Financial Engineering is Your Friend

A lot of people are confused about the market and do not understand how it can keep pressing higher. But it’s bifurcated, isn’t it? You have two markets: the small caps go down and the large caps go up. Why is this?

The answer is very obvious: very large asset managers allocate wealth into the most liquid and biggest companies. We used to call these “hedge fund hotels”. In recent years foreign banks have been increasing their exposure to American equities and you’d have to guess correctly where they might have interest: $NVDA, $AAPL, $GOOGL etc.

I’ve talked about the Yen Dollar carry trade here and how those Japanese banks might be leveraging up into US equities. Well if the ECB cuts and we don’t, we might soon begin to see a Euro Dollar carry with the same dynamics.

This is why it’s important to remember when allocating money your anecdotal experiences in the economy aren’t valid. The only thing that matters is American households have $150 trillion in wealth and it’s being managed by people who know how to walk up stocks and create a profitable environ for all involved.

The very worst case scenario would be to not participate in this phase and instead succumb to deleterious inflation and a decrease in buying power and personal wealth. You can very easily emulate where Joe Manager is looking next: buy companies whose market cap are over $50b and possess strong margins and free cash flow. Keep doing this until it stops working.