MacroVoices #333 Harley Bassman: Inflation, Bond Yields, VIX vs. MOVE, Demographics & More

Episode Summary

Executive Summary: Macro Voices episode 333 centered on whether inflation, rates, and asset prices are finally decoupling. Eric Townsend and Harley Bassman argued that inflation remains structurally sticky, the Fed is likely to keep tightening, and the bond market may not be fully pricing the risk of higher long rates. They also discussed how recession signals, oil market tightness, gold’s lagging response, and demographics/immigration could shape markets and policy.

Main Topics: Inflation and interest rates may be decoupling (Priority: 5/5): Bassman argued inflation can stay elevated even if Treasury yields don’t rise in lockstep, because the Fed controls the front end while the long end is driven by supply/demand and asset-liability flows. Fed tightening, recession, and policy credibility (Priority: 5/5): The discussion emphasized Powell’s incentive to fight inflation aggressively, even at the cost of recession and rising unemployment, with legacy and credibility as key motivations. Oil market tightness, backwardation, and geopolitical supply risk (Priority: 5/5): Eric’s extended oil commentary highlighted record backwardation, Libya/Nord Stream news, and the view that physical oil markets remain structurally tight despite recession pricing. Stock market resilience versus worsening macro data (Priority: 4/5): Both hosts were puzzled that equities were not selling off more on bad news, suggesting the market may be signaling a bottom or at least a stronger-than-expected tape. Gold as long-term currency/hedge, but weak short-term price action (Priority: 3/5): Gold was framed as a long-horizon diversifier and alternate currency, though both speakers noted its disappointing near-term response to inflation, dollar weakness, and geopolitical risk. Demographics, immigration, and wealth transfer (Priority: 4/5): Bassman argued that baby boomer retirement, wealth transfer, and reduced immigration could be major macro drivers of inflation, labor supply shortages, and housing affordability. Recession definition and nominal vs real GDP (Priority: 4/5): A major theme was whether recession should be judged on nominal or inflation-adjusted GDP, with Bassman arguing nominal growth can mask a real contraction.

Key Arguments: Inflation and Treasury yields are no longer tightly linked the way they were in the disinflation era; the Fed controls short rates, but the long end is set by market supply and demand. Powell has strong incentive to be remembered as the Fed chair who defeated inflation, making aggressive tightening more likely even if it causes recession. The yield curve inversion and recession signals are real, but recession may be obscured if people focus on nominal GDP rather than real GDP. Equities may not be falling on bad macro news because inflation initially supports nominal earnings and because rates have not risen enough to compress valuations materially. Oil is in a physically tight market, evidenced by extreme backwardation; recession may pressure prices in the short term, but structural supply constraints imply higher prices later. Gold remains a valid long-term diversification asset, but it is not guaranteed to rally immediately just because real rates are negative or geopolitical risk is elevated. Demographic shifts, wealth transfer, and reduced immigration are likely to support inflation and tighten labor supply over the medium term. The housing market is being repriced by higher mortgage rates, which will slow turnover and GDP rather than necessarily trigger a 2008-style crash. Mortgage-backed securities look unusually cheap relative to Treasuries, and the narrowing mortgage origination pipeline may create a favorable tactical entry point. If stock-bond correlation flips back to both falling together, leveraged portfolios and the 60/40 model could face major stress.

Data Points: Macro Voices episode: 333 - Episode number referenced at the start of the show. Recording date: July 21, 2022 - Episode recording date stated in the intro. SP 500 near-term level: around 4,000 - Patrick’s technical threshold for a potential summer rally continuation. U.S. dollar index support: around 105 - Eric’s estimate of where the dollar pullback may find support. Crude oil spot price: about $97 - Crude oil level cited during the market wrap. EIA crude inventory change: draw of 446,000 barrels - Headline crude inventory move for the week discussed by Eric. Strategic Petroleum Reserve draw: 5 million barrels - Used to show the ‘true’ crude draw if SPR releases are included. Cushing inventory change: build of 1.1 million barrels - Cushing, Oklahoma storage build noted in the EIA data. Gasoline inventory change: build of 3.5 million barrels - Interpreted as a sign of weakening demand. Distillate inventory change: draw of 1.3 million barrels - Distillates remained relatively tight despite gasoline weakness. U.S. crude production: 11.9 million barrels per day - Production ticked down by 100,000 barrels per day. Libya production: 700,000 barrels per day - Libya came back online at roughly this production level. Libya target production: 1.2 million barrels per day - Expected to be restored within about 10 days. August crude contract backwardation at expiry: $3.80 - Eric described this as extraordinarily and possibly historically extreme backwardation on the last trade day. Close backwardation after manipulation: $2.66 - Final close after late-session distortions in thin trading. Five-day crude moving average: $98.33 - Eric cited this as a short-term level crude would need to reclaim to show stronger resilience. Crude 200-day moving average: $87.69 - Eric identified this as a potential deeper downside target if recession fears intensify. 10-year Treasury yield: back below 3% - The yield briefly poked above 3% but failed to sustain it. MOVE index: 155 peak, about 127 current - Bassman used MOVE to illustrate elevated bond volatility. VIX: about 24 current; realized around 21.5% - Compared to MOVE to show equity vol remained lower than bond vol. Mortgage spread over 10-year Treasury: about 130 bps - Bassman called mortgage-backed securities unusually cheap relative to Treasuries. Prior mortgage spread: about 40 bps - Bassman contrasted current levels with last year’s tighter spread. Housing cost sensitivity: about 21% price decline equivalent - Bassman’s rough estimate of the effect of moving mortgage rates from low 3s to low 5s. Monthly mortgage cost increase: about 60%+ - Bassman said affordability has worsened dramatically for borrowers. Nominal GDP growth: about 6% - Used in the recession discussion to argue nominal growth can mask real weakness. Inflation: about 8% - Bassman used this to explain why real GDP could be negative despite nominal growth. Real GDP growth: about -2% - Derived from nominal GDP minus inflation in Bassman’s framework. Saudi Arabia current production: about 10.5 million barrels per day - Eric cited current output before planned increases. Saudi Arabia planned near-term output: 11 million barrels per day - Expected after removal of pandemic-related curbs. Saudi Arabia advertised maximum capacity: 12 million barrels per day - Eric questioned whether this figure is truly achievable. Saudi Arabia possible 2027 capacity goal: 13 million barrels per day - Announced as a long-term target after Biden’s visit. Oil market backwardation history: more than $1 per month is unusual - Eric explained that current backwardation is far beyond normal historical conditions.

Pivotal Quotes: "what the heck is going on? How come this bad news, bad, bad macro data ... is not affecting the stock market." — Eric Townsend: Describing the central market puzzle: equities staying firm despite deteriorating macro data. "I think the market is looking at the curve, looking at recession, and all this stuff, but I think they underestimate what Powell's going to do to go and try to spear inflation." — Harley Bassman: On why the Fed may still tighten more aggressively than markets expect. "If you print a lot of money, you print money faster than the growth of the overall economy, you're going to get inflation." — Harley Bassman: Bassman’s foundational inflation thesis rooted in monetary expansion.

Implications: Listeners should expect continued volatility as inflation, rates, and recession risks collide. The most important risks are higher-for-longer policy rates, structurally tight energy markets, and a possible breakdown in stock-bond diversification.