Dusting Off The Recession Playbook | Tian Yang

Episode Summary

Executive Summary: Tian Yang argues 2023 is a risk-off year defined by recession, weak excess liquidity, and falling inflation. He expects equities and high-yield credit to underperform, prefers bonds and some gold, and sees market bottoms only after policy panic, technical exhaustion, and a Fed pivot. China may help locally, but not enough to offset global slowdown.

Main Topics: Macro framework and research process (Priority: 5/5): Variant Perception uses a 'man plus machine' approach combining tactical, cyclical, and structural models across different horizons to synthesize market views. U.S. recession and growth slowdown (Priority: 5/5): Yang says the U.S. recession model triggered at the end of 2022 and believes the downturn is starting now, with housing, manufacturing, and leading labor indicators weakening first. Liquidity as the key market driver (Priority: 5/5): Excess liquidity remains deeply negative because broad money growth is weak relative to inflation and real activity, implying continued pressure on risk assets. Inflation, Fed policy, and terminal rates (Priority: 4/5): He expects inflation to keep falling as demand and supply pressures ease, and thinks the Fed likely needs CPI to fall below the policy rate before it can truly pause or pivot. Asset allocation across equities, bonds, gold, and FX (Priority: 5/5): He is underweight equities and U.S. high yield, prefers bonds and cash, is more constructive on gold, and sees a nuanced, only moderately bullish case for the dollar. China reopening and global implications (Priority: 4/5): China’s reopening may lift domestic activity and some commodities, but Yang argues U.S./global tightening is too negative to allow China to drive a 2009-style global reflation. Bottom checklist and market timing (Priority: 4/5): His market-bottom checklist is partly flashing but still missing the core policy pivot and bond-market confirmation, so he is not yet bullish on stocks.

Key Arguments: Variant Perception’s process combines tactical signals, cycle indicators, and structural models; timing matters as much as direction. The U.S. recession model triggered in late 2022, and Europe/China were already in recession territory, supporting a risk-off stance. GDP prints can mislead because inventories and trade are volatile; underlying consumption and investment trends matter more. Excess liquidity remains negative because narrow money growth minus inflation and real activity is still weak, which historically hurts both stocks and bonds. The current environment favors bonds over equities because growth is slowing and inflation is falling, even if recession timing creates tactical volatility. He does not think 2022 was the recession; instead, he sees the beginning of it in early 2023 as leading indicators roll over. A Fed pivot usually requires the policy rate to exceed trailing CPI; therefore, markets expecting an early stop may be too optimistic. Inflation should fall materially over the next 6–12 months due to demand destruction, supply-chain relief, and weaker commodity prices. China can support local assets and some commodities, but its stimulus is unlikely to offset the broader global liquidity contraction. Gold looks more attractive now because real yields and nominal yields may be peaking while the economy rolls over. Equities are vulnerable because earnings recessions become dangerous when they coincide with economy-wide recession and negative feedback loops. The best market bottoms usually need policy easing, curve steepening, and bond-market confirmation, which are not yet fully in place. Dollar strength may be less dramatic this cycle because safe-haven inflows from Europe and China already happened earlier. A tactical short squeeze in tech may continue near term, but the broader year outlook remains bearish for high-duration assets.

Data Points: U.S. recession model: Triggered at end of 2022 - Variant Perception’s real-time recession model for the U.S. economy Fed funds rate: Expected to reach about 5.0% to 5.25% by March/April 2023 - Estimated peak policy rate under current projections U.S. CPI: 6.5% - Referenced as the CPI print on the recording day Inflation outlook: Around 0.3% month-on-month - Yang’s estimate for future monthly CPI gains, implying about 3.6% annualized Atlanta Fed GDPNow: 4.1% quarter-over-quarter annualized - Cited as an example of why GDPNow looked less recessionary than Variant Perception’s models Private consumption and investment trend growth: Around 2.5% - Used as the underlying trend after stripping volatile GDP components Equity valuation rule of thumb: 15x forward earnings - His rough market-bottom framework for the S&P 500 S&P 500 fair value example: About 3,000 - Derived from 15x on roughly $200–$220 forward earnings 10-year Treasury fair value: 1.7% to 1.8% - Model-implied fair value under recession assumptions Current 10-year Treasury yield: About 3.5% - Used to argue bonds have upside if recession and easing arrive CPI vs policy rate rule: Fed historically does not stop hiking until Fed funds exceeds trailing YoY CPI - Anchor for his terminal-rate call Chinese policy impulse: Turning positive since Q3/Q4 2022 - Domestic China signal, but not enough to offset U.S. tightening December flow recovery: More than 50% recovered already in early 2023 - Yang’s observation that some of the late-2022 outflows had already reversed Bear market definition: 20% decline from peak - Used when discussing checklist items and bottoming signals Household difficulty paying expenses: Rising across income spectrum up to $100,000 households - Census Bureau survey used to challenge the strong-consumer narrative

Pivotal Quotes: "“Our research philosophy is this idea of man plus machine, it's man or machine alone.”" — Tian Yang: Describing Variant Perception’s multi-horizon macro research process "“Right now, it’s very risk-off for the year.”" — Tian Yang: Summarizing the base-case asset allocation stance for 2023 "“The best time to buy gold is when real yields are peaking, when policy rates are peaking, when the economy is about to turn down.”" — Tian Yang: Explaining why gold has become more attractive despite falling inflation

Implications: Listeners should expect continued macro volatility, weaker risk assets, and better opportunities in bonds and possibly gold. A durable equity bottom likely requires recession pain, policy easing, and confirmation from credit and the curve.