MacroVoices #532 Mike Green: Record Mechanical Flows

Summary

Mike Green explains that record passive and systematic flows, not fundamentals, are driving the S&P 500 to all-time highs despite the Hormuz energy crisis. He argues the labor market is weaker than reported and that the Fed will cut rates aggressively by September. Patrick Ceresna presents a bull call spread on SOFR futures to position for that rate cut. Erik Townsend maintains put spread hedges on the S&P 500 as insurance against the energy shock.

• Record monthly inflow into equities drove the April rally, driven by CTA short covering and systematic rebalancing.
• Mike Green disagrees with secular inflation forecasts, expecting demand destruction from the energy crisis to lower inflation.
• He believes Kevin Warsh will cut rates more aggressively than markets price by late 2026.
• Passive investing and defined-contribution plans have created a mechanical bid that detaches prices from fundamentals.
• Patrick Ceresna proposes a Dec 2027 SOFR bull call spread to fade the recent hawkish repricing.
• Erik Townsend holds S&P 500 put spread hedges due to tail risk from the Hormuz closure.
• Rory Johnston updates that the Strait of Hormuz remains mostly closed, with ~13 million barrels/day shut in, and demand destruction has been overstated.
• China's role in the Trump-Xi meeting is seen as pivotal to resolving the crisis or prolonging it.