MacroVoices #301 Julian Brigden: There‘s Behind the Curve and There‘s This

Episode Summary

Executive Summary: Macro Voices episode 301 centers on a sharp macro debate: Eric Townsend and Julian Brigden argue inflation is not merely transitory, driven by unprecedented fiscal/monetary stimulus, tight labor markets, and embedded price pressures, while Patrick’s technicals show risk assets still in rebound mode. The discussion focuses on how far the Fed may need to tighten, why financial conditions remain too loose, and which assets—rates, equities, credit, gold, crude, and the dollar—are most vulnerable.

Main Topics: Omicron, risk assets, and the near-term market rebound (Priority: 5/5): Eric and Patrick open by saying the Omicron panic was likely overstated for equities, which rapidly retraced the correction, though crude remained volatile. The key question is whether the rally can continue once Fed tightening becomes the dominant force. Fed policy pivot and tightening risk (Priority: 5/5): The hosts and Julian argue the Fed has shifted sharply hawkish and may need to move faster and farther than markets expect. The central theme is that the Fed cannot easily pivot back to easing until markets force its hand. Inflation versus disinflation debate (Priority: 5/5): Julian forcefully rejects the idea that inflation is simply transitory, arguing long historical evidence shows repeated inflationary episodes within a broader disinflationary era. He says current stimulus and supply-demand imbalances could keep inflation elevated for longer than markets expect. Labor market tightness, wages, and inflation expectations (Priority: 5/5): Julian argues labor participation assumptions were wrong, wage growth is real, and inflation expectations may be becoming unanchored. He sees the labor market as the key transmission mechanism that turns temporary price spikes into persistent core inflation. Bond yields, financial conditions, and the end of the bond bull market (Priority: 4/5): Townsend says the secular bond bull market may be ending, but that does not automatically mean a secular bear market. Julian is more aggressive, arguing short rates may need to rise enough to tighten financial conditions materially and pressure housing, credit, and equities. Asset-level technicals: equities, crude, gold, and Bitcoin (Priority: 4/5): Patrick’s chart review suggests equities remain technically constructive in the very short term, crude has likely formed a tradable low but remains volatile, gold is stuck in a weak range, China may be bottoming, and Bitcoin has suffered serious technical damage.

Key Arguments: Omicron looks less economically damaging than initially feared, so the equity market’s correction was likely overdone in the near term. The Fed has already pivoted hawkish and may need to tighten more than currently priced because financial conditions remain too easy. Inflation is not a one-off spike; massive combined fiscal and monetary stimulus has created excess demand that can keep feeding into core inflation. Historical data suggest pandemics and geopolitical shocks often mark the end of real-rate depressions, but not necessarily an immediate return to disinflation. Price pressures are still moving from goods into wages, rents, and other core categories, making inflation harder to dismiss as transitory. Labor participation has not rebounded as the Fed expected, so the economy may be running much hotter than policymakers assumed. Markets are underestimating how much tightening is required to slow equities, credit growth, and housing enough to cool the economy. Gold may not yet be ready for a durable breakout because real rates have not clearly turned higher in the way gold bulls want. Short-term technicals still favor equities over an immediate crash call, but macro risks are building underneath. Crude oil’s selloff was likely a panic move tied to virus fears, and the fundamental backdrop still supports higher prices if demand holds. Bitcoin’s breakdown below key levels materially worsened its technical picture and shifts risk toward lower lows.

Data Points: Episode number: 301 - Macro Voices episode identifier Recording date: December 9, 2021 - Episode intro U.S. crude production: 11.7 million barrels/day - Weekly inventory discussion; production ticked up 100,000 barrels U.S. crude inventory change: -240,000 barrels - Weekly inventory report Cushing inventory change: +2.4 million barrels - Weekly inventory report Gasoline inventory change: +3.9 million barrels - Weekly inventory report Distillates inventory change: +2.7 million barrels - Weekly inventory report Dollar index consolidation range: 95.5 to 97 - Julian and Eric discuss DXY trend status Potential dollar upside target: 104 - Julian says a breakout above 97 could imply a move back toward 104 10-year Treasury yield: above 1.50% - Eric notes yields bouncing north of 150 basis points Potential core PCE: 7% - Julian argues PPI pass-through could lift core PCE to around seven Typical PPI-to-core PCE spread: 125 bps - Julian cites the high end of historical spread in 2017-2018 M2 growth: almost 30% annualized - Julian emphasizes the scale of money supply expansion M2 current growth: about 13% - Julian says this would still be the highest postwar rate except the extreme surge Goods demand vs pre-COVID: 34% higher - Julian says goods demand remains far above pre-pandemic levels Services demand vs pre-COVID: 4% higher - Julian says services demand is also already elevated Estimated full employment by Fed members: 3.8% unemployment - Julian says the current FOMC view of full employment is around this level Potential unemployment implied by excess demand: 1% - Julian argues that even with full participation the demand backdrop could drive unemployment extremely low Weekly payroll growth: 9.5% - Julian cites rapid growth in aggregate weekly pay Nominal GDP gap: closed - Julian says the nominal GDP gap has already been closed Projected near-term growth: 6% - Julian says GDPNow suggests growth around six in the coming quarter Fed’s prior tightening template: 5.25% fed funds from 1% - Julian quotes Bill Dudley’s reference to the 2004-2006 cycle Potential rate hikes in 2022: 100 bps or more - Julian says the dots may imply as much as 100 basis points of hikes in 2022 Financial conditions index: 38-year lows - Julian says conditions are the easiest in 38 years S&P target cited by Julian’s liquidity model: 4,850 - If balance sheet tapering continues into April, Julian estimates further upside based on liquidity mechanics Payroll/participation shock: 4% of Americans retired due to crypto gains - Julian jokes this may have affected labor force participation Gold breakout level mentioned in post-game: failed breakout / retracement to prior support - Patrick notes the breakout in gold quickly retraced and remains range-bound Bitcoin key level: 55,000 - Patrick says BTC must reclaim this level to neutralize downside risk Potential lower Bitcoin target: below $40,000 - Patrick says another leg lower could take BTC under 40k Crude oil reflexive rally: about $10 off the intraday low - Patrick describes the rebound from the crash-like selloff Crude retracement: about 50% of the drop - Patrick says the bounce has retraced roughly half the move lower

Pivotal Quotes: "I think it's pretty much just what we predicted last week, which is Omicron was overstated in terms of its risk to the economy." — Eric Townsend: Opening market commentary on the equity rebound after the correction "The Fed will rescue the market next time the market needs to be rescued. But after they just pivoted pretty darn firmly to this very, very hawkish stance, the Fed can't pivot again until the market gives them a reason to." — Eric Townsend: Discussion of central bank policy and why the rally may be vulnerable "What the Bank of England discovered was that basically, when they look at the risk-free asset and they look at returns and inflation, that basically since the mid-1460s, we've been in a disinflationary world." — Julian Brigden: Julian’s historical framing of the inflation/disinflation debate

Implications: Listeners should expect a tug-of-war between technically resilient risk assets and a macro backdrop that may force much tighter policy. If Julian is right, rates, credit, and equities face material downside risk as inflation and wage pressures persist; if Patrick’s technicals hold, the rally can extend short term before the macro eventually reasserts itself.