MacroVoices #360 Viktor Shvets: Inflation, Interest Rates, Equity Outlook & more

Episode Summary

Executive Summary: Victor Schwetz argued geopolitics remains a long-term source of volatility, but 2023-24 may be relatively calmer than 2022 as Russia-Ukraine, Taiwan, and the Middle East simmer rather than explode. He sees inflation fading without a major demand destruction, rates peaking and then easing, and global growth skirting recession rather than collapsing. The post-game charts reinforced a risk-on bounce in equities, weaker dollar, firmer gold, and oil still needing confirmation.

Main Topics: Geopolitics as a long-term process, not an event (Priority: 5/5): Schwitz said geopolitical and social polarization will keep building over the next 10-15 years, but the near term may be less volatile than 2022. He framed conflict as simmering tensions with periodic flare-ups rather than immediate systemic breaks. Inflation regime: alternating spikes and disinflation (Priority: 5/5): He rejected both the 'inflation is over forever' and 'a new secular inflation era' views, arguing the world has a strong disinflationary backdrop but will experience recurring inflation spikes from black swans, healthcare shocks, geopolitics, and policy responses. Interest rate outlook and the end of permanent repricing (Priority: 5/5): Schwitz argued nominal and real rates have likely peaked and should trend lower over the next 12-24 months. He said neutral rates are unlikely to be permanently repriced higher given demographics, technology, inequality, debt, and weak productivity. Growth and recession: skirting global recession (Priority: 5/5): His base case is global GDP growth around 1.5%-2%, which he described as 'skirting a global recession' rather than a deep contraction. He expects policy easing and no need for a demand-destruction recession unless inflation re-accelerates materially. Equity market outlook: limited upside, low probability of crash (Priority: 4/5): He sees three scenarios for equities: Goldilocks (~5,000 SPX), base case around 3,600-4,000, or severe recession implying 2,700-3,000. He thinks the severe downside is becoming less likely because financial-system cracks are limited and leading indicators are improving. China reopening and Taiwan risk (Priority: 5/5): Schwitz argued China’s chaotic reopening could depress near-term demand, then boost growth later in 2023. He also believes the Ukraine war makes a Taiwan invasion less likely near term because China can see the costs of war, sanctions, and the difficulty of retrofitting its system. Chart-based market commentary on SPX, QQQ, VIX, gold, oil, and nat gas (Priority: 4/5): The post-game focused on technical levels: SPX holding above the 200-day moving average, VIX consolidating near 20, gold breaking out with a weaker dollar, oil needing confirmation above the low-80s, and natural gas showing a deep selloff with possible bottoming but no strong trend reversal yet.

Key Arguments: Geopolitics is not a one-off shock; it is a multi-year process that creates intermittent market disruptions, but 2023-24 may see fewer immediate flare-ups than 2022. Russia-Ukraine is likely to remain unresolved, yet most of the economic and geopolitical damage may already be behind us. China’s experience in Ukraine increases the perceived cost of any Taiwan conflict and lowers near-term invasion probability. Inflation is not a permanent high-inflation regime; the world has strong disinflationary forces from technology, demographics, financialization, and inequality. Deglobalization is not clearly inflationary; its price effect is muted by automation, services trade, and higher emerging-market labor costs. Interest rates are likely to trend lower over the medium term because neutral rates are constrained by weak productivity and structural disinflation. A global recession is not the base case; the more likely outcome is growth hovering near population-growth levels, which is recession-adjacent but not collapse. Equity valuations should reflect lower EPS growth but also falling risk-free rates and risk premiums, limiting the case for a major market derating. China reopening may create near-term softness in demand followed by a second-half growth rebound and some commodity support. Gold strength is being driven primarily by falling real yields rather than fear of systemic collapse.

Data Points: Macro Voices episode: 360 - Episode number and production date referenced at the start Production date: January 26, 2023 - Opening metadata for the episode WTI crude price: $80.65 - Discussed during the pre-interview oil commentary, with price near unchanged after inventory data EIA crude inventory build: +533,000 barrels - Weekly U.S. crude inventories Strategic Petroleum Reserve draw: -500,000 barrels - Offsetting part of the reported crude build Cushing, Oklahoma crude build: +4.1 million barrels - Highlighted as a needed positive for crude storage Gasoline inventories: +1.8 million barrels - Weekly product inventory change Distillates inventories: -507,000 barrels - Weekly product inventory change U.S. crude production: 12.2 million barrels/day - Week’s output figure referenced in the oil discussion Front-month WTI breakout level: Above $82-$82.50 - Eric’s technical threshold for confirming a new uptrend WTI downside support: Below $74.50 would violate trend line - Eric’s stated bearish invalidation level SPX spot level: 40.30 (likely 4030) - Nick’s chart commentary on the S&P 500 SPX expected move for Feb. 17 OPEX: 150 points / 3.7% - Options-implied move range SPX upside expected move: 4180 - Upper bound of Nick’s expected move range SPX lower expected move: 3880 - Lower bound of Nick’s expected move range QQQ spot level: 290 - Nick’s chart commentary on the Nasdaq 100 ETF QQQ expected move for Feb. 17 OPEX: 14 points / 4.8% - Options-implied move range QQQ upside expected move: 304 - Upper bound of expected move QQQ lower expected move: 276 - Lower bound of expected move VIX spot: 19.26 - Current volatility index level in the post-game VIX put/call volume: 0.05 - Described as roughly 20 times more calls than puts opened VIX put/call interest: 0.32 - Roughly three times more calls than puts opened Gold real interest rates peak: 1.7%-1.8% - Real yields in September/October, cited as the key driver of gold Current U.S. real interest rates: 1.2%-1.3% - Lower real yields supporting gold Gold trend move: +20% - Approximate rise from early November bottom China oil demand increase: 600,000-800,000 barrels/day - Victor’s estimate of incremental oil demand as China reopens U.S. household wealth drawdown: Over $7 trillion - Victor noted wealth has fallen but remains above pre-COVID levels Households vs pre-COVID: ~25% better off - Victor’s measure of household balance-sheet resilience High-yield spreads: Barely above 4.5% - Cited as evidence of limited financial stress Triple-C debt spreads: Below 10% - Used to argue that even distressed credit is not signaling systemic collapse World Bank 2023 global growth forecast: 1.7% - Mentioned as a potentially cyclical bottom in forecasts Victor’s base-case global GDP: 1.5%-2.0% - Defined as 'skirting a global recession'

Pivotal Quotes: "it took Hitler 15 years to come to power. So it's a process, not an event." — Victor Schwitz: Explaining why geopolitics should be viewed as a slow-building process rather than a single shock "we have a very strong disinflationary backdrop... But against that, we will have regular spikes of inflation when black swans and fat tails suddenly move us and disrupt us" — Victor Schwitz: Summarizing his view that inflation will oscillate rather than follow a straight-line regime "skirting a global recession" — Victor Schwitz: His base-case description for 2023 global growth

Implications: Listeners should expect lower but still volatile inflation, easing rates, and markets that may avoid a hard crash but also struggle to generate strong returns. Geopolitical and China-related shocks remain key swing factors for rates, commodities, and equities.