MacroVoices #259 Louis-Vincent Gave: As Inflationista As They Come

Episode Summary

Executive Summary: Macro Voices episode 259 centered on the accelerating shift from disinflation to inflation. Eric Townsend and Louis Vincent Gave argued that energy shortages, fiscal dominance, and policy-driven liquidity will push commodities, rates, and inflation expectations higher, while hurting bonds and pressuring gold near term. Kevin Muir then highlighted the Treasury General Account unwind as a major liquidity catalyst that could fuel risk assets and steepen the curve.

Main Topics: Secular inflation versus deflation (Priority: 5/5): The hosts framed the episode around the podcast’s recent tilt toward inflationists. Gave argued that inflation is already building through energy, supply-chain constraints, and underinvestment, while the hosts contrasted this with the few remaining deflationary voices. Treasury yields and the bond market (Priority: 5/5): Both guests discussed the rise in yields as potentially the start of a bigger repricing. Gave warned bonds may lose their anti-fragile status, while Muir argued the long end could rise sharply even if the Fed suppresses the front end. Treasury General Account (TGA) liquidity unwind (Priority: 5/5): Muir’s post-game segment focused on the Treasury’s plan to drain the TGA, releasing massive liquidity into markets. He argued this could boost reserves, steepen the curve, pressure short rates, and create risk-on conditions. Crude oil and the energy supercycle (Priority: 4/5): Townsend and Gave both saw energy as a major beneficiary of capital scarcity and reopening. Gave emphasized years of capital destruction in oil and the inability of supply to respond quickly enough to higher prices. Gold weakness and real rates (Priority: 4/5): Gold’s selloff was attributed to rising nominal and real yields, but Gave argued the weakness is temporary because inflation will ultimately be recognized and real yields should fall again. Portfolio construction in a fiscally dominated world (Priority: 4/5): Gave outlined a framework for separating assets into roles—contrarian, income, defensive, growth, and anti-fragile—and argued investors should diversify beyond U.S. assets and recognize that Treasuries may no longer be the portfolio ballast they once were. Hong Kong, Singapore, and Europe (Priority: 3/5): Gave argued Hong Kong remains the central China capital-market hub and dismissed the idea that Singapore will replace it. He also warned Europe could face social unrest as rising food and energy prices collide with heavy lockdowns and monetary debasement.

Key Arguments: Inflation is being driven by underinvestment in critical inputs like energy, grids, and semiconductors, not just by central bank money printing. The 60/40 portfolio is less reliable because bonds may no longer hedge equity risk if inflation and yields rise together. Treasuries’ role as an anti-fragile asset is vulnerable; if investors reprice them as inflation-sensitive, the damage could be severe. The Treasury General Account drawdown is a major, underappreciated source of liquidity that could push stocks higher and front-end yields lower. The long end of the Treasury curve can rise substantially even if the government shifts issuance toward shorter maturities. Gold remains a strategic hedge, but near-term pressure from rising nominal and real rates may continue until inflation is fully reflected in data. Energy has structural upside because capital has been starved for years and supply cannot quickly respond to demand recovery. Copper may be entering a major secular bull market due to electrification demand and limited new supply. Hong Kong remains the dominant venue for Chinese listings and capital-market activity despite political changes. Europe’s combination of monetary debasement, lockdown fatigue, and rising food/energy prices creates a risk of unrest that money printing may not solve.

Data Points: Macro Voices episode: 259 - Episode identifier Recording date: February 18, 2021 - Episode production date S&P 500 level: around 3900 - Described as gamma-pinned into options expiration US Dollar range: 89 to 92 - Townsend described the dollar index as consolidating between key support and resistance Crude oil target: 60.92 - Townsend’s prior-week upside target that was hit exactly WTI crude oil high: north of $60, approaching $62 - Market level discussed during the week Crude oil inventory draw: 7.3 million barrels - Weekly US crude inventory change Cushing inventory draw: 3 million barrels - Cushing, Oklahoma crude stock draw Gasoline build: 672,000 barrels - Weekly gasoline inventory change Distillates draw: 3.4 million barrels - Weekly distillate inventory change Net petroleum product draw: more than 10 million barrels - Crude plus finished products drawn down in aggregate Gold price: 1773 - Gold traded near late-November lows Gold channel support: 1759 - Downsloping channel support cited by Townsend Gold channel resistance: 1843 - Downsloping channel resistance cited by Townsend 10-year Treasury yield: north of 1.3% - Yield backed up sharply from prior sub-1% range Prior 10-year Treasury range: 70 bps to 1.0% - Described as a long boring consolidation period TGA starting level: $1.6 trillion - Muir said the Treasury General Account had been built to an unprecedented level TGA planned drawdown: $800 billion in two months - Yellen’s roadmap to reduce the TGA TGA target after additional two months: $500 billion - Expected TGA balance after the next phase of rundown Projected reserve increase: $1 trillion in two months - Muir cited Bank of America’s estimate including Fed QE and TGA runoff Projected reserve increase by end of June: $2 trillion - Expected cumulative liquidity increase Current banking system reserves: $3 trillion - Used as the baseline for projected growth Reserve increase percentage: 25% in two months; nearly 66% by end of June - Muir quantified the liquidity surge relative to current reserves US Navy annual cost equivalence: 0.5% yield increase on U.S. government funding - Gave said a 50 bps rise in funding cost equals Navy annual cost US Marine Corps annual cost equivalence: 0.3% yield increase on U.S. government funding - Gave said a 30 bps rise in funding cost equals Marine Corps annual cost US oil production decline: more than 2 million barrels from its high - Gave said US output had fallen substantially from peak US shale capital destruction: more than $300 billion lost - Gave described the shale boom as fueled by capital destruction Chevron and Exxon capex: about half of 2014 levels - Used to support the underinvestment thesis in energy Texas power outage impact: 4.5 million people cut off from the grid - Gave used the Texas freeze as evidence of infrastructure underinvestment Real rates in OECD government bonds: minus 1.5% to minus 2% - Gave argued cash and bonds are unattractive in real terms

Pivotal Quotes: "I'm as big an inflationista as you're going to have on this show, I'm afraid." — Louis Vincent Gave: Opening challenge from Eric about whether Gave would be a deflationist "The bonds are going to turn into the ballast for your equity portfolio, to the anchor." — Kevin Muir: Muir explaining his view that bonds may stop diversifying stocks and instead drag portfolios lower "I think we're well on our way into a crackup boom anyway." — Kevin Muir: Muir describing the risk of a liquidity-fueled melt-up amid fiscal and monetary expansion

Implications: Listeners should prepare for a regime shift: higher inflation, steeper curves, weaker bond diversification, and stronger commodity/energy trends. The TGA unwind may intensify short-term risk-on moves while also raising volatility across rates, gold, and growth equities.