MacroVoices #395 Simon White: Inflation, Stocks & Why TINA is Coming Back
Bloomberg's Simon White argues that a recession is more likely than consensus believes, driven by stress in both hard and soft economic data, and that secular inflation will return due to large fiscal deficits being monetized by central banks. He contends that the Fed's rate hikes have had little direct impact on inflation, which has instead been driven down by China's deflationary pressures that may soon reverse.
Summary
Simon White, Bloomberg's Markets Live macro strategist, presents a comprehensive case for an imminent recession and the return of secular inflation. He argues that current economic conditions show stress in both hard data (industrial production, retail sales) and soft data (market and survey data like ISM), which historically creates feedback loops leading to abrupt recessions. White emphasizes that recessions are characterized by being pronounced, protracted, pervasive, and precipitate, often catching markets off guard due to data revisions that obscure turning points.
Regarding inflation, White traces the root cause to central bank monetization of large fiscal deficits, which began before the pandemic. He argues that the Fed's 500+ basis points of rate hikes have had minimal direct impact on inflation reduction, with most of the decline coming from China's deflationary pressures via the acyclical component of core PCE. As China's economy shows signs of recovery and PPI begins to rise, White expects inflation to re-accelerate globally.
White discusses significant market implications, particularly the breakdown of traditional stock-bond correlations due to elevated inflation. He argues this fundamental shift undermines the portfolio hedging function that bonds have served for decades, potentially leading to a 'TINA with a vengeance' scenario where investors pile into equities due to lack of alternatives. He also highlights credit market distortions, noting that traditional indicators like credit spreads aren't reflecting underlying deterioration due to suppressed volatility and the growth of opaque private credit markets.
The interview concludes with White's observations on dollar strength, driven by real yield curves, and his view that despite current gold weakness, it remains well-positioned in an elevated inflation environment as insurance against financial upheaval.
About this episode
MacroVoices Erik Townsend and Patrick Ceresna welcome back Bloomberg’s Macro Strategist, Simon White to the show. Simon and Erik will discuss inflation, deflation and stock bond correlation. https://bit.ly/3tbJEeY Download Simon's Charts: Simon White - MacroVoices 28 2023 Check out Energy Transition Crisis on YouTube: https://www.youtube.com/@EnergyTransitionCrisis1 Download Big Picture Trading chartbook 📈📉 https://bit.ly/3RBr8a0 ✅Sign up for a FREE 14-day trial at Big Picture Trading: https://bit.ly/2JjZR7J Please visit our website https://www.macrovoices.com to register your free account to gain access to supporting materials
Key Insights
- White argues that recessions occur when hard and soft economic data interact to create cascading feedback loops, and current conditions show stress in both categories past thresholds historically associated with recession
- The speaker contends that the real cause of inflation is central bank monetization of large fiscal deficits, not just pandemic and Ukraine disruptions which were merely proximate causes
- White claims the Fed's 500+ basis point rate hikes have had virtually no direct impact on inflation, as evidenced by the cyclical component of core PCE remaining unchanged
- The author argues that China's deflationary pressures have been the primary driver of inflation decline through the acyclical core PCE component, and this trend may reverse as China's economy recovers
- White asserts that unemployment claims data by state shows deterioration across a high percentage of states consistent with recession patterns, providing more information than national data
- The speaker argues that positive stock-bond correlation eliminates bonds' traditional portfolio hedging function, potentially leading investors to increase equity allocations despite higher risk
- White contends that credit spreads are providing false signals due to suppressed VIX levels caused by low implied correlations and option speculation, masking underlying credit deterioration
- The author argues that bankruptcy filings are rising while credit spreads remain stable, indicating a disconnection between market pricing and fundamental credit conditions
- White claims that private credit markets totaling $1.5 trillion are obscuring price discovery and delaying recognition of credit problems
- The speaker argues that traditional recession playbook of selling stocks and buying bonds won't work in an elevated inflation environment due to unstable Phillips curves
- White asserts that real yield curves provide better dollar direction signals than nominal curves in inflationary environments, and the primary dollar trend remains downward medium-term
- The author argues that excess liquidity in dollar terms remains supportive for risk assets despite recession risks, creating conflicting signals for investors
Topics
Transcript
This is Macro Voices, the free weekly financial podcast targeting professional finance, high net worth individuals, family offices, and other sophisticated investors. Macro Voices is all about the brightest minds in the world of finance and macroeconomics telling it like it is, bullish or bearish, no holds barred. Now, here are your hosts, Eric Townsend and Patrick Ceresna. Macro Voices episode 395 was produced on September 28th, 2023. I'm Eric Townsend. Bloomberg's Simon White returns as this week's feature interview guest. We'll discuss the soft landing versus recession narratives, secular inflation, credit market risks, and much more. And I also have a big announcement to share with the Macro Voices community right after my interview with Simon and before Patrick's…
Full transcript available for MurmurCast members
Sign Up to AccessMore from Macro Voices
MacroVoices #547 Daniel Lacalle: The Future of Reserve Currency
Daniel Lacalle argues that governments have exceeded the three limits (economic, fiscal, and inflationary) that maintain currency credibility, threatening the U.S. dollar's reserve currency status. He contends that stablecoins and decentralized currencies will eventually replace centralized fiat systems, with the Trump administration's pro-crypto stance potentially either cementing or disrupting dollar dominance depending on fiscal prudence.
MacroVoices #546 Darius Dale: Darius Dale for POTUS 2028
In MacroVoices #546, Darius Dale discusses the current state of economic policies, financial markets, and geopolitical risks while emphasizing the significance of evolving market dynamics influenced by federal interventions. Dale's analysis highlights the potential implications for growth, inflation, and asset performance amid increasing government debt and intervention strategies.
MacroVoices #545 Michael Howell: Warsh vs. The Markets
Michael Howell discusses global liquidity cycles and their impact on asset markets, arguing that the liquidity peak in late 2025 has begun rolling over and will likely bottom in mid-to-late 2027. He contends that gold has likely bottomed and should rally significantly due to Chinese monetary expansion and Western debt monetization, while warning that equities face headwinds as bond yields rise and the Fed may need to tighten despite political pressure.
MacroVoices #544 Viktor Shvets: How Markets Survive Disruption
Viktor Shvets discusses the paradox of disinflation as the dominant long-term trend while near-term inflationary spikes persist from policy decisions, the deterioration of the Federal Reserve's independence and cohesion under Chair Kevin Warsh, escalating geopolitical conflicts with no clear resolution, and the K-shaped economy driven by AI-induced wealth concentration that is fueling dangerous levels of political polarization.
MacroVoices #543 Jim Bianco: Who Solves Inflation The FED or The Market?
In the latest Macro Voices episode, Jim Bianco discusses the Fed's recent decisions and their implications for inflation and long-term bond yields, highlighting the independence of Fed voters in the decision-making process. He argues that the bond market's reaction indicates persistent inflation concerns and that either the Fed must raise rates or the market will force higher yields.