MacroVoices #327 Luke Gromen: Recession with Rising Yields is Entirely Possible

Episode Summary

Executive Summary: Macro Voices episode 327 centered on Eric Townsend and Luke Gromen arguing that markets are underpricing a structural inflation regime, rising geopolitical risk, and a coming policy trap. They discussed foreign divestiture risk after Russian reserve seizures, the dollar’s near-term strength versus its longer-term vulnerability, persistent oil and food inflation, and why the Fed may ultimately be forced into yield-curve control and monetization.

Main Topics: Foreign divestiture and reserve-currency trust (Priority: 5/5): Luke Gromen argued that seizure of Russian FX reserves was a historic break in global trust and will incentivize countries to diversify away from Treasuries and toward gold, productive assets, or local development. Secular inflation vs. transitory inflation (Priority: 5/5): Both speakers argued that pandemic supply-chain inflation was only a temporary overlay and that a deeper secular inflation trend is likely to persist, driven by deglobalization, fiscal deficits, and negative real-rate requirements. Energy, oil, and geopolitical scarcity (Priority: 5/5): They emphasized that oil and gas supply is constrained, OPEC spare capacity is exhausted, U.S. shale is not responding, and Europe faces escalating dependence on Russian energy heading into the fall/winter. Dollar strength now, dollar weakness later (Priority: 4/5): Gromen reconciled his long-term bearish dollar view with a near-term bullish case: in a global stress event, the dollar can spike, but eventual Fed monetization and balance-of-payments stress could drive a later reversal. Gold’s muted price action versus macro fundamentals (Priority: 4/5): Despite the bullish macro case for gold as a reserve asset, prices had not yet responded strongly; the guests suggested this reflects market skepticism about the durability of higher rates and the timing of reserve diversification. Rates, recession, and the Fed’s policy trap (Priority: 5/5): Townsend argued the 10-year yield above 3% could signal markets waking up to persistent inflation. Gromen said the U.S. cannot sustain positive real rates with current debt and deficit levels without forcing de facto default or monetization. Post-game chart outlook: summer grind (Priority: 3/5): The chart discussion framed equities, euro, crude, gold, lumber, nat gas, and the yield curve as likely to grind sideways or trend with high volatility, rather than revert neatly to pre-2022 patterns.

Key Arguments: Russia reserve seizures changed the rules: if sovereign reserves can be frozen, other countries will reduce Treasury exposure as a defensive move. The U.S. needs negative real rates to service its debt load; if real rates normalize sustainably, default pressure rises unless the Fed monetizes deficits. Inflation is not solely a pandemic artifact; deglobalization, reshoring, and energy scarcity create a durable secular inflation backdrop. Oil is structurally tight because spare capacity is exhausted, Cushing inventories are low, U.S. shale growth is weak, and Chinese demand may return. Europe’s energy vulnerability could force a political and economic crisis in the fall, especially if it must choose between sanctions policy and winter heating needs. The dollar can rise in a global stress/liquidity squeeze even if its long-term reserve status erodes over time. Gold should eventually benefit from reserve diversification and distrust of sovereign assets, but the move may lag until the market fully prices the policy regime shift. A recession does not guarantee falling inflation or falling energy prices; a stagflationary recession is plausible if supply constraints dominate demand weakness.

Data Points: Episode number: 327 - Macro Voices episode identifier Recording date: June 9, 2022 - Episode recording date Fed survey foreign divestiture concern: 41% of respondents - Referenced as an unprecedented level of concern about foreign divestiture of U.S. assets Dollar index level: above 103 - Recent short-term dollar rebound discussed by Eric and Patrick Dollar breakout level: 104+ (five-year high breakout) - Eric said the decisive move would be a close above the five-year high around 104 Crude oil inventory headline: +2.0 million barrels - Weekly crude oil inventory build that looked bearish on the surface SPR withdrawal adjustment: 7.3 million barrels - Eric argued the crude build was offset by the week’s Strategic Petroleum Reserve release Net adjusted crude balance: -5.2 million barrels - Net effect after accounting for the SPR release SPR drawdown over the last year: more than 100 million barrels - Eric criticized the administration’s use of the SPR Cushing inventory draw: 1.6 million barrels - Discussed as another major draw in Oklahoma storage hub Cushing stocks: below 25 million barrels - Eric said stocks were nearing minimum operating levels Gasoline inventory draw: 1.6 million barrels - 10th consecutive weekly drawdown Distillates inventory build: 2.6 million barrels - Largest build since December 2021 U.S. oil production: 11.9 million barrels/day - Described as flat for several weeks OPEC+ production shortfall: 2.6 million barrels/day below targets - Used to illustrate lack of spare capacity Russian ruble move: from ~120 to ~60 per USD - Luke described the ruble’s recovery after sanctions and gas settlement dynamics German PPI inflation: ~30% - Luke cited Germany as an example of energy-driven inflation stress German bond yield: ~60 bps - Used to highlight pressure on Europe’s policy mix U.S. debt-to-GDP: ~120% - Central to Luke’s argument that the U.S. needs inflation and negative real rates U.S. deficit: ~6% to 7% of GDP - Cited as part of the structural financing problem Record tax receipts: ~$4.3 trillion - Luke used this to show that even strong receipts are insufficient Entitlement PAYGO outlays: ~$2.8 trillion - Luke said nearly 70% of tax receipts were absorbed by entitlements Defense spending: ~$850 billion - Included as one of the three major spending blocks Tax receipt vs big-three spending ratio in 2016: ~62% - Luke contrasted 2016 with the present Tax receipt vs big-three spending ratio recently: ~100% - Showed how much tighter the fiscal position has become Gold price: ~$1,850/oz - Discussed as surprisingly muted relative to macro risks Hypothetical gold fair value cited by Luke: ~$1,300 to $1,450/oz - Luke said gold was still not as high as it should be given real rates, implying the market was discounting inflation persistence 10-year Treasury yield threshold: above 3% - Eric framed this as a key inflection point for markets and inflation expectations

Pivotal Quotes: "I think a recession is imminent in the United States, and I think that the Fed needs one in order to battle inflation." — Eric Townsend: Opening market macro thesis on inflation, recession, and the Fed "The U.S. has a structural deficit problem. Needs more buyers of treasuries rather than less, preferably at negative real rates." — Luke Gromen: Why reserve seizures and policy risk may accelerate foreign diversification away from Treasuries "The only option they have is inflate the debt away." — Luke Gromen: Summary of why the U.S. cannot sustainably normalize rates without fiscal stress

Implications: Listeners should expect higher volatility, a possible stagflationary recession, and policy responses that may favor inflation over stability. Portfolio positioning may need to emphasize real assets, gold, commodities, and regime-aware risk management rather than recent-cycle playbooks.