MacroVoices #361 Alex Gurevich: Jay Powell says, “Effects of tightening not yet felt.” Alex says, “No shit, Jay.”
Alex Gurevich argues that the Fed's tightening hasn't been fully felt yet and predicts deflation rather than continued inflation, expecting rates to hit zero by end of 2024. He recommends buying long-dated oil futures and bonds while predicting gold could reach $3,000.
Summary
Alex Gurevich, fund manager at Honte Investments, agrees with Fed Chair Powell's statement that the full consequences of monetary tightening are yet to be felt, but argues this points toward deflation rather than inflation concerns. He believes the inflation spike was driven by negative real rates in 2020-2021, but now with falling inflation and tightening policy, deflation is more likely. Gurevich expects the Fed to reverse course, cutting rates to zero by end of 2024 and potentially implementing negative rates within two years. On energy markets, he sees a fundamental disconnect between oil supply and global growth needs, but argues that dollar scarcity from Fed tightening could force a deflationary recession rather than higher oil prices. His trade recommendation is buying long-dated oil futures around $65-68 for three-year contracts, viewing this as a low-risk, high-reward asymmetric bet. He's also bullish on bonds across the yield curve, particularly five-year treasuries for buy-and-hold strategies. Regarding gold, he predicts prices could reach $3,000 driven by anticipation of future Fed liquidity injections. The interview covers the Fed's Wednesday rate hike announcement, with discussion of how strong consumer balance sheets from pandemic cash distributions are delaying the typical recession transmission mechanism, potentially making the eventual downturn more severe.
Key Insights
- Gurevich argues that deflation is more likely than inflation because falling inflation combined with continued Fed tightening creates a deflationary dynamic
- He believes the Fed will be forced to cut rates to zero by end of 2024 and implement negative rates within two years
- The author contends that energy supply at current prices is inadequate for sustained global growth, but dollar scarcity could force recession instead of higher prices
- Gurevich recommends buying three-year oil futures at $65-68 as an asymmetric trade with limited downside and significant upside potential
- He argues that gold could reach $3,000 because it anticipates future Fed liquidity injections rather than responding to current conditions
- The speaker claims this recession will be deeper because strong consumer balance sheets delay the Fed's incentive to react quickly
- Gurevich states that in this cycle, inflation will be the first shoe to drop rather than employment, reversing the typical recession sequence
- He argues that inverted yield curves have historically always been good times to buy bonds, with more easing occurring than markets project
- The author believes the 'mother of all bond rallies' is just beginning and recommends five-year treasuries for buy-and-hold strategies
- Gurevich contends that negative real rates in 2020-2021 drove the inflation spike through excessive money creation and borrowing
- He argues that current positive real rates and shrinking money supply will inevitably cause prices to fall in a non-accommodative environment
- The speaker claims that any scenario where oil trades at current forward prices of $65-68 three years out requires at least a deflationary recession
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