Many macro funds, especially quantitative ones, are facing headwinds because their models are optimized for trending markets. The current choppy, volatile environment lacks the long, clean trends seen in previous years, leading to performance dispersion across the industry.

When bond prices exhibit short-term mean reversion (up one day, down the next), it's a quantitative sign of deep uncertainty. This reflects the market and the Fed struggling to choose between fighting inflation and addressing weakening employment, leading to no clear trend until one indicator decisively breaks out.

Keith McCullough's core process categorizes the economy into four "quads" based on the accelerating or decelerating rates of change for GDP growth and inflation. Each quad has a predictable asset allocation playbook, with Quad 2 (both accelerating) being the best and Quad 4 (both slowing) being the worst for investors.

A multi-year "rolling recession," which affected different sectors sequentially, concluded in April, quietly kicking off a new bull market. This recovery is not yet obvious because many parts of the economy still lag, which presents a significant investment opportunity.

Market participants are conditioned to expect a dramatic "Minsky moment." However, the more probable reality is a slow, grinding decline characterized by a decade of flat equity prices, compressing multiples, and degrading returns—a "death by a thousand cuts" rather than one catastrophic event.

The unusual concurrent rally in stocks (a risk-on asset) and gold (a risk-off asset) reflects a divided market sentiment. Investors are optimistic about corporate growth, driven by AI (buying stocks), while simultaneously fearful of government policies and fiat currency debasement (buying gold).

Quantitative models relying on momentum in equities, commodities, and rates are underperforming because the performance gap (dispersion) between assets has collapsed. This creates a low-conviction environment unfavorable for relative value trades and non-carry macro trends in the FX market.

The current economic cycle is unlikely to end in a classic nominal slowdown where everyone loses their jobs. Instead, the terminal risk is a resurgence of high inflation, which would prevent the Federal Reserve from providing stimulus and could trigger a 2022-style market downturn.

Contrary to popular belief, the current upward inflationary pressure is a net positive for equities. It is not yet at a problematic level that weighs on growth, but it is high enough to prevent a more dangerous disinflationary growth scare scenario, which would trigger a full-blown "risk-off" cascade.