• The Big Flip is a macro thesis that suggests the market misjudged the timing of an upcoming recession.
• This shift in market expectations can be seen through Fed fund futures and short-end rates in U.S. Treasuries, which have priced in multiple rate cuts by the Federal Reserve.
• It’s possible that rates may readjust higher in 2023 due to persistent inflation, leading to lower risk asset prices reflecting higher discount rates.
The Big Flip
The Big Flip is a macro thesis that has been gaining an increasing amount of traction in the financial world. It was first introduced by pseudonymous macro trader INArteCarloDoss and is based on the market’s apparent misplaced belief on the path of inflation and subsequently the path of policy rates.
Change In Market Expectations
This change in market expectations can be viewed through Fed fund futures and short-end rates in U.S. Treasuries, which have priced in multiple rate cuts by the Federal Reserve, providing a tailwind for equities due to this expectation of a lower discount rate.
Higher Rates Possibility
It’s possible that rates may readjust higher in 2023 if inflation remains persistent, leading to continued ratcheting of rates and sending risk asset prices lower to reflect higher discount rates.
“Higher For Longer” Rates On The Horizon
Given this potential outlook, it’s likely that those attempting to aggressively front-run the policy pivot may once again get caught offside at least temporarily as “higher for longer” could become a tone communicated with markets continually by the Fed Chairman.
The Big Flip is an interesting macro thesis that suggests markets may be misjudging when an upcoming recession will occur, as well as how long interest rates are likely to remain low over time which could have significant implications for asset prices going forward if proved correct