MacroVoices #377 Daniel Lacalle: On The Road To Stagflation

Episode Summary

Executive Summary: Macro Voices episode 377 centers on Daniel LaCalle’s view that Europe has avoided an immediate energy collapse but remains vulnerable to stagflation, tightening credit, and winter/summer energy stress. He argues commodities are fundamentally tight but suppressed by monetary contraction, gold remains the best portfolio hedge, Bitcoin is still too volatile to rival it, and China/Taiwan plus BRICS currency efforts are major geopolitical wildcards. The post-game adds a cautious but tactically bullish take on crude, equities, gold, and the dollar.

Main Topics: Europe’s fragile macro outlook and stagflation risk (Priority: 5/5): LaCalle argues Europe survived winter mainly due to mild weather and weaker demand, not structural fixes. Manufacturing remains in contraction, credit is tightening, and elevated inflation plus slowing growth point to stagflation rather than a clean recovery. Energy crisis is not over (Priority: 5/5): The panel stresses Europe remains exposed because LNG supply is tighter, China is reopened, nuclear capacity is being reduced, and summer energy demand can be as dangerous as winter. Policymakers are seen as overly complacent. Commodities: tight fundamentals vs monetary headwinds (Priority: 5/5): LaCalle says oil, copper, and other commodities are fundamentally supported by underinvestment and supply tightness, but rate hikes and monetary contraction have pushed prices lower by making financing and storage more expensive. Gold as the preferred defensive asset (Priority: 4/5): Gold is framed as the best portfolio hedge in a stagflationary, monetarily debased world, especially because bonds and equities no longer reliably diversify each other. Pullbacks are seen as buying opportunities. Bitcoin vs. gold and tech correlation (Priority: 3/5): Bitcoin is viewed as emerging as a separate monetary asset, but still too volatile and too correlated with speculative tech stocks to be a true reserve asset. Its scarcity alone does not guarantee price appreciation. China, Taiwan, and BRICS as geopolitical/macro wildcards (Priority: 5/5): China’s reopening is less important than its property slowdown and worsening U.S.-China relations. A Taiwan escalation could trigger global recession, while any BRICS currency is seen as limited by capital controls and weak institutional trust. Market technicals: crude, equities, dollar, and gold (Priority: 4/5): The post-game reviews near-term setups: crude remains range-bound but tight, SPX/QQQ are frothy and breadth-poor, VIX may spike, the dollar is testing 105 resistance, and gold is nearing a potential buying zone near its 100-day moving average.

Key Arguments: Europe’s winter energy “success” was largely the result of mild weather, lower commodity prices, and China’s prior shutdown, not a durable fix to supply security. Eurozone weakness is amplified because roughly 80% of real activity is financed through banks, so ECB tightening transmits much faster than in the U.S. Commodity prices have been pulled down by Fed-driven monetary contraction; the decline in money supply has tracked the decline in WTI closely. Despite weak spot prices, crude’s backwardation and OPEC cuts imply the physical oil market remains tight and underinvested. The world may be moving toward stagflation: inflation can fall from extreme levels, but getting from 5% to 2% requires a real contraction in spending and growth. Gold is the best non-correlated portfolio asset because the traditional bond/equity hedge broke down in 2022. Bitcoin is becoming more distinct from other cryptos, but scarcity does not ensure higher prices; it still behaves like a high-beta risk asset. A BRICS currency may increase intra-bloc settlement use, but cannot become a true reserve currency without capital mobility and independent institutions. A Taiwan crisis would likely cause global recession, but the U.S. and China may be less harmed than Europe due to their relative commodity and tech advantages. Nvidia-driven market strength is seen as narrow and potentially frothy, with poor breadth and elevated downside asymmetry if growth or liquidity expectations shift.

Data Points: S&P 500 weekly change: -108 bps to 4126 - Macro scoreboard as of close Wednesday, May 25, 2023 U.S. Dollar Index weekly change: +99 bps to 103.88 - Macro scoreboard WTI crude oil (July) weekly change: +207 bps to 74.34 - Macro scoreboard Gold weekly change: -101 bps to 1965 - Macro scoreboard Copper weekly change: -507 bps to 356 - Macro scoreboard Uranium weekly change: +84 bps to 5420 - Macro scoreboard U.S. 10-year Treasury yield: +18 bps to 3.75% - Macro scoreboard EIA crude inventory draw: 12.5 million barrels - Post-game crude discussion Strategic Petroleum Reserve draw: 1.6 million barrels - Included in total weekly crude draw calculation Total crude draw including SPR: 14.1 million barrels - Post-game crude discussion Cushing, Oklahoma build: 1.8 million barrels - Post-game crude discussion Gasoline draw: 2.0 million barrels - Post-game crude discussion Distillates draw: 562,000 barrels - Post-game crude discussion U.S. oil production: 12.3 million barrels per day - Post-game crude discussion; described as post-COVID peak and plateauing Gold all-time high test: 2085 - Feature interview and post-game gold discussion Gold 100-day moving average / channel support: 1939-1940 - Key technical buy zone discussed for gold Potential lower gold support: 1840 - If gold breaks the 100-day moving average and channel support SPX spot level discussed: 4115-4126 - Post-game equity discussion SPX June 16 expected move: 3975 to 4255 (±140 points) - Options-implied move from Nick Galarnick SPX call wall: 4300 - Options positioning SPX put wall: 3900 - Options positioning QQQ spot level: ~336 - Post-game NASDAQ discussion QQQ June 16 expected move: 323 to 349 (±13 points) - Options-implied move from Nick Galarnick DXY consolidation range: 100 to 105 - Post-game dollar discussion China’s share of world GDP: ~13-14% - Used to compare with currency usage Chinese currency use in global transactions: ~4% - Used to argue the yuan is underused relative to GDP U.S. economy financed through banking channel: ~15% - Daniel LaCalle citing IMF, contrasted with Europe European Union economy financed through banking channel: ~80% - Used to explain why ECB tightening hits Europe harder Manufacturing contraction duration in Eurozone: 35th month - PMI figures discussed by LaCalle Oil & gas underinvestment: $600 billion - LaCalle’s estimate of underinvestment in the sector

Pivotal Quotes: "we will see a mild slowdown in the economy ... the picture that is being created is one that is very uncomfortable for policymakers, which is that of stagflation" — Daniel LaCalle: He summarizes his second-half-2023 macro outlook for the U.S. and Eurozone "Certainly not out of the woods. The European energy crisis ... remains" — Daniel LaCalle: On Europe’s energy security after a mild winter "gold is certainly the really decorrelated asset that investors can build and put in a portfolio" — Daniel LaCalle: His case for gold as the best portfolio hedge

Implications: Listeners should expect persistent inflation, weak growth, and intermittent market volatility. Europe remains energy-vulnerable, commodities may tighten again once monetary pressure eases, gold looks like the clearest hedge, and China/Taiwan remains the biggest geopolitical tail risk.