MacroVoices #415 Tian Yang: Fiscal, Sisyphus or Hercules
Variant Perception CEO Tian Yang discusses extreme U.S. fiscal deficits, growing earnings vulnerabilities, and multiple market signals suggesting a shift from the current economic regime. Yang argues that the Fed's dependency on fiscal stimulus creates a 'Sisyphus' scenario where stopping would cause economic decline.
Summary
Tian Yang from Variant Perception presents a comprehensive analysis of current macro conditions, starting with the unprecedented nature of U.S. fiscal policy. Yang argues the government is in a 'Sisyphus' situation, forced to maintain extreme deficits (6-7% of GDP) while households draw down savings - a historically rare combination. He identifies concerning data anomalies, including divergences between tax receipts and nominal GDP that suggest the government may have run larger deficits than intended due to tax avoidance and IRA credits. In labor markets, Yang reveals that while headline numbers appear strong, there's significant deterioration among larger businesses (10+ employees) masked by micro-business job openings, suggesting margin pressures are building. He warns that earnings forecasts remain overly optimistic given declining job openings, with corporate pricing power having largely disappeared. Yang's inflation leading indicators suggest bottoming patterns that could lead to upside surprises in the second half of 2024, challenging the Fed's cutting narrative. His firm's LPPL (log periodic power law) indicator recently signaled potential bottoms in palladium and Chinese equities. Yang recommends tactical positions in tips over nominal treasuries, MBS, and structured trades around Chinese assets including dollar/CNH upside paired with capped equity upside. His capital cycle and crowding models favor energy, gold miners, and emerging market sectors while suggesting caution on mega-cap tech without monetary easing.
Key Insights
- Yang argues the U.S. is running 6-7% GDP deficits while households draw down savings, an extremely rare historical combination that creates government dependence on continued stimulus
- Tax receipt data shows unprecedented divergences from nominal GDP due to COVID-enabled tax avoidance and IRA credits, suggesting larger unintended deficits
- Labor market strength is concentrated in micro-businesses under 10 employees, while larger businesses show significant deterioration in job openings and hiring
- Corporate pricing power has largely disappeared in aggregate, explaining increased margin pressure and layoff announcements despite strong headline job data
- Yang's inflation leading indicators are bottoming across multiple measures, suggesting potential upside surprises in the second half of 2024
- The firm's LPPL crash climax indicator recently signaled potential bottoms in palladium and multiple Chinese equity markets
- Earnings forecasts remain overly optimistic given declining job openings data, suggesting downside risks independent of AI/tech sectors
- Implied correlations in S&P 500 options are extremely low, creating potential for significant index volatility if dispersion trades unwind
- Yang's liquidity framework based on Perry Mehrling's money hierarchy suggests reduced margin of safety after last year's asset price rally
- Capital cycle models favor energy, gold miners, and select emerging markets while suggesting caution on crowded mega-cap tech positions
- Yang argues that without monetary tightening, narrow market breadth rarely leads to major bubble bursts, requiring additional conditions like median stock declines
- The firm's macro FX models suggest continued dollar/CNH upside, creating opportunities for structured trades pairing currency strength with capped Chinese equity upside
Topics
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