Why Macro is “Pretty Risk-On” for Equities | Tian Yang of Variant Perception

Episode Summary

Executive Summary: Tian Yang argued that the broad equity market remains risk-on over a 3-6 month horizon, but the AI/semiconductor trade has likely exhausted its current narrative and entered a dead-money phase unless a new catalyst emerges. He emphasized tactical LPPL bubble signals, a rotation into lagging sectors like energy and financials, and a macro backdrop still supported by growth, liquidity, and limited policy tightening. He also highlighted sovereignty, geopolitics, and supply shocks as the key lens for oil, China, Japan, and global portfolios.

Main Topics: Near-term equity outlook and AI/semiconductor exhaustion (Priority: 5/5): Yang said the broader market is still constructive, but semis and AI names have likely topped in the current narrative cycle. He sees possible bounces, but expects the sector to struggle until a new story—such as world modeling or robotics—emerges. LPPL bubble/exhaustion signals (Priority: 5/5): He explained Log Periodic Power Law as a tactical bubble-detection tool that flags late-stage exponential moves. The model identified exhaustion in semis, China, and other crowded trades, helping time de-risking and rotation. Macro regime: still risk-on (Priority: 5/5): His macro model remains supportive of equities because growth is okay, inflation is high but manageable, policy is not aggressively tightening, and liquidity is still supportive. Breadth and insider buying also suggest the market is not at a full-cycle top. Rotation into value, energy, and financials (Priority: 4/5): Rather than exiting equities, the portfolio has rotated toward laggards—especially energy, financials, and healthcare—while trimming some tech/semi exposure. Yang framed this as a better risk-return balance amid broadening market participation. Geopolitics, sovereignty, and supply-side shocks (Priority: 4/5): Yang argued that sovereign competition, especially U.S.-China rivalry, is reshaping investment risk. He expects more supply-side shocks, making resources and ballast assets more relevant than traditional defensive sectors. China, India, Japan, and regional allocation (Priority: 4/5): He was skeptical on China consumer recovery, skeptical on India due to geopolitics and inflation sensitivity, cautious on Europe due to energy/regulatory issues, and more constructive on LATAM and parts of Japan if FX/BOJ dynamics shift. VPX ETF and systematic equity allocation (Priority: 3/5): Yang described Variant Perception’s ETF as a long-only systematic U.S. equity strategy combining macro, capital cycle, quality, crowding, and LPPL signals to dynamically rotate sectors and stocks for better long-term risk-adjusted returns.

Key Arguments: The broad equity market is still in a risk-on macro regime over the next 3-6 months, even though AI/semis have shown clear signs of speculative exhaustion. LPPL signals are tactical rather than long-term; they are meant to identify the final, often non-obvious leg of a bubble move and help manage exposure. The current AI rally likely needs a new narrative to resume leadership; without one, the trade may stay flat even if the underlying technology remains real. Market tops usually require a combination of tightening policy, narrowing breadth, and deteriorating market internals; those conditions are not fully present yet. Breadth remains supportive, credit spreads are not extreme, insider buying is elevated, and household/corporate savings dynamics continue to support nominal growth. Energy and financials are attractive portfolio ballast because they benefit from wide crack spreads, persistent activity, and potential inflation/stagflation risks. Geopolitical fragmentation means traditional defensives may be less effective; resource exposure can better hedge supply shocks and sovereign disruptions. China remains export- and sovereignty-driven, so consumer-led recovery is unlikely without a major FX or policy shock; domestic demand remains structurally constrained. India is attractive on growth but constrained by geopolitics, inflation, and policy sensitivity, making it a difficult allocation versus LATAM. The systemic risk in AI is not immediate collapse but eventual pricing compression as open models, on-prem deployment, and model commoditization intensify competition.

Data Points: Macro horizon: 3 to 6 months - Yang said his macro risk indicators are primarily forward-looking over this time frame. AI/semi rally start: From April onward - He said the last leg of the AI/semi rally was fueled by the narrative that began in April and then exhausted. LPPL signal timing: Early June - He said a bunch of LPPL bubble exhaustion signals went off in early June. US real growth estimate: 1.5% to 2.0% - Yang estimated U.S. real growth as roughly in this range, closer to 2%. Oil recession tipping point for U.S.: WTI around $120 for the rest of the year - He said their March scenario analysis suggested U.S. recession risk would rise if oil averaged that level. Oil recession tipping point for Europe: Brent around $110 to $120 - He said Europe’s sensitivity is higher than the U.S. and a sustained move there could tip recession risk. Japan inflation: Headline around 1.2% - He cited Japan’s official inflation as low while noting on-the-ground inflation is much higher. Japan wage rounds: About 5%+ for three years in a row - He used this as evidence of persistent inflationary pressure in Japan. Equity top timing: 6 to 9 months of tightening plus narrowing breadth - Yang said major cycle tops historically arrive after this pattern persists. VPX launch: March - He said the Variant Perception equity ETF was launched in March. Portfolio tilt: Long energy, long financials, buying back tech/semi - He described the portfolio barbell and recent rotation. Gold level: Around 4,000 seems okay - He suggested gold had found a floor and could remain sideways, with 4,000 as a reasonable level.

Pivotal Quotes: "the macro regime where it sees the mix of growth, inflation, policy, liquidity is broadly still supportive of risk assets" — Tian Yang: He summarized why the broad market remains constructive despite recent weakness in semis and AI names. "the narrative around agenic AI ... is clearly done, and we're waiting around for the next narrative" — Tian Yang: He explained why the semiconductor/AI trade may be entering a dead-money period absent a new catalyst. "the quality of money matters only in the downside, only when things are turning down" — Tian Yang: He used Perry Mehrling’s hierarchy-of-money framework to explain why circular financing can still work in an upcycle.

Implications: Investors should expect broader equity participation, not necessarily a market-wide bear phase. Favor rotation, not all-out risk reduction: energy, financials, and other laggards may outperform while AI/semis pause until a new narrative or macro catalyst appears.