MacroVoices #384 Darius Dale: Blow-Off Top Coming Before Bears Get Validated

Episode Summary

Executive Summary: Darius Dale argued the 2022 bear market call and 2023 recession timing were broadly correct, but that the true “phase two” credit-cycle downturn is still ahead. He sees more upside in equities and credit before a later reversal, while inflation continues to cool in the near term. In the post-game, Patrick and Nick assessed a strong but complacent risk market, a technically constructive crude oil rally, persistent dollar weakness, a gold breakout, and a still-incomplete shift in recession pricing.

Main Topics: Business cycle timing and recession outlook (Priority: 5/5): Dale said the recession call remains intact, but the start is likely in Q4 2023 or Q1 2024 rather than immediately. He tied timing to the historical lag from yield-curve inversions and the sequencing of housing, orders, production/profits, employment, and inflation. Why the credit event has not fully arrived (Priority: 5/5): SVB and First Republic did not qualify as the “phase two” credit downturn. Dale emphasized that bank lending deterioration has been incremental rather than nonlinear, with credit growth slowing but not collapsing. Why equities can still rise before the reversal (Priority: 4/5): Dale argued that market peaks often occur before recession starts and that positioning is still not crowded enough to exhaust the rally. He sees right-tail upside in stocks because institutional participation remains relatively limited. Sources of economic resilience (Priority: 5/5): He highlighted six supports: excess household cash, corporate cash, real income/wealth still above inflation, limited credit vulnerabilities, smaller manufacturing exposure, and labor hoarding. Together these delay recessionary dynamics. Inflation and the limits of “immaculate disinflation” (Priority: 4/5): Dale agreed inflation is cooling sharply, but said this disinflation is likely near its end. He warned housing inflation may reaccelerate later in 2023 as lagged home-price effects feed into CPI and PCE. China’s weaker-than-expected reopening (Priority: 4/5): Dale said China has largely reopened into a structural liquidity trap rather than a strong demand boom. He expects some additional easing, but not enough to recreate the prior commodity-led global growth impulse. Post-game market technicals: crude, equities, dollar, gold (Priority: 4/5): Patrick and Nick discussed crude oil building a base near key moving averages, equities trending higher but overbought, the dollar testing the critical 100 level, and gold breaking out with potential for more upside if follow-through continues.

Key Arguments: The 2022 bear market call was correct; the current rally does not negate the eventual bearish thesis, only delays it. SVB/First Republic were stress events, but not the nonlinear credit-cycle break needed to trigger the next leg down. Historical recession studies show equity markets often peak well before the recession begins, so further upside before reversal is plausible. Positioning is still relatively subdued, suggesting the market has room for a short-squeeze-style continuation. Household and corporate balance sheets remain unusually liquid, supporting spending, capex, and labor retention. Inflation has fallen substantially, but that reprieve may be temporary because shelter inflation is lagged and could firm again. China’s recovery has been muted because authorities are avoiding the large-scale stimulus that previously fueled global demand. The dollar’s breakdown below 100 could be a major tailwind for commodities and risk assets; gold may be starting a new leg higher.

