MacroVoices #436 Tian Yang: Left & Right Tails

Episode Summary

Executive Summary: Macro Voices episode 436 featured Variant Perception’s Tian Yang arguing that the U.S. has already experienced a segmented recession in credit cards, micro-businesses, and manufacturing, while fiscal deficits and locked-in low mortgages prevented a broader downturn. He sees inflation staying moderately elevated but peaking, supports a 2s10s steepener, and remains constructive on long euro, short dollar, and select commodity and relative-value trades.

Main Topics: Macro regime: recession delayed vs. already absorbed (Priority: 5/5): Tian argues the recession has largely already shown up in vulnerable pockets—micro-businesses, credit cards, and manufacturing—while broad household and labor data stayed resilient because fiscal support and low existing mortgage rates muted the usual negative feedback loop. Inflation outlook and Fed cuts (Priority: 5/5): Variant Perception sees inflation biased higher structurally but likely peaking cyclically around the 3%–3.5% area. Tian thinks the Fed can justify a limited, hawkish cut rather than an aggressive easing cycle. Trade recommendation: curve steepener (Priority: 5/5): The main fixed-income expression is a 2s10s steepener, timed using forward curves rather than spot inversion. Tian believes the market still prices too much inversion and not enough normalization. Growth nowcast: sideways, not recessionary collapse (Priority: 4/5): Their LEI framework suggests the U.S. economy is muddling through with mixed signals and modest growth rather than entering a classic recession or a strong boom. Election risk and fiscal implications (Priority: 4/5): Tian uses a 'continuity vs. change' framework to assess the U.S. election, finding a slight edge for continuation/Democrats based on past four-year performance. He links sweep risk to more fiscal spending and possible curve steepening. Cross-asset positioning: dollar, commodities, equities, gold, uranium (Priority: 4/5): The team discusses a softer dollar, constructive long euro views, cautious bullishness on commodities, neutral-to-selective equity exposure, a possible breakout in gold, and longer-term bullishness in uranium despite near-term consolidation.

Key Arguments: The recessionary damage has already occurred in the weakest parts of the economy, but fiscal deficits and low effective mortgage rates prevented it from turning into a broad-based recession. Inflation is still uncomfortable for the Fed, but leading indicators suggest the inflation scare is peaking rather than accelerating into a new wave. A hawkish cut is plausible because market-implied neutral real rates are near Variant Perception’s estimate; aggressive easing is not justified absent a fresh shock. The spot 2s10s inversion is less informative than the forward curve, which already looks less inverted and supports a steepener trade. U.S. manufacturing may be bottoming because the post-COVID bullwhip/inventory distortion is normalizing and a standard inventory rebuild can now occur. Small businesses have suffered operational margin pressure, but bottom-line income has been buffered by unusually weak tax collection and fiscal support. Housing remains a real growth headwind because higher mortgage rates suppress new buyer demand and housing starts/permits. The U.S. election should be viewed as a referendum on the past four years; by that measure, continuity/Democrats retain a slight edge, though uncertainty is unusually high. Longer-term, structural scarcity in labor, credit, and commodities points to upside inflation pressure over a two- to three-year horizon. In equities, the market is not obviously cheap or a clear short; the better expression is selective and relative-value, not a broad directional bet.

Data Points: Macro Voices episode: 436 - Episode number for the July 11, 2024 broadcast Production date: July 11, 2024 - Episode production date SP 500 September futures: 5688 - Closed up 175 basis points week over week US dollar index: 104.98 - Down 33 basis points week over week WTI crude (August): 82.10 - Down 212 basis points week over week RBOB gasoline (August): 250 - Down 385 basis points week over week Gold (August): 2379 - Up 42 basis points week over week Copper: 460 - Up 155 basis points week over week Uranium: 8595 - Up 53 basis points week over week US 10-year Treasury yield: 4.29% - Down 6 basis points week over week Inflation point estimate (6 months forward): 3.5% annualized - Tian’s estimate for near-term inflation Real neutral rate proxy: ~1.5% - Based on five-year, five-year forward real OIS Fed cuts priced by year-end: 1.5 to 2 cuts - Market pricing cited during interview Fed cuts priced by mid-next-year: about 4 cuts - Market pricing cited during interview Effective mortgage rate on existing stock: 3.8% - Used to explain why household debt service remains manageable Mortgage rate for new first-time buyers: above 7% - Illustrates housing and affordability pressure US fiscal deficit flow to private sector: 6%–7% of GDP annually - Tian says fiscal policy has propped up incomes and activity Non-financial, non-corporate operating margins: all-time lows - Evidence of pain in micro-businesses Credit card delinquency rate: 10%+ - Fed data cited as recession-like stress Micro-business jobs opening level: elevated since COVID - Suggests smaller firms have not fully collapsed Variant Perception growth LEI: 1.8 - Six-month-forward point estimate SPX spot level: ~5630 - Post-game technical discussion SPX implied move for July 19 monthly OPEX: 70 points - Upper/lower implied move around current spot QQQ spot level: ~503 - Post-game technical discussion QQQ implied move for July 19 monthly OPEX: ±10 points - Upper/lower implied move around current spot VIX level: ~13 - Used to discuss cheap portfolio hedging US crude oil production: 13.3 million barrels/day - EIA weekly print returned to all-time high area Crude oil drawdown: 3.4 million barrels - EIA weekly inventory change Cushing drawdown: 702,000 barrels - EIA weekly inventory change Gasoline drawdown: 2.0 million barrels - EIA weekly inventory change Distillates build: 4.9 million barrels - Only weekly build in products Net petroleum drawdown: 0.5 million barrels - EIA weekly inventory result Crude oil rally range: $72 to $84 - Recent trading range described in post-game Crude oil support: $80.04 - 21-day moving average mentioned SPX breadth: 51% - Breadth indicator in post-game discussion SPX breadth in June: 60% - Comparison point showing deterioration in participation SPX breadth in May: 65% - Comparison point showing deterioration in participation SPX breadth in March: 85% - Comparison point showing prior broad participation July return for NASDAQ so far: ~5% - Compared with historical average July performance NASDAQ average July return over 16 years: 4.64% - Historical seasonal benchmark Kazakhstan share of global uranium supply: almost half - Used to explain uranium tax impact

Pivotal Quotes: "the recession has already happened" — Tian Yang: Explaining that stress has shown up in vulnerable sectors without becoming a broad-based recession "the trade right now, the stir trades, You know, the front end isn't that interesting anymore ... getting to like two's ten steepness" — Tian Yang: Why Variant Perception favors a 2s10s steepener over front-end trades "inflation is probably running at a 3.5% annualized rate" — Tian Yang: His six-month-forward inflation point estimate

Implications: Listeners should expect a muddle-through macro backdrop: no deep recession, no disinflation collapse, and limited Fed easing. The favored setup is curve steepening, softer dollar, and selective rather than broad risk exposure.