equity funds… central banks were withdrawing liquidity, but we as investors decided, ‘We’re going to pile in anyway.’”
— ZeroHedge Debates (@zerohedgeDebate) January 24, 2025
The Bullish Case: Kantro
Compartmentalized speculation and record-high profitability in the S&P may not send markets another 20% higher by year-end but should allow them to continue to “chug along” says Piper Sandler’s Kantro, pointing out key differentiators from past speculative fervors:
“In 2000, we had a market that was really full of junk and speculation, far more than we have today.”
Highlighting the billion-dollar market cap of “Fartcoin”, Kantro posited that most speculative capital has funneled into crypto rather than equities and thus likely does not pose a widespread risk.
More good news is the representation of public companies that “lose the most money” is at a record low. Meaning the S&P 500 is dominated with profitable firms more so than at any time in the past, as Kantro highlights in the chart below.
Lastly, high PEs (price-to-earnings ratios) do not scare Kantro as technology has evolved from the “old economy cyclicality”. Large companies are reaching more customers at lower costs, something AI will accelerate further.
“In 2007, financials, industrials, energy, and materials added up to half the market. If you have a market that basically looks like Canada — those four sectors — you’re damn right, you should have a low PE.”
— ZeroHedge Debates (@zerohedgeDebate) January 24, 2025
We’re All Fed Watchers Now
Both strategists agreed that economics are largely irrelevant to stock prices. It’s reactions to econ data that matter. And no reaction matters more than Jerome Powell’s.
King sees money creation dwindling, thus equities are likely to fall which could usher in a recession like in 2000 (where, he argues, crashing markets ushered in the recession and not the other way around).
Kantro, however, views recession risk through the bad-news-is-good-news lens that Fed dominance has necessitated:
“My whole bullish case… was that the markets are going to go up more because the economy is going to soften more,” he said. “In other words, the unemployment rate is going to go up — which it did — and eventually got the Fed to cut.”
Looking through history, “all equity markets all bottom with rates peaking.” With ‘rates peaking’ meaning ‘when Fed is done hiking’. Kantro thinks the recent Fed pivot is the green light to investors.
And to sum up investor sentiment rather perfectly…
Kantro: “Every client meeting I had people were asking me, ‘Is the Fed going to raise rates?’ It just shows you how quickly the sentiment has shifted. And the Fed being data dependent has only made everything much more reactive and myopic.”
— ZeroHedge Debates (@zerohedgeDebate) January 24, 2025
Check out the full debate here to hear more insights and fascinating charts.
Find King’s research at Satori Insights. Accredited investors can find Kantro’s research through Piper Sandler and everyone can tune into his new podcast “What’s Next For Markets?”.
These debates would not be possible without support from JM Bullion. Visit https://www.JMBullion.com to purchase gold and silver at competitive prices along with exclusive ZeroHedge-branded coins.
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