Data Points: S&P 500 futures: 4507 - Close of Wednesday, July 12, 2023, up 51 bps week over week. U.S. Dollar Index: 100.55 - Down 271 bps week over week after CPI. WTI crude oil (Aug contract): 75.75 - Up 552 bps week over week. Gold: 1961 - Up 180 bps week over week, attempting to break out. Copper: 385 - Up 212 bps week over week as commodities gain traction. U.S. 10-year Treasury yield: 3.86% - Down 4 bps week over week. Median S&P 500 max drawdown in recessions: -24% - Slide 65 historical post-war recession sample. Interquartile range of S&P 500 max drawdown: -19% to -39% - Historical recession drawdown distribution. S&P 500 one year ahead of peak before recession: +16% median - Historical pattern cited to support upside before recession starts. S&P 500 three months ahead of peak before recession: +9% median - Historical pattern cited to show strong markets into peaks. Aggregated speculative positioning percentile: 26th percentile - Current non-commercial net length across equities, rates, dollar, and commodities. Aggregated positioning at October 2022 lows: 21st percentile - Used as comparison to show positioning is not yet crowded. Household checkable deposits and currency: $4.5 trillion - Record household cash balance cited as a source of resilience. Pre-COVID household checkable deposits and currency: ~$1 trillion - Comparison level before the pandemic. Household cash as share of assets: 3% - Near late-1960s highs, implying high liquidity. Household debt service ratio: Near all-time low - Dale argued household leverage pressure remains muted. Corporate checkable deposits and currency: Record level; ~3% of assets - Evidence of corporate balance-sheet liquidity. Nominal employee compensation: +21% since end-2019 - Used to show income growth has outpaced inflation in nominal terms. Household net worth: +27% since end-2019 - Evidence of wealth support for spending. Household cash and money market exposure: +127% since end-2019 - Large increase in liquid assets since pre-pandemic. CPI: +17% since end-2019 - Compared with faster growth in income and wealth measures. Private non-financial sector credit to GDP: -0.7 sigma - Dale used this to argue there is not yet severe credit misallocation. Mortgage debt service ratio: 3.9% - Low mortgage burden supporting housing resilience. Effective mortgage rate on outstanding debt: 3.55% - Existing homeowners remain insulated from current high rates. Marginal mortgage rate for new buyers: 7.31% - Creates a large spread that suppresses existing-home turnover. Housing starts growth: +54% three-month annualized - Evidence of cyclical recovery in housing. New home sales growth: +88% three-month annualized - Shows strength in the new-home segment. Current housing starts to existing home sales ratio: 38% - At an all-time high, indicating buyers are shifting to new homes. Core PCE inflation: 0.4% - China headline data discussed in the transcript; the U.S. discussion focused on disinflation more broadly. China headline CPI: 0.0% - Flirting with deflation, showing weak recovery. China core inflation: 0.4% - Also near deflationary levels. China private non-financial sector debt to GDP: 200%+ - Used to explain Beijing’s reluctance to unleash large stimulus. U.S. manufacturing share of non-farm payrolls: 14% - Shows the smaller role of cyclical manufacturing in the modern U.S. economy. U.S. manufacturing share of nominal GDP: 18% - Supports the argument that services dominate activity. Manufacturing share of recessionary payroll drawdown: 98% - Historical evidence that job losses in recessions are heavily concentrated in manufacturing. VIX: 13.5 - Indicates a complacent equity-volatility regime in the post-game. SPX options call wall: 4,500 - Near-term technical resistance discussed by Nick. SPX options put wall: 4,200 - Lower support/flow anchor. SPX July 21 implied move: +/- 60 points - Defines expected move into next OpEx. QQQ spot price: 373 - Used in the options/technical discussion. QQQ July 21 implied move: +/- 8 points - Expected move into next OpEx. DIXIE critical level: 100 - Eric said a daily close below 100 would be an important bearish-dollar signal.

Pivotal Quotes: "No, we do not think the Silicon Valley Bank incident and the First Republic bank incidents was the credit event." — Darius Dale: He explained why the March 2023 banking stress did not yet represent the nonlinear phase-two credit downturn he expects. "In our view, is right-tail risks left to price in the equity market and credit markets." — Darius Dale: Dale argued there is still upside potential before the eventual reversal. "This is a very regular, stereotypical business cycle... We just have to be patient in terms of respecting the X-axis." — Darius Dale: He emphasized that the current cycle is unfolding in a historically familiar sequence, just on a delayed timeline.

Implications: Listeners should expect more near-term resilience in stocks, credit, and possibly commodities, but remain alert for a later recessionary/credit inflection in Q4 2023 or Q1 2024. For now, the macro setup still favors carry and selective risk-taking, with hedges becoming more important as complacency rises.