MacroVoices #218 Lakshman Achuthan: What cycles teach us about what to expect post coronavirus

Episode Summary

Executive Summary: Macro Voices episode 218 centers on Eric Townsend’s market read that the S&P 500’s rebound is likely a bear-market rally, the dollar remains range-bound, gold is structurally bullish but may need a correction, and crude oil is the main focus as storage stress and time spreads may be near an inflection. The feature interview with ECRI’s Lakshman Achuthan frames the COVID recession as a deep, broad but potentially short technical downturn with an uncertain, non-V-shaped recovery, plus long-term concerns about deflation, inflation cycles, and U.S.-China geopolitical strain.

Main Topics: S&P 500 as a bear-market rally (Priority: 5/5): Eric argues the equity bounce likely topped at the 61.8% Fibonacci retracement near 2,930 and views the rally as vulnerable, though he avoids an aggressive short due to heavy Fed and political intervention risk. U.S. dollar consolidation (Priority: 3/5): The dollar index is described as range-bound between 99 and 101, with no clear directional signal until it breaks above 101, then 104 for confirmation of a higher move. Crude oil storage, contango, and time spreads (Priority: 5/5): A deep dive into WTI time spreads and storage economics suggests the storage crisis may be easing, but Eric stresses ambiguity: the move could reflect real shut-ins, a short squeeze, or both, with expiration dates likely निर्णing the truth. Gold’s long-term bull case vs short-term correction (Priority: 4/5): Gold is viewed as fundamentally strong and strategically worth owning, but Eric hopes for a technical pullback before adding leverage, noting the recent breakout attempt may be resolving higher. ECRI’s recession framework and recovery outlook (Priority: 5/5): Lakshman Achuthan explains recessions through the three D’s—depth, diffusion, duration—and says this recession is exceptionally deep and broad but could be short in technical duration if reopening lifts activity from very low levels. Secular deflation, future inflation, and cycles (Priority: 4/5): The discussion separates growth cycles from inflation cycles, with Achuthan arguing that recession kills inflation now, but leading inflation indicators will matter later if they turn up. COVID-19 origin, public health, and U.S.-China tensions (Priority: 4/5): Eric raises emerging evidence consistent with gain-of-function research and a possible lab leak, and argues the narrative around the virus could intensify geopolitical conflict and prolong economic disruption.

Key Arguments: The S&P 500’s move above the 61.8% retracement was brief, so the most likely interpretation is a bear-market rally rather than a new bull leg. The Fed and U.S. political incentives to support markets make aggressive short equity bets riskier than in a normal market. The dollar has not broken its 99-101 consolidation range, so no decisive trend signal exists yet. WTI contango near the front of the curve is effectively a proxy for storage demand in Cushing because arbitrage allows oil owners to buy time through futures spreads. Smaller crude inventory builds may mean storage is filling up, not necessarily that demand has disappeared; the real test is expiration behavior in the front contract. Gold remains fundamentally strong, but a technical correction would be ideal before adding leverage. ECRI’s framework says recessions are driven by endogenous cycles plus shocks; COVID was an exogenous shock that hit during cyclical vulnerability. This recession is extraordinarily deep and diffused, but because the shutdown was abrupt, the technical recession could end relatively quickly once activity restarts from depressed levels. A V-shaped recovery is unlikely because reopening the economy is not the same as restoring the prior level of demand, jobs, and incomes. Inflation and growth cycles are distinct; current recessionary conditions suppress inflation, but future inflation depends on separate leading indicators. The global bullwhip effect means demand shocks amplify upstream, hurting China and commodity producers more severely than end consumers. U.S.-China relations may deteriorate as both sides politicize the virus origin story, reinforcing a longer geopolitical cycle of East-West power shifts.

Data Points: S&P 500 futures level: about 2,876 - Eric references the market after the recent pullback from the bear-market rally Fib retracement level: 2,930 - Eric identifies 61.8% retracement as the key resistance that likely marked the rally top Dollar index range: 99 to 101 - Eric says the DXY is consolidating inside this band Dollar upside confirmation: above 101, then 104 - Breakout levels Eric cites for a bullish dollar signal Crude oil inventory build (U.S. national): 4.6 million barrels - Weekly inventory report discussed in the post-game summary Strategic Petroleum Reserve build: 1.7 million barrels - Added to the crude inventory figures to reach the broader build figure Combined crude build incl. SPR: 6.3 million barrels - Eric’s adjusted total after including the SPR Earlier crude build comparison: 15 million barrels - Eric contrasts current builds with the much larger builds from two to three weeks earlier Cushing inventory build: 2.1 million barrels - Current week Cushing build, smaller than prior weeks Gasoline inventories: down 3.2 million barrels - Weekly petroleum products report Distillates inventories: up 9.5 million barrels - Weekly petroleum products report U.S. crude production: 11.9 million barrels/day - Production ticked down by a couple hundred thousand barrels Gold futures price: about $1,727 - Price level at the time of recording after a late-session surge Prior gold cycle high: $1,780.88 - Eric says a move above this would confirm a new cycle high 10-year Treasury yield: 0.62% - Patrick and Eric discuss yields pressing lower after a brief pop Jobless claims: over 30 million - Locke cites the scale of unemployment claims to illustrate recession depth Great Recession duration: 1.5 years - Used as a comparison against a potentially much shorter technical recession now Potential COVID recession duration: around half a year - Locke’s estimate if reopening begins and activity rises from extreme lows June crude oil contract low: $5 print - Referenced in the post-game discussion of the rebound May-June crude spread extreme: minus $60 - Eric says the expiring May-June spread collapsed to this level before expiration June-July spread intraday extreme: minus $12 - Intraday low on April 21 before closing nearer minus $7.10 June-July spread close: about minus $7.10 - Closing level on April 21 mentioned in the spread chart discussion May contract options expiration: April 16, 2020 - Eric identifies this as a key date for the time-spread collapse Last trading day for May crude contract: April 21, 2020 - Eric says this was when the market found out the true delivery imbalance June contract penultimate day: May 18, 2020 - Eric says this will be a critical date for resolving the storage question June contract last trade day: May 19, 2020 - Final date by which the market should reveal whether storage stress persists

Pivotal Quotes: "I think this is a bear market rally." — Eric Townsend: Eric’s assessment of the S&P 500 after the retracement above the 61.8% level "You can force a recession, you can mandate one, which is what happened. But you cannot force a recovery." — Lakshman Achuthan: Core point on why reopening does not automatically produce a durable rebound "recession kills inflation" — Lakshman Achuthan: His concise summary of why current recessionary conditions suppress inflation

Implications: Listeners should expect choppy risk assets, an uncertain but potentially short technical recession, and a crude-oil market still vulnerable to sharp reversals around expiration. Longer term, the episode argues for careful positioning around deflation, possible future inflation, and rising U.S.-China geopolitical risk.