MacroVoices #357 Darius Dale: The Recession is Coming But Not Until the Second Half

Episode Summary

Executive Summary: Macro Voices episode 357 features a wide-ranging 2023 macro outlook with Darius Dale arguing the 2022 equity decline was only phase one of a two-stage bear market and that a more severe credit-driven selloff may still lie ahead. He expects the U.S. economy to stay resilient longer than consensus, forcing the Fed to tighten more and delaying recession into late 2023 or early 2024. The discussion also covers structurally higher inflation, deglobalization, dollar strength, oil supply constraints, and a longer-term bullish case for gold on dips.

Main Topics: Two-phase bear market framework (Priority: 5/5): Darius Dale argues the market has only priced phase one of the downturn—liquidity tightening—and has not yet priced the phase two credit-cycle deterioration that typically occurs in recessions. Fed policy, inflation, and recession timing (Priority: 5/5): Dale expects the Fed to remain hawkish longer than markets expect because inflation and labor-market measures remain above policy rates; he sees recession arriving later than consensus, likely late 2023 or early 2024. Market levels and potential SPX downside targets (Priority: 5/5): The interview develops scenarios for an interim Q1 low and rally, followed by a deeper second leg lower if credit conditions worsen, with downside targets in the 2,900-3,600 range depending on the severity of phase two. Structural inflation and deglobalization (Priority: 4/5): Dale frames the 2020s as a higher-inflation decade driven by labor shortages, supply-chain fragmentation, geopolitical rivalry, and reduced globalization, implying higher volatility and persistent wage pressure. Dollar, euro, and global central-bank policy divergence (Priority: 4/5): The guest argues the market is too aggressive in pricing ECB tightening versus the Fed, which supports a continued dollar bid in the near term and tempers enthusiasm for gold and EUR-linked trades. Commodities, oil, and energy constraints (Priority: 4/5): Eric Townsend emphasizes oil’s supply-side tightness and warns the world cannot easily replace Russian oil; both hosts see medium-term bullish pressure on commodities even amid near-term recession fear. Gold and long-duration portfolio positioning (Priority: 3/5): Gold is viewed as a good medium/long-term store of value in a more fragmented world, but Darius prefers waiting for a better entry because he still expects some dollar strength first.

Key Arguments: 2022’s stock-market decline was only phase one; recession-linked credit stress has not yet been fully priced into risk assets. The U.S. economy is more resilient than consensus expects, so recession is likely later than the market currently prices. Because inflation remains above Fed funds on a 3-month annualized basis across multiple measures, the Fed will likely keep tightening and stay reluctant to ease. The Fed’s December 2022 pivot was hawkish because it upgraded labor-market resilience and signaled less willingness to cut rates later in 2023. Labor-market strength, cash-rich households, and manageable corporate debt service suggest the economy can absorb more tightening before breaking. If phase one extends and phase two is priced from lower levels, the S&P 500 could revisit 3,600 or even fall into the 2,900-2,800 range. Structural inflation is likely higher in the 2020s due to deglobalization, resource scarcity, reshoring, and labor’s increasing bargaining power. The market is overly confident in ECB tightening relative to the Fed; that supports ongoing dollar strength and reduces the attractiveness of a near-term gold chase. Oil fundamentals remain tight because spare capacity and inventory buffers are scarce, and Russia’s oil is difficult to replace globally. In a multipolar, deglobalizing world, traditional 60/40 portfolio assumptions are weaker because bond rallies may be capped by higher inflation and debt-supply pressures.

Data Points: Macro Voices episode: 357 - Episode identifier for the January 5, 2023 show. Production date: January 5, 2023 - Release date of the episode. S&P 500 at prior January 2022 appearance: Just under 4,800 - Eric references where the S&P was when Darius made his crash call a year earlier. Dale’s 2022 trading result: -334 basis points - Darius says his portfolio trading approach lost 334 bps in 2022 despite the correct bearish call. WTI crude move to start the year: Down 10% in first two trading days - Eric notes the sharp early-year selloff in oil. Household checkable cash: $7.9 trillion - Dale cites Q3 household balance-sheet cash holdings. Household checkable cash share of assets: 5% - Q3 share of total household assets in checkable cash. Household debt to disposable income: 101 cents on the dollar - Dale uses this to show households still have borrowing capacity. Household debt service ratio: Practically an all-time low - Dale argues consumer balance sheets are still strong. Corporate cash holdings: $2.3 trillion - Corporate balance-sheet cash cited by Dale. Corporate cash share of assets: Just over 4% - Corporate cash as a share of total assets. Corporate debt: 49% on the dollar - Dale says corporate debt is near an all-time high excluding the pandemic shock. Corporate debt service ratio: 40.2% - Dale says corporate debt service remains manageable. Nominal employee compensation growth: 6.1% three-month annualized - November figure from the BEA/PCE report. Private sector labor income growth: 6.6% three-month annualized - 42 Macro composite measure using payrolls and earnings. Core inflation measures vs Fed funds: All five measures above Fed funds on 3-month annualized basis - Dale cites median CPI, trim mean CPI, median PCE, trim mean PCE, and core services PCE ex-shelter/housing. Fed core PCE forecast: 3.5% by end of 2023 - Used to argue the Fed is implicitly forecasting a major decline in inflation. Fed unemployment forecast: U3 at 4.6% by end of 2023 - Dale argues this implies recessionary labor-market conditions. Market pricing for Fed funds: 3 hikes to 5.25%, then 2 cuts later in 2023 - Dale says futures pricing is too dovish. Net liquidity target: About $5.5 trillion by end of Q1; potentially near $5 trillion by summer - 42 Macro liquidity model discussed by Dale. S&P 500 phase-one downside target: Around 3,600 - Dale’s valuation estimate for a liquidity-cycle low. S&P 500 deeper downside targets: 2,900 and 2,800 - Targets if phase two credit-cycle pricing begins. Euro OIS vs ECB/Fed relative tightening expectation: 154 bps over 1 year; 202 bps over 2 years - Used to argue the market expects too much ECB tightening relative to the Fed. Euro net long positioning: +21% net long - Eric cites market positioning as very crowded long euro. Gold net long positioning: +26% - Eric cites gold positioning as also crowded long. Taylor-rule spread / policy tightness: U.S. still tighter than ECB/BoE/Japan - Dale argues policy divergence supports dollar strength.

Pivotal Quotes: "We have not seen the ultimate lows of this bear market." — Darius Dale: His core view on why 2022 did not finish the full bear-market process. "If we rally substantially... then you start to price in phase two from a higher level than $3,600. However, if phase one keeps extending itself... that's how you get to below $3,000 on the SP." — Darius Dale: Explains the market path that could lead to a deeper second leg down. "The world literally can't live without Russian oil now." — Eric Townsend: Eric’s statement on the structural tightness of global oil supply.

Implications: Listeners should expect continued macro volatility: a later recession, more Fed tightening than markets price, and higher inflation persistence. That favors caution on equities, patience on gold, and attention to structural winners in commodities, value, cyclicals, and potentially non-U.S. assets.