MacroVoices #237 Juliette Declercq: U.S. Election Outlook, U.S. Dollar, Real Yields and more

Episode Summary

Executive Summary: Macro Voices episode 237 centered on the 2020 U.S. election, contested-election risk, inflation, and the Fed’s new policy regime. Juliet de Klerk argued fiscal stimulus, not politics alone, will drive markets, while Eric Townsend emphasized unrest and uncertainty as key market risks. Both see a weaker dollar, higher inflation expectations, and a structural shift toward financial repression and greater volatility.

Main Topics: 2020 U.S. election and contested outcome risk (Priority: 5/5): Juliet and Eric focused on the possibility of a very close election, delayed results, postal-vote asymmetry, and the market impact of unrest or a Supreme Court battle over the outcome. Fiscal stimulus, employment support, and consumer demand (Priority: 5/5): Juliet argued that ending unemployment benefits too early risks a deflationary loop, while robust fiscal support is needed to sustain recovery and consumer confidence. Inflation outlook, real yields, and Fed policy shift (Priority: 5/5): The interview highlighted the Fed’s flexible average inflation targeting, de-emphasis of NAIRU, and a likely path toward lower real yields and higher inflation expectations. U.S. dollar weakness and global liquidity (Priority: 4/5): Both speakers viewed the dollar as a major macro driver; Juliet saw continued dollar downside as a consequence of Fed/fiscal coordination and lower real yields, with global liquidity benefits. Oil market rebound, OPEC jawboning, and structural backwardation (Priority: 4/5): Eric discussed crude oil’s technical rebound versus the possibility of a short-lived OPEC-driven pop, while maintaining a longer-term bullish thesis tied to falling U.S. supply in Q4. Equity market breadth deterioration and FANG weakness (Priority: 4/5): Patrick argued the S&P 500 and Nasdaq are vulnerable because a handful of FANG/mega-cap names dominate index weightings and are breaking down technically. Natural gas term structure and physical market imbalance (Priority: 3/5): The post-game noted sharp weakness in the front-month nat gas contract while deferred contracts held up, suggesting storage and seasonal physical-market distortions rather than a uniform selloff.

Key Arguments: A contested election is likely enough to create weeks of uncertainty, and that uncertainty could escalate unrest and hurt markets. Juliet argued Trump’s advantage comes from the economy and equities, but the loss of fiscal support and weak employment recovery could still cost him politically. The end of CARES Act-style support risks income expectations falling toward unemployment levels, creating a deflationary loop. Europe avoided a fiscal cliff more successfully than the U.S., helping consumer confidence recover despite renewed COVID cases. The Fed’s new framework is a paradigm shift: it is willing to overshoot inflation targets and keep nominal yields capped, allowing real yields to fall. Lower U.S. real yields and persistent dollar weakness should support gold, commodities, and global risk assets. Eric’s oil thesis remains constructive longer term, but the current rally could be an OPEC jawboning-induced pop-and-drop rather than a full trend reversal. Patrick argued that index-level risk is being masked by mega-cap concentration; if FANG stocks stay weak, the broader indices likely follow. Macro regime has shifted from central-bank-led stabilization to government-led fiscal intervention, implying more volatility and less reliance on passive investing. Nat gas weakness appears concentrated in the front month, consistent with storage/physical constraints and term-structure distortion rather than a broad structural collapse.

Data Points: Episode number: 237 - Macro Voices episode identifier Recording date: September 17, 2020 - Episode recording date Dollar index range: 92.5 to 93.5 - Eric described the dollar as pinned in a tight range for nearly two months Gold range: about $50 range, around 1,150/1,950? - Transcript indicates gold centered around roughly 1,950? and mentions 1972/1910 thresholds; the key point is a ~$50 sideways range for nearly two months Gold breakout levels: Above 1972 or below 1910 - Eric said those daily closes would confirm resolution of the consolidation WTI crude prior downside target: Low $30s - Eric’s initial base case for the oil correction Crude oil inventory draw: 4.5 million barrels - Weekly crude draw reported in the interview Strategic Petroleum Reserve draw: 2.2 million barrels - Added to commercial drawdown to make a combined 6.5 million barrels Combined oil draw including SPR: 6.5 million barrels - Eric aggregated the crude and SPR drawdowns Cushing crude draw: 74,000 barrels - Weekly Cushing, Oklahoma inventory change Gasoline inventory draw: 381,000 barrels - Weekly gasoline stock change Distillates inventory build: 3.5 million barrels - Largest build in the crude products report U.S. production level: 10.9 million barrels/day - Eric said production had rebounded above pre-tropical-storm levels Pre-tropical-storm U.S. production: 10.7 million barrels/day - Reference point for rebound in U.S. oil output Hours worked decline: 7.5% year-on-year - Juliet cited this as still down near the worst of the Global Financial Crisis Germany job protection extension: Until end of 2021 - Used as a European fiscal support comparison France furlough duration: Up to two years - Juliet cited France’s support program Spain furlough extension: Indefinitely - Used to contrast with U.S. fiscal cliff risk CAREs Act unemployment benefit: $600/week reduced to $300/week - Juliet said the U.S. bridge support was cut too quickly Trump fiscal package reference: $1 trillion to $2 trillion - Juliet described a possible compromise relief package Market concentration in S&P 500: 20% weighting in top five names - Patrick highlighted mega-cap concentration risk Market concentration in Nasdaq: 45% weighting in top six names - Patrick included Tesla among the top six names Nat gas front-month contract: October 2020 - Patrick noted the contract was near its last trading day on September 28 Nat gas last trading day: September 28, 2020 - Used to explain front-month pressure and rolling dynamics U.S. real-yield target range: -2% to -3.5% - Juliet and Eric discussed negative real yields as a likely regime outcome Nominal 10-year yield cap: Below 1% - Juliet said yield caps/forward guidance would likely keep nominal yields low 10-year breakevens: Trending higher since 1% in late March - Juliet said her inflation trade has worked since recommending it at about 1% breakevens

Pivotal Quotes: "I think the big story is going to be from now to the election and really through Inauguration Day, is going to be the escalation of unrest" — Eric Townsend: Eric framed the central market risk as political unrest and a contested election "Macro economics almost always wins over politics." — Juliet de Klerk: Juliet’s core view that underlying macro trends will matter more than which candidate wins "The Fed is basically moving away from a rules-based reaction function to a more discretionary one" — Juliet de Klerk: Her explanation of the Fed’s policy regime shift under average inflation targeting

Implications: Expect higher macro volatility around the U.S. election, continued pressure on the dollar, rising inflation expectations, and supportive conditions for real assets. Portfolio construction should emphasize flexibility, hedging, and active management over passive exposure.