Fed-Crazed Markets Are „Reactive And Myopic”; Highlights From Kantro-King Debate

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 and now runs Satori Insights), panelists at last night’s ZH Debate.

With CB-dominance and ever-forward-looking market participants, bad economic news is good news — because it means a sooner return of central bank rescue liquidity — argued the cautiously bullish Kantro. While King doesn’t count out the impact of private investors, crediting them for staving off any market pain during the Fed’s most recent tightening cycle, 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 here.

It’s All Money Flows: King

Citi’s King described the journey of financial analysis that ultimately led him to one answer: flows. The epiphany began for him during the Obama-Bernanke years when markets began to break.

“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 this shift, King said that nowadays “markets seem to be driving the economy more than the conventional view of the economy driving markets.” He now follows a rather simple methodology: look at 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.’”

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— 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. He pointed 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 much of the speculative capital has funneled into crypto rather than equities and thus likely does not pose a widespread risk.

He additionally pointed to the allocation of 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.

Lastly, high PEs (price-to-earnings ratios) do not scare Kantro because technology has evolved from the “old economy cyclicality”. Large companies are reaching more customers than ever 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.”

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— ZeroHedge Debates (@zerohedgeDebate) January 24, 2025

We’re All Fed Watchers Now

Both strategists agree that the economic outlook is largely irrelevant to stock prices. For markets, it’s reactions to econ data that matter and no reaction matters more than Jerome Powell’s.

As King sees money creations slowly dwindling, he sees equities as likely to fall which could usher in a recession like in 2000 (where, he argues, crashing markets lead to the recession and not the other way around).

Kantro, however, views this 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.”

Kantro goes on to point out that “all equity markets all bottom with rates peaking.” In other words, when the Fed is done hiking (and he thinks the recent pause is enough of a green light).

And to sum up the market 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.”

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— 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?”.

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