MacroVoices #303 Jesse Felder Joins Inflation/Deflation Debate

Episode Summary

Executive Summary: Macro Voices episode 303 centers on a near-term market risk from Omicron-driven panic but argues the longer-term trend remains higher for risk assets, especially crude oil and inflation hedges. Guest Jesse Felder makes a detailed case that secular inflation is replacing the old disinflationary regime, driven by demographics, debt monetization, deglobalization, and fading tech disruption. He also warns stocks are extremely overvalued and vulnerable to a correction if the Fed tightens into weakening liquidity and growth.

Main Topics: Omicron and near-term market volatility (Priority: 5/5): Eric Townsend argues Omicron may trigger a holiday-period panic and sharp but temporary selloff, especially in thin liquidity, but views it as a buy-the-dip event rather than a lasting reversal. Crude oil bullishness vs. holiday risk (Priority: 5/5): Despite recent weakness and a rebound, Eric remains structurally bullish on crude oil due to bullish inventories and tightening supply, but reduced risk exposure because holiday liquidity and virus headlines could cause a sharp swing. Secular inflation thesis (Priority: 5/5): Jesse Felder lays out why he believes inflation is not temporary, arguing the 4 Ds—demographics, debt, disruptive technology, and deglobalization—are now inflationary rather than disinflationary. Stock market valuation and bubble risk (Priority: 5/5): Felder argues the S&P 500 is at extreme valuation levels by multiple measures, with speculative excess, insider selling, and weak breadth suggesting poor future returns and heightened correction risk. Fed policy dilemma and liquidity (Priority: 4/5): Both Eric and Jesse focus on the Fed’s tightening path as a critical macro variable: tapering may be too late, and removing liquidity could expose the market to a downturn or force another pivot. Gold, precious metals, and inflation hedging (Priority: 4/5): Felder sees gold as undervalued versus deeply negative real rates, but says it likely needs a risk-off move or a Fed policy disappointment to break out meaningfully higher. Patrick’s technical read on 2022 setup (Priority: 3/5): The post-game chart deck emphasizes that near-term technicals still look constructive for equities and crude, while gold is at a pivotal breakout zone and grains are showing early signs of bottoming.

Key Arguments: Omicron is likely to cause a panic spike in cases, but not equivalent hospitalization/death damage, making any selloff potentially temporary rather than structural. Crude oil has supportive fundamentals: large inventory draws, declining U.S. production, and ongoing backwardation that signals tight physical supply. Holiday trading could exaggerate price moves because many professional traders are away, increasing the risk of a sharp but short-lived dislocation. The U.S. stock market is at historically extreme valuations, and the Buffett yardstick suggests very poor long-term forward returns from current levels. Real earnings yield on the S&P 500 is deeply negative, a historical warning sign that has preceded prior major market stress periods. Demographics have shifted from disinflationary to inflationary as more retirees leave the labor force, tightening wages and reducing labor supply. Debt is inflationary when the federal government monetizes it; issuing trillions in new debt while the Fed buys it is not disinflationary. Big Tech has concentrated market power and neutralized some of the disinflationary effects of disruptive technology. Deglobalization and the move from just-in-time to just-in-case supply chains are adding persistent inflationary pressure. Insider selling and high margin debt indicate speculative excess and weak future returns for both the market and the broader economy. The Fed faces a dilemma: fight inflation hard enough to trigger an asset-price crash or ease off and risk unanchored inflation expectations. Gold remains undervalued because real rates are deeply negative, but a convincing breakout may require a risk-off phase or a Fed policy disappointment. Broad market breadth deterioration and weak cyclical leadership suggest a hidden slowdown beneath index-level strength.

Data Points: Macro Voices episode: 303 - Episode identifier Recording date: December 23, 2021 - Episode recording date S&P 500 move after Omicron drop: Back close to 52-week new highs - Eric’s opening market overview U.S. dollar index trading range: 96 to 97 - Recent one-month consolidation range Crude oil inventory change: -4.7 million barrels - Weekly crude inventory draw cited by Eric Cushing, Oklahoma crude stocks: +1.3 million barrels - Inventory rebuild at Cushing Gasoline inventory change: -719,000 barrels - Weekly gasoline draw cited by Eric Distillates inventory change: -2.9 million barrels - Weekly distillate draw cited by Eric U.S. crude production: 11.6 million barrels/day - Production level after a 100,000 barrel/day decline 10-year Treasury yield range: 140 to 150 basis points - Treasury market trading range described by Eric Gold breakout threshold: 1833 - Eric’s line in the sand for confirming bullish momentum Buffett yardstick peak context: Almost double the dot-com peak; nearly triple 1968 - Jesse’s valuation comparison Margin debt: Over $900 billion - Referenced as a speculation indicator Margin debt 12-month growth threshold: Over 50% - Jesse cites this as a speculative blow-off signal S&P 500 12-month earnings yield: Most deeply negative on record - Jesse’s real earnings yield chart Negative correlation between Buffett yardstick and 10-year forward returns: About -90% - Jesse’s chart discussion NASDAQ 200-day breadth peak earlier in year: 80% to 90% above 200-day moving averages - Breadth comparison with later weakness NASDAQ breadth at new highs later in year: About 40% above 200-day moving averages - Breadth deterioration despite index highs Hindenburg Omens on NASDAQ: 18 over the last 12 months - Used as a breadth warning signal Fed balance-sheet impact on stock market moves: More than 50% - Jesse cites Bank of America research Amazon starting wage: $18/hour - Cited as pressure on wages across employers Gold undervaluation backdrop: Deeply negative real rates - Jesse’s gold bullish thesis Potential rate hikes priced by markets: 2 to 3 rate hikes - Jesse says markets/dollar already price this in Potential Fed funds rate under Taylor-rule logic: Almost 8% - Jesse’s example of how far policy is from rule-based levels

Pivotal Quotes: "I think we got another one of those coming, and it doesn't really make sense because Omicron doesn't have the hospitalization and death rates that the previous strains have." — Eric Townsend: Eric’s near-term market risk view on Omicron and the chance of a panic selloff "I look at these three Ds and I call them the four D's of inflation. And I think they're all pointing towards higher inflationary impulses in the years ahead." — Jesse Felder: Jesse’s core thesis on why inflation is becoming secular rather than temporary "The devil is raise interest rates enough to create another crash in the stock market... The deep blue sea is... protect the stock market at all costs at the risk of allowing inflationary expectations to become unanchored." — Jesse Felder: Jesse describing the Fed’s policy dilemma

Implications: Listeners should expect continued near-term volatility, but the bigger story is a regime shift toward inflation, tighter liquidity, and pressure on expensive growth stocks. Energy, commodities, and gold may benefit if the Fed disappoints or pivots again.