MacroVoices #360 Viktor Shvets: Inflation, Interest Rates, Equity Outlook & more
Macquarie's Viktor Shvets discusses his expectation that geopolitical tensions will simmer but not escalate significantly in 2023-24, predicts inflation will drain away without requiring demand destruction, and sees the global economy skirting recession with modest equity returns ahead.
Summary
Viktor Shvets presents a comprehensive analysis of the global macro environment for 2023-24. On geopolitics, he argues that while tensions remain high, the probability of major conflicts has actually decreased due to lessons learned from the Ukraine war. He believes both the Russia-Ukraine conflict and Taiwan tensions are more likely to simmer than escalate, as neither Russia nor Ukraine can achieve decisive victory, and China needs time to retrofit its economic system against potential sanctions. Regarding inflation, Shvets presents a nuanced view that we live in neither the disinflationary 1990s-2000s nor the inflationary 1970s-80s, but rather face alternating periods of inflation and disinflation similar to the 1930s. He identifies strong disinflationary forces (technology, demographics, inequality, financialization) offset by periodic inflationary spikes from 'black swan' events. He expects inflation to drain away in 2023 without requiring demand destruction, as the current inflation stems from supply disruptions rather than excess demand. For interest rates, he predicts they will fall over the next two years and sees the current cycle highs as already behind us, driven by underlying disinflationary pressures and economic constraints. On GDP and recession risk, Shvets outlines three scenarios with his base case being 'skirting global recession' with 1.5-2% global growth - neither a soft landing nor deep recession. He expects earnings per share around zero growth but sees limited systemic fractures in the financial system. For equities, this translates to his S&P 500 target range of 3,600-4,000, with downside protection from falling interest rates offsetting modest earnings disappointments. On China's reopening, he anticipates initial demand weakness in Q1-Q2 2023 followed by strong 7-8% growth in the second half, though focused more on consumption than infrastructure, limiting commodity market impact.
About this episode
MacroVoices welcomes Macquarie chief macro strategist Viktor Shvets to the show. They discuss the geopolitical outlook, inflation, bond yields, recession risk, equity market outlook, gold and much more. https://bit.ly/3WL6enD Download Big Picture Trading chartbook 📈📉https://bit.ly/3JzMktd ✅Sign up for a FREE 14-day trial at Big Picture Trading: https://bit.ly/2JjZR7J Check out Nick's YouTube channel: https://www.youtube.com/c/Optionfinity Join OptionFinity discord: https://discord.gg/Rvnsv6Y Please visit our website https://www.macrovoices.com to register your free account to gain access to supporting materials
Key Insights
- Shvets argues that geopolitics is a process rather than an event, taking time to unfold, and investors should focus on identifying periods when tensions simmer versus explode
- The strategist believes neither Russia nor Ukraine can achieve decisive victory, leading to eventual stalemate with dotted lines drawn on maps rather than resolution
- China's Taiwan invasion probability has decreased because Ukraine war taught China that Taiwanese will fight, they'll be well-armed, and China needs time to retrofit its economic system against sanctions
- Current inflation resembles the 1930s pattern with both inflationary and disinflationary forces rather than the consistently disinflationary 1990s-2000s or inflationary 1970s-80s
- Shvets contends that de-globalization is not inflationary because labor represents a smaller cost component, emerging market labor costs have risen, and re-industrialization is based on automation rather than labor
- The analyst expects inflation to drain away without requiring demand destruction because it stems from supply disruptions rather than excess demand, with most countries still below pre-COVID trajectories
- Interest rates have likely seen their cycle highs and will fall over the next two years due to underlying disinflationary pressures from demographics, technology, inequality and financialization
- His base case 'skirting global recession' scenario implies 1.5-2% global GDP growth, leading to roughly zero earnings per share growth but avoiding major financial system fractures
- The S&P 500 should trade between 3,600-4,000 in his core scenario, with falling interest rates and equity risk premiums offsetting modest earnings disappointments
- China's chaotic reopening will initially depress demand in Q1-Q2 2023 but could drive 7-8% growth in the second half as consumers draw down accumulated savings
- Chinese growth will likely focus on consumption rather than infrastructure and real estate to avoid further deterioration in capital efficiency, limiting commodity market impact
- The probability of policy errors is very low currently, with the three key risks being healthcare disruptions, geopolitical flare-ups, and China's recovery trajectory rather than central bank mistakes
Topics
Transcript
Thank you. Eric Townsend and Patrick Ceresna. Macro Voices episode 360 was produced on January 26, 2023. I'm Eric Townsend. This episode of Macro Voices was made possible by Respect Energy, a leading European trader of renewable energy and a one-stop shop for all green energy investors. Macquarie chief macro strategist Victor Schvitz returns as this week's feature interview guest. We'll discuss the geopolitical outlook, inflation, bond yields, recession risk, equity market outlook, gold, and much more. And I'm Patrick Ceresna. Listeners, be sure to stay tuned for our post-game segment after Eric's feature interview with Victor when Eric, Nick, and I will discuss the charts on the S&P 500, NASDAQ, VIX, gold, and the oil markets. Now, Eric, before…
Full transcript available for MurmurCast members
Sign Up to AccessMore from Macro Voices
MacroVoices #554 Yasir Arafat: Mass Manufacturing Nuclear Power Plants
Yasser Arafat, CTO of Allo Atomics, discusses the company's plans to mass-produce advanced nuclear reactors at scale, arguing that cost-competitive nuclear energy (cheaper than coal and gas) could be achieved within years, not decades, by leveraging manufacturing principles similar to Tesla's approach. He addresses fuel supply chain constraints, nuclear waste recycling potential, and competitive threats from China while outlining a pathway to transition global energy systems away from fossil fuels.
MacroVoices #553 Brent Johnson: Disparate Housewives
Brent Johnson discusses the dollar's breakout above 102, analyzing why the greenback continues strengthening despite expectations for decline, while also exploring the deepening coordination between the Federal Reserve and Treasury Department in what he calls the "Disparate Housewives" framework. He argues the US remains positioned to weather higher rates better than other economies, and frames the current geopolitical environment as analogous to the early Cold War era with China rather than a replay of the 1970s.
MacroVoices #552 David Rosenberg: Navigating The Noise
David Rosenberg argues that inflation concerns are overblown despite recent energy price spikes, contending that without wage pressures entering the labor market, price shocks will remain transitory. He identifies the November 3rd midterm elections and November 4th Treasury refunding announcement as pivotal catalysts that could trigger significant bond market rallies and economic slowdown as fiscal stimulus ends and gridlock returns.
MacroVoices #551 Michael Every: Decoding The Global Geopolitical Puzzle (Part 2)
Michael Every from Rabobank discusses the interconnected geopolitical tensions between the U.S. and China, analyzing how conflicts in Ukraine, the Middle East, and potential Taiwan invasion scenarios serve as strategic moves in a broader great power competition. He examines emerging policy shifts including potential diesel export bans, AI arms races, and nuclear escalation risks while arguing that national security concerns are overriding traditional free market economics.
MacroVoices #551 Michael Every: Decoding The Global Geopolitical Puzzle
Michael Every of Rabobank discusses interconnected geopolitical crises spanning Iran, Ukraine, and the Middle East, arguing that oil prices don't reflect true disruption risks and that energy will increasingly become a tool of statecraft. The conversation covers potential diesel shortages, U.S. policy responses, the Greenland-Denmark security deal, and China's strategic positioning amid global instability.