MacroVoices #228 Lyn Alden: The Road to Inflation

Episode Summary

Executive Summary: Macro Voices episode 228 centers on Lynn Alden’s thesis that the COVID shock hit an already fragile economy with rising deficits, dollar shortages, and de facto deficit monetization already underway. The discussion argues policy is shifting toward “Monetary Policy 3”/MMT-like direct support, which may be more inflationary, bullish for gold, and supportive of large-cap growth while leaving smaller cyclical equities and bonds vulnerable to regime shifts.

Main Topics: Pre-COVID structural fragility and dollar shortage (Priority: 5/5): Lynn Alden argues the economy was already weakening before COVID due to rising deficits in an expansion, aging-driven entitlement spending, tax cuts, weak foreign Treasury demand, and bank balance-sheet strain that culminated in the 2019 repo spike and early deficit monetization. COVID shock, jobs, and equity market resilience (Priority: 5/5): Alden says the pandemic created the largest employment shock in modern U.S. history, but equities bottomed near the peak in initial jobless claims and recovered faster than the real economy because fiscal and monetary stimulus were unprecedented. Monetary Policy 3 / MMT / yield curve control (Priority: 5/5): The interview frames current policy as a shift from rate suppression and QE toward direct fiscal-monetary coordination: Treasury issuance financed by Fed purchases, helicopter-style transfers, and potential yield curve control modeled partly on the 1940s. Inflation, real rates, and gold (Priority: 5/5): Both guests see gold as a long-duration bull market candidate because it tracks real rates and money supply growth. Alden argues that policy 3 is more inflationary than post-2008 QE because money is reaching households and businesses directly. Market internals: leadership, breadth, and concentration (Priority: 4/5): Patrick highlights that FANG/mega-cap stocks drove most of the rally while equal-weight and smaller-cap components lagged badly, raising the question of whether broader market participation will improve or if concentration worsens. Dollar, crude oil, and Treasury yields (Priority: 4/5): The hosts watch key technical levels in the dollar index (96), crude oil around $41–42, and the 10-year yield as signals for risk appetite, inflation expectations, and potential reversals in consensus trades. Election and policy path dependence (Priority: 3/5): The episode notes that the 2020 election matters mainly for the size/timing of additional fiscal stimulus and whether government spending is expansionary, delayed, or paired with tax hikes, all of which could affect markets and inflation paths.

Key Arguments: Rising fiscal deficits before COVID were structurally abnormal in an expansion and reflected demographics plus tax cuts, not just the virus shock. A global and domestic dollar shortage forced banks and eventually the Fed to absorb Treasury supply, creating early deficit monetization before pandemic relief. The equity market recovered far faster than the real economy because roughly $3 trillion of combined fiscal and monetary support flowed into households, firms, and markets. Current policy resembles a move from QE aimed at financial assets toward direct real-economy injections, which is more inflationary over time. Gold is primarily driven by real interest rates; if nominal yields are capped while money supply and fiscal deficits expand, gold should benefit. The strongest long-term case for gold is not just inflation hedge status but scarcity in an environment of negative/low real yields and currency debasement. Treasuries may still have room to rally if deflationary pressures persist or if negative rates become plausible, which could temporarily pressure gold. Market leadership is highly concentrated in mega-cap tech/FANG; a healthy broadening would show equal-weight outperforming market cap-weighted indices. A stronger dollar could trigger foreign selling of U.S. assets and hurt equities; a weaker dollar would ease pressure on dollar-funded global balance sheets. The 2020 election outcome matters less than whether government remains willing to expand deficits; divided government may slow policy while a sweep may accelerate fiscal action.

Data Points: Macro Voices episode: 228 - Episode number Recording date: July 16, 2020 - Episode recording date SP 500 level: around 3,200 - Hosts discuss the index hovering below early-June highs Dollar index level watched: 96 - Key technical support referenced repeatedly Crude oil high: $41.63 - June rally peak cited as the likely top of the move Crude oil weekly high: $41.25 - Latest weekly high mentioned in market wrap U.S. COVID cases per day: more than 65,000 - Used to argue demand destruction is worsening U.S. previous COVID peak: about half of current rate - Described as almost double the prior peak from April Crude oil inventory change: -7.5 million barrels - Weekly EIA report discussed in the wrap Strategic Petroleum Reserve change: +100,000 barrels - Indicates SPR inflow may be tapering Cushing inventory change: +949,000 barrels - Weekly storage build at Cushing, Oklahoma Gasoline inventory change: -3.1 million barrels - Weekly EIA report Distillates inventory change: -453,000 barrels - Weekly EIA report U.S. production: 11 million barrels/day - Discussed as steady week over week Broad money supply growth: well over 20% year over year - Alden cites historic money growth during 2020 Federal Reserve balance sheet increase: about $3 trillion in a matter of months - Alden contrasts current pace with post-2008 QE Fiscal/market support: roughly $3 trillion - Combined fiscal and monetary force pushing against the shock Stimulus checks: $1,200 - Household direct payments during COVID response Extra unemployment benefit: $600 per week - Temporary federal enhancement referenced by Alden PPP lending: about half a trillion dollars - Small-business support program cited as major liquidity injection Household net worth decline in 2008-09: about $11 trillion - Used to compare post-GFC deflation shock with 2020 Household net worth decline in Q1 2020: about $7 trillion - Alden notes the first-quarter 2020 decline Fed balance sheet increase in 2008-2014: about $3.6 trillion - Compared with the scale of lost household net worth Bank cash levels post-GFC: about 15% by end-2014 - Result of bank recapitalization through QE Bank cash levels pre-crisis: about 3.3% - Low level entering the GFC era Large bank cash levels during repo stress: about 7% - Post-financial-crisis low cited from the 2019 repo spike Foreign ownership of U.S. assets: about $40 trillion - Net international investment position discussion U.S. ownership of foreign assets: about $29 trillion - Used to illustrate foreign exposure to U.S. asset sales U.S. debt/GDP in 1940s: over 100% - Historical precedent for yield curve control 1940s long bond cap: 2.5% or less - Alden cites wartime yield curve control Inflation in 1940s: double digits at peak - Used to show capped yields can mean real losses Gold breakout level discussed: $1,800 - Psychological and technical level under review Gold technical support level: $1,786 - Alden says this is the more meaningful breakout threshold Gold spot/contract level: about $1,796 - Current level during discussion SP 500 vs gold cyclical measure: CAPE-based earnings yield versus 10-year forward returns - Alden explains long-term relative valuation chart FANG index year-to-date performance: +45% - Patrick’s post-game chartbook NASDAQ year-to-date performance: +18% - Patrick’s post-game chartbook Russell 2000 year-to-date performance: more than -10% - Patrick contrasts broad market weakness with tech leadership

Pivotal Quotes: "If anything, the news that we're seeing coming out about COVID-19 is it looks like the antibodies that form to protect the immune system against COVID-19... would probably only have an effective period of six to eight weeks from the science that we're seeing so far." — Eric Townsend: Market wrap commentary on why vaccine headlines may be over-optimistic "We started on this path of deficit monetization in late 2019 before the COVID crisis even happened." — Lynn Alden: Explaining the pre-pandemic structural setup of Treasury demand and Fed support "I think we're looking at a potentially more inflationary environment." — Lynn Alden: Answering whether Monetary Policy 3 / direct transfers will be more inflationary than post-2008 QE

Implications: Listeners should expect policy-driven markets to dominate: weaker real yields and ongoing fiscal deficits favor gold and mega-cap quality, while broadening participation will be key for confirming recovery. Treasury, dollar, and election outcomes remain critical swing factors.