MacroVoices #454 Vincent Deluard: The Five Body Problem

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.