MacroVoices #245 Lakshman Achuthan: Brace For Inflation

Episode Summary

Executive Summary: Macro Voices Episode 245 centers on the post-election, post-vaccine market reaction and a deep dive with ECRI co-founder Lakshman Achuthan on cyclical analysis. The hosts argue markets are overreacting to headlines, while Locke says growth and inflation are in separate cycles, the recession is over, a virtuous recovery is underway, and inflation is likely to keep rising for a few quarters.

Main Topics: Election uncertainty and media narratives (Priority: 5/5): Eric argues the election was prematurely called and that there was still no official president-elect at the time; he also discusses the possibility of a Democratic Senate win in Georgia and Trump’s move toward a media platform. COVID resurgence and the 'Pfizer vaccine' reaction (Priority: 5/5): The hosts contrast the market’s euphoric response to Pfizer’s preliminary vaccine news with the worsening pandemic data, including record infections and deaths, and argue the news was not a true game changer. Market reaction across major assets (Priority: 4/5): They review the immediate and then mixed reactions in equities, the dollar, oil, gold, treasuries, and credit, emphasizing that markets have not fully digested the negative virus backdrop or the inflation implications. Lakshman Achuthan on business cycles vs inflation cycles (Priority: 5/5): Locke explains ECRI’s framework: business cycles, growth-rate cycles, and inflation cycles are distinct; the recession has ended and a self-reinforcing recovery is in place, with leading indicators supporting ongoing growth. Inflation outlook and the Future Inflation Gauge (Priority: 5/5): Achuthan argues inflation is a separate cyclical process that is currently moving higher, with the FIG signaling more upside over the next couple of quarters and warning against event-driven interpretations. Portfolio and sector implications (Priority: 4/5): The discussion highlights possible rotations: reflation, higher yields, stronger commodities, small caps and non-U.S. equities outperforming mega-cap tech, and potential upside in uranium and energy assets.

Key Arguments: The election was not technically over yet, and calling Biden president-elect was premature; outcomes still depended on the formal electoral process. The Pfizer vaccine announcement was positive but not a true 'game changer'; it reflected early clinical-trial progress, not a ready mass-deployment solution. COVID trends were materially worse, with infections and deaths spiking globally and in the U.S., particularly in the northern hemisphere. A mink-to-human transmission and mutation raises concern that virus evolution could complicate or reduce vaccine effectiveness. Locke argues business-cycle recovery is already underway and self-reinforcing, supported by leading indicators and improving activity in goods and construction. Inflation is a distinct cycle from growth and can rise even when the business cycle narrative is unclear; investors should not rely on the Phillips curve or the Fed’s event-driven framing. The Future Inflation Gauge is rising strongly, implying inflation should continue to surprise to the upside for the next few quarters. The 38-year bond bull market may be ending, with long-term yields likely bottoming and a broader reflation trade developing. Market leadership may be rotating away from mega-cap tech toward small caps, international equities, cyclicals, energy, and uranium if reflation persists.

Data Points: Recorded episode date: November 12, 2020 - Macro Voices episode 245 recording date U.S. new COVID cases (recent days): More than 135,000 per day; 143,000 yesterday - Eric contrasts current wave with April peak U.S. April peak new cases: 35,000 per day - Used as comparison to current surge Global new COVID cases (April): About 85,000 per day - Comparison to current global surge Global new COVID cases (current): Over 600,000 per day - Shows magnitude of resurgence Single-day COVID deaths: More than 10,000 in one day - Described as a new record Pfizer CEO stock sale: More than half of personal holdings sold - Presented as occurring into the vaccine rally Oil inventory build: 4.3 million barrels - Weekly crude inventory data surprised to the upside Cushing, Oklahoma crude draw: 518,000 barrels - Part of the weekly inventory report Gasoline inventory draw: 2.3 million barrels - Product drawdown supportive for oil Distillate inventory draw: 5.4 million barrels - Large product drawdown in weekly data 10-year Treasury yield: Almost 100 bps at peak; about 91 bps at time of recording - Yield reaction to vaccine/election news Oil price level before move: Around $34 per barrel - Referenced as the low two weeks earlier Gold technical level: 200-day moving average at $1,798 - Eric’s stated near-term support/buy level U.S. FIG baseline: 100 (1992 baseline) - How the Future Inflation Gauge is normalized Uranium ETF ticker: URNM - Sponsor and later post-game discussion Art market size: $1.7 trillion - Masterworks sponsor copy Art historical annual return: 8.9% annually from 2000 to 2018 - Sponsor claim used in ad read Masterworks first Banksy sale return: 32% - Sponsor claim used in ad read Art-stock correlation: 0.13 - Sponsor claims art has low correlation to equities U.S. 10-year Treasury bonds with yield under 5%: 97% - Sponsor copy in ad read Stock market PE ratio: Over 31x earnings - Sponsor copy in ad read

Pivotal Quotes: "the inflation cycle is not directly correlated to the business cycle" — Patrick Serezna: Closing discussion on Locke’s core framework "The recession has ended. We are in the business cycle recovery." — Lakshman Achuthan: Locke explains the current stage of the cycle "Be prepared for inflation to continue to surprise to the upside." — Lakshman Achuthan: Locke’s view of the Future Inflation Gauge and near-term inflation path

Implications: Listeners are being told to expect more reflation: stronger growth, higher inflation, rising yields, and possible sector rotation away from crowded tech into cyclicals, small caps, energy, uranium, and other inflation beneficiaries.