MacroVoices #267 Jeff Snider: Why Deflation Is The Story, Not Inflation

Episode Summary

Executive Summary: In this episode of Macro Voices, hosts Eric Townsend and Patrick Serezna interview Jeffrey Snyder, CIO of Alhambra Investments, who presents a compelling deflationary case against the prevailing inflation narrative. Snyder argues that despite massive fiscal and monetary stimulus, global bond markets remain unimpressed, pricing in continued disinflation. He uses Eurodollar futures and yield curve analysis to show that current reflationary moves are weaker than past cycles, suggesting the market expects no lasting inflation. The hosts also discuss technical market conditions, including overextended equities, a weakening dollar, and potential breakouts in commodities like oil and gold.

Main Topics: Inflation vs. Deflation Debate (Priority: 5/5): Jeffrey Snyder argues that despite unprecedented government stimulus, global bond markets are pricing in continued disinflation, not inflation. He contrasts this with the mainstream inflationist view held by many macro experts. Eurodollar Futures and Yield Curve Analysis (Priority: 5/5): Snyder uses Eurodollar futures curves to demonstrate that current reflationary sell-offs are weaker than those in 2013 and earlier, indicating the market sees little chance of sustained inflation or higher rates. Market Technicals: Equities, Dollar, Commodities (Priority: 4/5): The hosts analyze current market conditions: S&P 500 overextended above its 50-day moving average, dollar index struggling below 92, crude oil and copper showing potential breakouts, and gold attempting to reverse its downtrend. Quantitative Easing and Fiscal Policy Impact (Priority: 4/5): Snyder argues that QE is not inflationary because it creates bank reserves, not money in the real economy. He contends that even direct fiscal transfers (like UBI) have been deflationary in Japan and will likely be so in the West. Commodity Supercycle Potential (Priority: 3/5): The hosts discuss the possibility of a new commodity supercycle, with crude oil potentially reaching $90/barrel and copper breaking out to new highs, driven by dollar weakness and reflation trades. TIPS and Inflation Expectations (Priority: 3/5): Snyder notes that while short-term TIPS break-evens have risen, the 5-year/10-year inversion indicates the market expects any inflation to be temporary, not sustained.

Key Arguments: Global bond markets, including Eurodollar futures and Treasuries, are pricing in continued disinflation, not inflation, despite massive stimulus. Current reflationary sell-offs are weaker than those in 2013 and earlier, showing diminishing market conviction in inflation. Quantitative easing is not inflationary because it creates bank reserves, not money in the real economy. Direct fiscal transfers (like UBI) have been deflationary in Japan and are likely to be so in the West due to negative multipliers. The TIPS market's inverted break-even curve (5-year above 10-year) suggests any near-term inflation is expected to be temporary. The bond market, not central banks, sets long-term interest rates, as evidenced by the 2013 taper tantrum where rates fell despite Fed tapering.

Data Points: M2 Money Supply Growth: 25% annual - Rising at historic rate for about a year, cited by Snyder as a factor often misinterpreted as inflationary. Fed Bank Reserves: $4 trillion - Record level due to QE and Treasury General Account drawdowns. S&P 500 Distance from 50-Day MA: 217 points - Indicates overextended rally, similar to levels seen in May-June and August 2020 before corrections. Crude Oil Measured Move Target: $90-91/barrel - Projected top for 2021 based on November to February rally extent. 10-Year Treasury Yield: 1.53% - Down almost 10 basis points from previous day, breaking down from recent highs. Gold Price: $1,765 - Key level above 50-day moving average; if sustained, confirms trend reversal. Eurodollar Futures (Dec 2022): $99.50 - Implies small probability of one rate hike by end of 2022, but most likely no hike. 5-Year TIPS Break-Even: Highest since 2008 - But inverted relative to 10-year, indicating temporary inflation expectations.

Pivotal Quotes: "Even after the so-called historic reflationary sell-off, the Eurodollar futures curve is projecting an intermediate and longer-run future that's about the same as the awful projections were back at that time. Our current best case for growth and inflation... is about the same as past worst cases." — Jeffrey Snyder: Summarizing his deflationary thesis: current market pricing is as pessimistic as the worst-case scenarios from 2013. "The market sets the long-term interest rates, not central bank bond buying. In fact, there's very little correlation between bond buying programs and where interest rates are and how they've gone." — Jeffrey Snyder: Arguing that QE does not control yields; the market does, based on fundamental economic expectations. "Gold did everything today that it possibly could do from a technical perspective, other than perhaps staying there for a few days, which is the next thing it has to do." — Eric Townsend: Highlighting gold's technical breakout above key moving averages, suggesting a potential trend reversal.

Implications: Listeners should consider that the consensus inflation narrative may be premature. Bond markets suggest deflationary forces remain dominant, which could mean lower yields and continued commodity volatility. Investors should watch for confirmation of breakouts in gold and oil, and be cautious of overextended equities.