Why Andy Constan Is Bearish Stocks
4/16/2024 · 51 min · transcript via mlx
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Key topics
— Andy Constan argues the S&P 500 has likely topped for 2022 at current levels (~4% from all-time highs), with Treasury supply and term premium as key headwinds to equities.
— The Treasury's quarterly refunding announcements reveal massive coupon issuance (~$538 billion net in Q2, up from $348 billion in Q3), which increases term premium and anchors stock valuations.
— The end of the 40-year disinflationary era driven by globalization and Chinese productivity gains has shifted to an inflationary regime, with deglobalization and nationalism now dominant structural forces.
— Fiscal dominance is no longer the growth driver; current government spending is flat or decelerating relative to GDP, making deficits a drag rather than stimulus.
— The Fed and central banks face a credibility test: if they cut rates while inflation rebounds, they signal surrender on price stability, which supports gold and Bitcoin as inflation hedges.
— Michael Howell's liquidity framework captures the balance between savings and investable assets, though Constan questions whether the framework's published outputs consistently apply to all asset classes.
Market & price signals
— S&P 500 down roughly 4% from 2024 highs; Constan's base case is near-term top with potential 4–5% additional correction (5–10% total from peak). Bond yields rising due to elevated term premium from Treasury coupon issuance; real yields increasing alongside nominal yields. Gold rallying on central bank buying and U.S. consumer selling, signaling renewed concern over Fed credibility on inflation. Bitcoin briefly mentioned as benefiting from the same "reflation" trade and higher-for-longer inflation expectations. Treasury bills at 22.7% of federal public debt—historically high outside recessions—as the Treasury works to rebalance back to the 15–20% target.
Actionable insights
— Monitor the May 1st quarterly refunding announcement for total coupon issuance relative to market expectations; higher-than-expected supply will likely pressure equities and steepen the yield curve.
— Watch U.S. government spending as a share of GDP, not just the deficit; if spending growth falls below GDP growth, it becomes a drag on growth regardless of how it is financed.
— The Fed's rhetoric and action on rate cuts while inflation remains elevated will determine whether gold and Bitcoin remain attractively valued as inflation hedges; a May 1st credibility reassertion from Powell would likely cause a correction in those assets.
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