MacroVoices #397 Alex Gurevich: The Real Rates Tsunami

Episode Summary

Executive Summary: Macro Voices episode 397 centers on Alex Gurevich’s updated macro thesis: short-term inflation has rolled over into sticky disinflation/deflation, but the path may be delayed by tight policy, labor-market resilience, geopolitics, and energy shocks. In the post-game, Patrick and Eric frame Israel/Gaza as a major oil-volatility catalyst while technicals suggest a rebound in equities, a firmer dollar, and a watchful stance on gold and rates.

Main Topics: Alex Gurevich’s revised inflation/deflation framework (Priority: 5/5): Gurevich says he underestimated inflation persistence but now sees self-reinforcing disinflation underway, driven by tight policy, higher real rates, QT, dollar strength, and weaker commodities/financial conditions. Labor markets as the key cycle variable (Priority: 5/5): He argues employment is the missing link: strong jobs delayed disinflation, but higher real rates and productivity pressure should eventually force hiring to slow and unemployment to rise. Long-duration thesis remains intact (Priority: 5/5): Despite short-term bond weakness, Gurevich stays committed to long-duration, arguing Treasury supply, higher real rates, and tighter policy set up a future move back toward lower policy rates. Oil market outlook and market structure (Priority: 4/5): Both sides expect oil to remain vulnerable to supply shocks and geopolitics in the near term, but Gurevich favors deferred oil as a structural long on tightening supply and underinvestment. Israel/Gaza conflict as a geopolitical market shock (Priority: 5/5): The hosts debate whether the conflict triggers broader regional escalation and potential U.S. involvement, with Eric especially emphasizing upside oil risk and volatility. Cross-asset technicals and positioning (Priority: 4/5): Patrick and Nick review SPX, QQQ, VIX, DXY, gold, Fed expectations, and 2-year yields, concluding the equity rebound may be tactical while key levels could determine whether volatility re-expands.

Key Arguments: Inflation is best forecast by its current level, and its persistence is self-reinforcing; the same dynamic now applies in reverse to disinflation. 2021’s extremely loose policy reinforced inflation; 2023’s tight policy, QT, higher real rates, and a strong dollar should reinforce disinflation/deflation. Employment is the crucial transmission mechanism: once labor weakens, consumer resilience and pricing power should fade. Gurevich admits his earlier layperson assumption—that COVID-era redundancies would reduce jobs—was wrong because labor demand stayed strong longer than expected. Recent Treasury weakness does not negate the long-duration thesis; it may improve entry levels and eventually force policy rates lower. In a deep recession/depression, oil may fall first, but that would likely coincide with a bond rally and later create the conditions for a new oil move. Eric argues the Israel/Gaza conflict is likely to spread and that the market is underpricing geopolitical tail risk in crude oil. Patrick/Nick argue the recent equity bounce is mostly mean reversion from oversold conditions, with resistance near 4,400 and support near 4,300 on SPX. Gold’s recent rally is seen as a reaction to geopolitics and a weaker dollar, but the move may struggle near moving-average resistance unless the macro backdrop improves. The Fed is closer to pausing, but a true easing pivot likely depends on a clearer slowdown in growth and labor data.

Data Points: Macro Voices episode: 397 - Episode identifier Production date: October 12, 2023 - Show intro S&P 500 December futures: up 261 bps to 4409 - Macro scoreboard week-over-week U.S. dollar index: down 98 bps to 105.72 - Macro scoreboard WTI crude oil (Nov.): down 87 bps to 80.349 - Macro scoreboard RBOB gasoline (Nov.): up 45 bps to 2.21 - Macro scoreboard Gold (Dec.): up 283 bps to 1887 - Macro scoreboard Copper: up 56 bps to 3.61 - Macro scoreboard Uranium: down 157 bps to 69.00 - Macro scoreboard U.S. 10-year Treasury yield: down 18 bps to 4.56% - Macro scoreboard SPX call wall: 4400 - Options levels discussed by Nick SPX put wall: 4300 - Options levels discussed by Nick SPX implied move for Oct. 20 OPEX: ±80 points - Options levels discussed by Nick QQQ call wall: 380 - Options levels discussed by Nick QQQ put wall: 360 - Options levels discussed by Nick QQQ implied move for Oct. 20 OPEX: ±8 points - Options levels discussed by Nick VIX level: around 16 - Post-game volatility discussion Fed hike probability for Nov. 1 meeting: 11% - CME watch tool discussed in post-game Probability Fed unchanged on Nov. 1: 88%+ - CME watch tool discussed in post-game Real rates move cited by Gurevich: from about -9% to +2.5% - Gurevich’s argument about tightening conditions Change in real rates: about +11.5 percentage points - Gurevich’s framing of policy shock API crude build: 13 million barrels - Post-game crude discussion Confirmed American deaths referenced: at least 22 - Post-game geopolitical update WTI March 2024 $100 calls: more than doubled from 66 cents - Eric’s note on rising oil volatility Potential oil target mentioned: $150 oil - Eric’s geopolitical risk view

Pivotal Quotes: "“the best predictor of inflation next month is the level of inflation this month”" — Alex Gurevich: Explaining why inflation and disinflation can become self-reinforcing "“we got some stuff wrong, and we got some stuff right almost”" — Eric Townsend: Praising Gurevich’s candid research note and self-assessment "“This ain’t over till it’s over, and my sense is that this is still the calm before the storm.”" — Eric Townsend: His view that the Israel/Gaza conflict could still escalate further and keep oil bid

Implications: Listeners should expect continued macro volatility: bonds may be setting up for a larger long-duration opportunity, oil remains highly sensitive to geopolitics and supply fears, and equity strength looks tactically fragile. Employment and real rates remain the key macro signals to watch.