MacroVoices #436 Tian Yang: Left & Right Tails
Tian Yang argues that reduced left and right tail risks characterize the current market environment, as recession pressures hit vulnerable sectors like micro-businesses and manufacturing but failed to create the expected negative feedback loops due to persistent fiscal deficits. He recommends a yield curve steepener trade as manufacturing recovers and inflation pressures moderate.
Summary
Tian Yang, CEO of Variant Perception, presents a contrarian view that both left-tail (recession) and right-tail (overheating) risks have diminished in the current economic environment. He argues that while leading indicators suggested recession conditions over the past 18 months, the actual recession occurred in specific vulnerable sectors - micro-businesses saw operating margins fall to all-time lows, consumer credit card delinquencies rose above 10%, and manufacturing experienced significant stress. However, the expected negative feedback loops that typically spread recession conditions broadly never materialized, largely due to persistent fiscal deficits that supported incomes and job creation. Yang points to unique features of this cycle, including households locked into low mortgage rates (effective rate still only 3.8% despite new mortgages at 7%+) and government fiscal support that prevented the typical income shocks. On manufacturing, he identifies that the COVID-induced bullwhip effect is normalizing, suggesting a manufacturing recovery ahead. For inflation, Yang sees a tactical moderation despite structural upward bias long-term, with leading indicators like NFIB and ISM price plans rolling over. He recommends a 2s10s steepener trade, arguing that forwards remain too inverted. On politics, Yang applies historian Alan Lichtman's framework suggesting elections are referendums on the past four years, which would favor Democratic continuity based on economic improvement metrics, though Biden's debate performance has created unprecedented uncertainty. He maintains structural bullishness on commodities despite tactical weakness from poor China data, and sees the dollar potentially weakening as positioning remains stretched long.
Key Insights
- Yang argues that recession stress occurred in vulnerable sectors like micro-businesses and manufacturing but failed to create the typical negative feedback loops due to persistent fiscal deficits
- The speaker claims that effective mortgage rates remain at 3.8% for existing homeowners despite new mortgage rates exceeding 7%, preventing typical credit cycle stress
- Yang contends that manufacturing recovery is underway as COVID-induced bullwhip effects normalize, evidenced by inventory cycle indicators returning to historical patterns
- The analyst argues that inflation leading indicators like NFIB and ISM price plans have peaked and begun rolling over, suggesting tactical moderation ahead
- Yang recommends a 2s10s steepener trade based on his view that forward curves remain too inverted relative to economic fundamentals
- The speaker applies historian Alan Lichtman's framework suggesting elections are referendums on economic performance, which would favor Democratic continuity based on GDP per capita growth
- Yang argues that government fiscal policy prevented typical income shocks by not collecting taxes at historical rates relative to nominal GDP growth
- The analyst contends that micro-business operating margins hit all-time lows but net income margins held up due to fiscal policy buffers
- Yang claims that positioning data shows investors remain stretched long the dollar despite weakening fundamentals, suggesting room for unwinding
- The speaker argues that commodity markets face headwinds from weak China data but should benefit from broad-based global growth recovery in other economies
- Yang suggests that small businesses maintained elevated job openings despite operational stress, indicating they avoided the worst recession outcomes
- The analyst argues that housing remains a key headwind with building permits and housing starts declining, limiting right-tail growth potential
Topics
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