MacroVoices #371 Larry McDonald: Fed Will Be Forced To Cut By The End Of The Year

Episode Summary

Executive Summary: Larry McDonald argues 2023 marks a major macro regime shift: debt-ceiling-induced Treasury issuance, elevated deficits, and crowded-out corporate credit could force the Fed into cuts, QE, or yield-curve control by late 2023/early 2024. He expects sustained 3%-5% inflation, a weaker dollar, rising value/hard-asset appeal, and a major energy-sector consolidation led by majors buying reserve-rich smaller producers.

Main Topics: Debt ceiling, Treasury issuance, and Fed constraint (Priority: 5/5): McDonald says the debt-ceiling standoff will suppress Treasury issuance now and create a massive catch-up later, forcing rates higher and potentially pushing the Fed toward yield-curve control or QE. Sustained inflation and regime change in portfolio construction (Priority: 5/5): He argues the U.S. is moving from a deflationary era that favored bonds and growth stocks to a sustained inflation regime that favors value, hard assets, Europe, and emerging markets. Crowding out and fiscal/monetary stress (Priority: 4/5): Higher Treasury issuance and interest expense could crowd out corporate borrowing, defense, and Medicare, creating political pressure that limits how long the Fed can keep rates high. Energy market bull case and consolidation (Priority: 5/5): McDonald sees structurally higher oil prices due to Saudi-Russia coordination, underinvestment, and friend-shoring, and expects majors like Exxon to acquire reserve-rich smaller producers. De-dollarization and multipolar world dynamics (Priority: 4/5): He says sanctions, non-dollar commodity trade, and geopolitical fragmentation are incentivizing countries to move away from the dollar, weakening structural demand for USD over time. Postgame technical outlook for major markets (Priority: 3/5): The postgame segment reviews bullish technical setups in crude oil, S&P 500, gold, and levels to watch in the dollar, VIX, and 10-year Treasury yield.

Key Arguments: Debt-ceiling restrictions today create a later surge in Treasury issuance, and that refinancing wall could force the Fed into yield-curve control or QE. If the Fed has to cut or ease while the rest of the world stabilizes, the dollar should weaken materially. Inflation may not return to the pre-2020 2% regime; instead, a 3%-5% inflation range could persist for years. Persistent higher rates would crowd out corporate credit, defense, and other spending, making 5%-6% Fed funds politically unsustainable. Energy markets are moving into a structurally tighter, higher-price regime because Saudi Arabia and Russia coordinate supply more effectively than in the past. Smaller oil and gas companies have reserve values that look especially cheap versus market cap, making them takeover targets for majors. The next investment cycle favors value equities, hard assets, metals, and selected emerging markets over long-duration growth assets. De-dollarization is still early, but sanctions and non-USD commodity settlement are gradually undermining dollar hegemony.

Data Points: S&P 500 weekly change: +0.2% - Macro scoreboard for week ending Apr. 12, 2023 S&P 500 close: 4,127 - Week-over-week close in macro scoreboard U.S. Dollar Index weekly change: -0.3% - Macro scoreboard U.S. Dollar Index close: 101.53 - Macro scoreboard WTI crude weekly change: +3.3% - Macro scoreboard WTI crude close: $83.26 - Macro scoreboard and postgame oil analysis Gold weekly change: -0.5% - Macro scoreboard Gold close: $2,025 - Macro scoreboard Copper weekly change: +2.3% - Macro scoreboard Copper close: $4.08 - Macro scoreboard Uranium close: $51.10 - Macro scoreboard; unchanged on week U.S. 10-year Treasury yield change: +9 bps - Macro scoreboard U.S. 10-year Treasury yield close: 3.40% - Macro scoreboard EIA crude inventory draw: 597,000 barrels - Weekly postgame inventory update Cushing, Oklahoma inventory draw: 409,000 barrels - Weekly postgame inventory update Gasoline inventory draw: 331,000 barrels - Weekly postgame inventory update Distillate inventory draw: 606,000 barrels - Weekly postgame inventory update U.S. crude production: 12.3 million barrels/day - Postgame; new post-COVID record high CBO deficit pace: $1.1 trillion in six months - Used to argue for roughly $2 trillion annual deficits Future Treasury issuance catch-up: $1.2 trillion - McDonald’s estimate of deferred issuance to be absorbed later in 2023 Run-rate interest expense: near $1 trillion - McDonald’s estimate if rates stay elevated Debt-ceiling extraordinary measures runout: June 30, 2023 - McDonald’s cited key date Potential Fed rate-cut magnitude: 100 bps or more - McDonald’s view of cuts forced by late 2023/early 2024 Gold breakout resistance: $2,080 - Postgame technical level near prior all-time highs Gold upside target if breakout continues: $2,100-$2,150 - Postgame technical discussion S&P 500 call wall: 4,150 - Options-related resistance discussed in postgame S&P 500 put wall: 3,800 - Options-related support discussed in postgame S&P 500 implied move for Apr. 21 OpEx: ±70 points - Postgame options outlook QQQ spot: ~312 - Postgame technical update QQQ call wall: 350 - Postgame options outlook QQQ put wall: 270 - Postgame options outlook QQQ implied move for Apr. 21 OpEx: ±8 points - Postgame options outlook VIX support zone: below 20 - Postgame volatility analysis VIX potential spike zone: above 25, possibly to 35 - Postgame volatility analysis LNG exports to Europe: 12 bcf to 30 bcf - McDonald cites rising LNG export demand as support for energy and dollar Lehman crisis policy response: $2.5 trillion - Compared with later crisis responses COVID crisis policy response: $10 trillion - Used to illustrate escalating fiscal/monetary bailouts

Pivotal Quotes: "we could see the Federal Reserve in yield curve control, QE, by the fourth quarter" — Larry McDonald: On deferred Treasury issuance and the debt-ceiling-driven funding wall "you need a whole new Portfolio construction than the previous decades" — Larry McDonald: On the shift from disinflation to a sustained inflation regime "Exxon is your Goldman Sachs of energy. Exxon is your apple of energy" — Larry McDonald: On Exxon’s role as the likely consolidator and market repricer in energy

Implications: Listeners should prepare for a higher-inflation, weaker-dollar regime with greater emphasis on value, hard assets, and energy. Watch Treasury issuance, Fed guidance, and oil-sector M&A as signals of the next macro phase.