MacroVoices #454 Vincent Deluard: The Five Body Problem
Vincent Deluard discusses his thesis on secular inflation driven by policy responses rather than external shocks, arguing that recessions have been effectively cancelled through government intervention. He introduces the 'Five Body Problem' framework for understanding macro conditions and explores the shadow economy's impact on economic resilience.
Summary
Vincent Deluard, Chief Macro Strategist at StoneX, presents a comprehensive analysis of secular inflation and structural economic changes. He argues that the pandemic response, not COVID itself, triggered the current inflationary cycle through massive deficit spending exceeding World War II levels. Deluard maintains that inflation occurs in waves, citing historical patterns from the 1950s and 1970s, and expects another wave driven by policy responses to future shocks.
Regarding Trump's presidency, Deluard views Trump as fundamentally populist and inflationary, with greater mandate and administrative coherence than his first term. He argues the economic context is vastly different from 2016, when deflationary pressures made Trump's policies appropriate, whereas current conditions of 3% growth and underlying 4-4.5% core inflation make similar policies potentially problematic.
Deluard introduces his 'Five Body Problem' framework, identifying five critical macro questions: maintaining high US growth, Fed policy stance, Chinese stimulus success, election outcomes, and potential oil shocks. He believes answering these questions correctly provides the macro 'Rubik's cube' solution.
A central thesis involves the 'shadow economy' comprising shadow work, shadow lending, and shadow savings. Deluard argues the US is experiencing reverse development, with a massive gig economy generating approximately $6 trillion in income (20% of GDP). Self-employment tax collections have reached $1 trillion, suggesting a hidden economy twice Brazil's size growing at 10% annually. This includes platforms like Uber, Airbnb, and even OnlyFans, which collectively generated more revenue than the NBA.
Shadow lending involves $2 trillion in private credit markets larger than junk bonds, filling gaps created by bank regulation. Shadow savings reflect $50 trillion in household wealth increases since COVID, equivalent to 50 years of normal savings, creating powerful wealth effects supporting consumption.
Deluard presents a 'recessions cancelled' thesis, arguing policymakers can eliminate one of four economic quadrants (inflationary boom, disinflationary boom, stagflation, deflationary bust). Current policy consensus aims to prevent deflationary busts, making long-term treasuries unnecessary portfolio components. He supports this with massive ongoing deficits (7% of GDP) and Fed dovishness despite full employment and record asset prices.
On international markets, Deluard expects Chinese stimulus to succeed, noting policy implementation follows different timelines and political processes than Western assumptions suggest. He sees potential for a March 2009-style bottom in Chinese equities around Trump's inauguration, which could benefit emerging markets broadly. Regarding gold's recent decline, he attributes it to rotation into Bitcoin following Trump's crypto-friendly stance, but maintains long-term bullish outlook based on central bank accumulation and secular inflation.
Deluard emphasizes China's nuclear energy leadership as a critical long-term competitive advantage, comparing it to SpaceX's approach to rockets - achieving massive cost reductions through standardization and scale rather than one-off projects. This technological leadership in reliable, cheap energy generation could provide substantial economic advantages over coming decades.
Key Insights
- Deluard argues the pandemic response, not COVID itself, triggered secular inflation through deficit spending that exceeded World War II levels and never normalized afterward
- Deluard maintains inflation occurs in historical wave patterns and expects another wave driven by policy responses to future external shocks
- Deluard views Trump as fundamentally populist and inflationary, with greater mandate and administrative coherence than his first term
- Deluard argues current economic conditions differ drastically from 2016, with 3% growth and underlying 4-4.5% core inflation making Trump's policies potentially problematic
- Deluard identifies a shadow economy worth approximately $6 trillion (20% of GDP) driven by gig platforms, self-employment, and asset monetization
- Deluard claims self-employment tax collections reaching $1 trillion suggest a hidden economy twice Brazil's size growing at 10% annually
- Deluard argues $2 trillion in private credit markets have replaced bank lending, creating shadow lending that doesn't appear in traditional financial surveys
- Deluard contends household wealth increases of $50 trillion since COVID represent 50 years of normal savings, creating powerful consumption support
- Deluard presents a 'recessions cancelled' thesis where policymakers can eliminate deflationary busts through massive deficits and dovish Fed policy
- Deluard expects Chinese stimulus to succeed despite Western skepticism, noting different policy implementation timelines and potential March 2009-style market bottom
- Deluard attributes gold's decline to rotation into Bitcoin following Trump's crypto stance but maintains long-term bullish outlook based on central bank accumulation
- Deluard emphasizes China's nuclear energy leadership as providing critical long-term competitive advantages through standardized, scalable approaches rather than one-off projects
Topics
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