MacroVoices #339 Lakshman Achuthan: Leading Indicators Say The Bear Market Has Not Ended

Episode Summary

Executive Summary: Macro Voices episode 339 focused on recession risk, the weakening summer rally in equities, and broad dollar strength. Guest Lakshman Achuthan argued the economy may not yet meet the formal recession definition, but leading indicators are deeply recessionary and the Fed is behind the curve, making a soft landing unlikely. Hosts concluded downside risk for stocks is still greater than upside.

Main Topics: Market selloff and bearish equity outlook (Priority: 5/5): Eric and Patrick argued the summer rally is likely over, the S&P 500 remains vulnerable, and the market has not yet seen the kind of disorderly selling that could accompany a deeper decline. Dollar strength across FX markets (Priority: 5/5): The dollar index hit a new cycle high near 110, with the euro below parity, sterling at fresh lows, and yen near 140, reinforcing the macro theme of USD dominance. Oil volatility and inventory dynamics (Priority: 4/5): Crude experienced a pop-and-drop week despite a large inventory draw, with the Strategic Petroleum Reserve hitting its lowest level since 1984 and the market still below key moving averages. Gold and bonds reflecting macro stress (Priority: 4/5): Gold weakened as an inverse function of the dollar and rates rather than as a hedge, while the 10-year Treasury yield moved toward 3.25%, showing broad pressure across asset classes. Defining recession and interpreting the cycle (Priority: 5/5): Achuthan explained that recession is a process, not a statistic, defined by a pronounced, pervasive, and persistent decline in output, employment, income, and sales. Leading indicators and recession timing (Priority: 5/5): ECRI’s leading indexes were described as clearly recessionary, with the long-leading index said to be at its worst level since the Great Recession, though coincident data had not fully confirmed recession yet. Fed policy, inflation, and soft-landing odds (Priority: 5/5): Achuthan said the Fed should have hiked earlier when inflation pressures turned up in 2020; being far behind the curve now makes a soft landing highly unlikely and a hard landing more probable.

Key Arguments: The summer equity rally lacked fundamental support and is likely to reverse because economic data does not suggest recovery. The dollar remains strong because it is the reserve currency and the 'cleanest dirty shirt' relative to weaker alternatives. Oil’s price action is being driven by paper-market dynamics, but physical supply tightness and SPR depletion should eventually matter. Gold is no longer behaving as a crisis hedge and is mainly tracking the dollar and real-rate moves. A recession is not officially defined by two negative GDP quarters; it is a broader process involving output, jobs, income, and sales. Current coincident data do not yet fully confirm recession, but leading indicators are broadly and persistently recessionary. The Fed’s delayed tightening response to rising inflation pressures makes a soft landing unlikely and increases the odds of a hard landing. Post-QE market behavior may differ from prior cycles, but cyclical leading indicators still remain valid for risk management.

Data Points: S&P 500 decline from mid-August peak: about 400 points, close to 10% - Patrick described the late-August drop in the S&P 500 Dollar index intraday high: almost 110 - Dollar index reached a fresh cycle high during the week Dollar index level: 109.60 - Quoted as the latest level on the day of discussion Euro: below parity - FX market update amid broad USD strength Japanese yen: almost 140 - FX market update amid yen weakness Brent/crude oil level: $87 - Patrick noted crude had given back its prior pop EIA inventory draw: 3.3 million barrels - Weekly U.S. oil inventory change discussed by Eric U.S. crude inventory draw excluding SPR: 6.4 million barrels - Eric separated commercial draw from SPR draw Strategic Petroleum Reserve draw: 3.1 million barrels - Portion of inventory change coming from the SPR SPR level: lowest since 1984 - Eric emphasized the historical low in the reserve Cushing, Oklahoma crude draw: 523,000 barrels - Weekly inventory data detail Gasoline inventory draw: 1.2 million barrels - Weekly inventory data detail Distillate inventory build: 111,000 barrels - Weekly inventory data detail U.S. crude production: 12.1 million barrels/day - Production figure cited during the oil discussion Production from cycle high: 100,000 barrels/day shy - Production was just below a recent peak Gold level: near 1700 - Gold was described as approaching prior lows 10-year Treasury yield: pressing 3.25% - Bond market update S&P 500 level: around 3970 - Level mentioned during the interview with Locke VIX: above 25 - Patrick cited elevated volatility as a warning sign High-yield bonds: breaking back down to their lows - Patrick used this as a risk-off signal Macro Voices audience: over 170,000 listeners - Advertiser pitch near the end of the episode Accredited investors registered: more than 20,000 - Show host audience statistics Estimated accredited investor audience: at least 40,000 - Show host audience statistics Historical recession timing: August peaks, September volatility, October crash month - Eric referenced seasonality in crash years

Pivotal Quotes: "A recession is not a statistic, it's really a process." — Lakshman Achuthan: Defining recession early in the interview "The long leading index right now, for example, I'll call out something on the chart for you, is the worst it's been since the Great Recession." — Lakshman Achuthan: Discussing ECRI’s leading indicator deck "I think the risk is definitely more to the downside than the upside." — Eric Townsend: Closing market outlook after the interview

Implications: Listeners should treat the current environment as high risk for equities and other risk assets: recession signals are broad, the Fed is behind inflation, and the dollar remains a dominant headwind. Until leading indicators turn up, caution and risk management are favored.