MacroVoices #279 Viktor Shvets: The Inflation-Deflation Pendulum

Episode Summary

Executive Summary: Macro Voices episode 279 centers on the debate between Eric Townsend’s secular inflation thesis and Victor Schwetz’s disinflationary, pendulum-swing framework. Market wrap focused on equities still trending higher, a softer dollar, crude oil’s OPEC-driven volatility but bullish inventory draws, gold’s tentative recovery, and falling Treasury yields. Schwetz argues technology, financialization, demographics, and globalization drive long-run disinflation, while fiscal policy and deglobalization create intermittent inflation bursts.

Main Topics: Inflation vs. disinflation regime debate (Priority: 5/5): Eric frames the episode around whether the world is entering a 1970s-style secular inflation cycle, while Schwetz argues the more durable pattern is alternating inflation/disinflation swings, with disinflation ultimately dominant. Equity market melt-up and short-term correction risk (Priority: 4/5): Eric and Patrick note the S&P 500’s first meaningful down day after a long rally. Patrick sees the potential for a summer consolidation or 5%-10% correction, while Eric remains broadly bullish on the uptrend. Crude oil, OPEC+ dysfunction, and inventory draws (Priority: 5/5): Eric dismisses OPEC+ drama as transient and bullish, emphasizing strong demand, ARBOV/WTI technical strength, and large weekly inventory draws that support higher prices. Dollar, bonds, and global rate trends (Priority: 4/5): The dollar is viewed as range-bound rather than in a decisive new trend. Treasury yields are falling, and Patrick highlights similar declines in German and Japanese yields as evidence of a broader global disinflationary turn. Gold, real yields, and recovery potential (Priority: 4/5): Gold rebounds toward $1,800 but remains below key moving averages. The discussion ties gold’s prospects to real yields, which have moved back near -1%, potentially improving the metal’s outlook if the move persists. Schwetz’s structural thesis: technology, capital, and social change (Priority: 5/5): Schwetz argues that digitization, automation, biotech, and deglobalization are changing the economy. He links rising government role, financialization, and generational politics to shifting markets and social preferences. Central banks, asset prices, and the limits of normalization (Priority: 5/5): Schwetz contends that central banks are trapped by a financialized system that depends on low volatility and ever-cheaper capital. He argues interest rates are unlikely to return to past norms and that asset markets are increasingly managed.

Key Arguments: Eric Townsend argues the current environment is consistent with the early stages of a secular inflation regime, but acknowledges Victor Schwetz provides a credible countercase grounded in structural disinflation. Schwetz argues the last 20 years were dominated by financialization, digitization, and globalization, all of which were strongly disinflationary; the next 10-20 years will include inflationary bursts, but disinflation remains the longer-term force. Schwetz claims technology is becoming more capital-intensive and increasingly affects physical production, which initially raises investment demand but ultimately reduces marginal pricing power and pushes prices toward zero. Schwetz says fiscal policy will become more active because society wants government to redirect excess capital into healthcare, infrastructure, research, and social support, adding episodic inflation. He argues deglobalization and localization reinforce inflationary pressure, but only temporarily against a stronger disinflationary backdrop. Schwetz claims younger generations favor fairness and government support over the Baby Boomer emphasis on freedom, choice, and efficiency, helping expand the role of the public sector. He says central banks cannot allow meaningful volatility because asset prices are now embedded in household and corporate behavior, so they must keep expanding liquidity and suppressing rates. Patrick argues equity leadership remains concentrated in large-cap growth/FANG stocks, but broad-market momentum looks tired and vulnerable to a mean-reverting correction. Patrick also argues the recent commodity rally is maturing outside energy, making crude oil the key variable for whether the broader commodity complex holds up or rolls over. Both hosts highlight that falling yields in the U.S., Germany, and Japan may be an important signal that the bond bear market feared earlier in the year is fading.

Data Points: Macro Voices episode: 279 - Episode number and recording date are stated in the opening. Recording date: July 8, 2021 - Feature interview and market discussion were recorded on this date. S&P 500 move: First sell day in several weeks - Patrick and Eric discuss the market’s first meaningful down day after a long rally. Dollar index support: Above 92, with key support near 89 - Eric says he sees no downside panic as long as the dollar stays above 89. WTI crude high: Almost $77 - Referenced as the recent intraday high on the August contract. Crude oil inventory draw: 6.6 million barrels - Weekly crude stocks drawdown cited in the market wrap. Gasoline inventory draw: 6.1 million barrels - Weekly gasoline stocks drawdown cited in the market wrap. Distillate build: 1.6 million barrels - Weekly distillate inventories increased. Net petroleum product draw: More than 10 million barrels - Combined crude and finished products drawdown. Cushing draw: 614,000 barrels - Cushing, Oklahoma inventory change. U.S. production: 11.3 million barrels per day - U.S. crude output increased by 200,000 barrels/day. U.S. production change: +200,000 barrels per day - Weekly increase in U.S. crude production. Gold price: Around $1,800/oz - Gold had temporarily moved above 1,800 and was trading near that level. Gold key resistance zone: $1,829 to $1,841 - Eric identifies the clustered moving averages as the technical hurdle. 10-year Treasury yield: Below 1.30% - Nominal yields were described as breaking lower. 10-year Treasury yield threshold: Below 1.50% - Eric says the market calmed once yields moved comfortably below this level. German 10-year Bund yield: About -30 bps - Patrick uses this to show global yields are falling again. Japanese 10-year yield: Back to 0 bps - Used as another example of global disinflationary pressure. Public sector spending share of GDP (U.S.): 48% - Schwetz cites this as evidence of expanding government role. Debt/liquidity needed per $1 GDP historically: $1 to $1.50 - Schwetz contrasts earlier era financial requirements with today’s much higher leverage. Debt/liquidity needed per $1 GDP today: About $5 in some countries; almost 10x in the U.S. by his framing - Schwetz argues financialization has sharply raised system leverage needs. Future productivity growth pre-industrial revolution: 10 basis points per annum - Schwetz’s historical comparison of productivity trends. Post-first industrial revolution productivity: 100 basis points per annum - Historical productivity comparison. Post-second industrial revolution productivity: 200 basis points per annum - Historical productivity comparison. Current productivity growth: About 50 basis points per annum - Schwetz says current productivity is low but will eventually accelerate. Millennial/Z electoral share: About 20% of votes in the latest election - Schwetz uses this to argue younger cohorts are gaining political power. Time to plurality for younger generations: About 8 years - Schwetz predicts the shift will become politically decisive within roughly eight years. Japan government debt servicing: 4% of budget - Schwetz uses Japan as evidence that high debt does not necessarily force rates higher. Japanese central bank holdings: 52%-53% of JGB market - Schwetz cites this as evidence of extreme monetization and market dominance. Lumber price peak: $1,700 - Patrick references the parabolic rise and subsequent collapse in lumber. Lumber price level: Under $800 - Current level at the time of discussion, still above pre-pandemic ranges.

Pivotal Quotes: "The private sector will never walk again unassisted." — Victor Schwetz: Schwetz’s core thesis that government support and central-bank intervention will remain permanent features of the system. "Everything becomes free." — Victor Schwetz: He explains his long-run view that technology and financialization compress marginal pricing power toward zero. "That story has got to end badly someday, but I don't think there's any reason to think it's today." — Eric Townsend: Eric on the S&P 500’s persistent uptrend despite the first meaningful sell day in weeks.

Implications: Listeners should expect continued regime debate: secular inflation may be real, but structural disinflation and policy intervention remain powerful counterforces. Near term, watch crude oil, real yields, and global bond yields as the clearest signals for asset rotation and market direction.