MacroVoices #443 Viktor Shvets: From Central Banks To Assets Classes To Geopolitics & More

Episode Summary

Executive Summary: Macro Voices episode 443 centers on Victor Schwetz’s view that central banks have kept rates too high, but policy mistakes are cushioned by abundant global capital, fast risk repricing, and rapid policy backstops, making recession less likely. He argues the world is entering a slower-growth, lower-rate, more liquid “Goldilocks” regime amid rising political polarization and more frequent geopolitical conflicts, while markets remain range-bound across stocks, oil, and commodities.

Main Topics: Central banks, policy errors, and liquidity (Priority: 5/5): Schwitz argues inflation largely faded in 2023, rates stayed too high, and central banks are politically influenced but able to reverse errors quickly. He expects slower growth, lower neutral rates, and more liquidity rather than recession. Yen carry trade unwind and contagion (Priority: 5/5): The recent yen-funded leverage unwind is framed as a ‘hot pop’ rather than a systemic crisis because no contagion appeared across funding markets, spreads, or credit, and Japan is less central to global liquidity than in prior decades. Political polarization and the ‘1930s’ analogy (Priority: 4/5): Schwitz links rising extremism and social conflict to a fusion of technology, financialization, and neoliberal/globalization forces. He argues parties are being pushed toward the center by electorates, potentially avoiding the worst outcomes. Geopolitics and the ring of fire (Priority: 4/5): He describes a global arc of conflict from Eastern Europe to the Middle East, Asia, and Korea, expecting continued instability but mainly as cold-war-style proxy conflict rather than direct world-war escalation. Oil, energy, and commodity outlook (Priority: 4/5): Energy markets are seen as range-bound: ample oil/gas supply, redirected Russian exports, muted global growth, and China’s reduced appetite for debt-driven stimulus limit upside. Copper remains structurally constructive, while oil lacks a strong demand catalyst. U.S. equities and valuation regime (Priority: 5/5): Schwitz expects the S&P 500 to remain range-bound because lower rates can offset softer EPS growth, while equity risk premium is already too low to compress much further. Rotation toward quality/sustainable growth is favored.

Key Arguments: Central banks are not purely technocratic; they are inherently political institutions to some degree. Inflation pressure from COVID was largely over by early 2023, so keeping rates above neutral into 2024 was a policy error. That error is less damaging today because global capital is abundant, risk reprices instantly, and central banks can deploy facilities rapidly. The yen carry trade episode did not spread contagion through funding markets, so it was a liquidity event, not a systemic breakdown. Political fragmentation is driven by the interaction of technology and financialization, which widens social and geopolitical divergence. Modern conflicts are likely to persist along a global “ring of fire,” but most will be cold-war or proxy conflicts rather than direct great-power war. China is unlikely to reprise its old commodity-supercycle role because debt has ballooned and capital efficiency has deteriorated. U.S. equities are likely range-bound as lower risk-free rates offset moderating earnings growth, while valuation support is limited by already-low risk premia.

Data Points: September S&P futures weekly change: -55 bps - Macro scoreboard for week ended Aug. 28, 2024 U.S. dollar index weekly change: -10 bps to 101.03 - Macro scoreboard October WTI crude weekly change: +360 bps to 74.52 - Macro scoreboard October RBOB gasoline weekly change: +49 bps to 206 - Macro scoreboard December gold weekly change: -39 bps to 2537 - Macro scoreboard Copper weekly change: -95 bps to 415 - Macro scoreboard Uranium weekly change: -81 bps to 79.20 - Macro scoreboard U.S. 10-year Treasury yield: 3.83% - Flat week over week; consolidating near year lows Fed Treasury holdings: About $3.2T-$3.3T - Schwitz cited the Fed balance sheet level as a reason QT should eventually reverse Reverse repo balance: About $300B - Schwitz cited this as another sign liquidity must be added Estimated global capital stock: $500T-$800T - Schwitz’s estimate of excess surplus capital worldwide Neutral U.S. policy rate: About 3.0%-3.5% - Schwitz’s estimate of where rates should settle Neutral Eurozone policy rate: About 1.5%-2.0% - Schwitz’s estimate of where Euro rates should settle Japan net international investment position: Roughly $3T - Used to explain Japan’s diminished but still important liquidity role China debt since 2000: Less than $5T to $65T - Schwitz used this to argue China can no longer drive another commodity supercycle China capital intensity: $10 of investment per $1 of GDP - Compared with roughly $3 previously; indicates poor capital efficiency China corporate ROE: About 9% vs 20% previously - Evidence of declining returns on capital U.S. corporate EPS growth expectation for 2025-26: 14%-15% - Schwitz said analysts are too optimistic and expects high-single-digit growth instead U.S. equity risk premium: About 3% inflation-adjusted; less than 1% nominal - He said current premiums are near dot-com lows SPX implied move into Sept. 20 OpEx: +/- 140 points - Post-game option positioning discussion SPX support / resistance: Support 5,500; resistance 5,670 - Nick Galarnick’s technical levels QQQ implied move into Sept. 20 OpEx: +/- 20 points - Post-game options discussion VIX: Around 16 - Used to frame expected intraday SPX swings of roughly 1% Kazatomprom 2025 production guidance cut: 5,250 metric tons - Equivalent to about 7.5% of global annual uranium production U.S. crude production: 13.3 million barrels/day - EIA weekly data EIA crude inventory draw: 846,000 barrels - Smaller draw than the 3 million barrel expectation Cushing crude inventory draw: 486,000 barrels - Inventories near operational minimums Gasoline inventory draw: 2.2 million barrels - EIA weekly petroleum data Distillate inventory build: 275,000 barrels - EIA weekly petroleum data Net petroleum draw: 2.8 million barrels - EIA weekly petroleum data

Pivotal Quotes: "Team Transitory has won, and Team Transitory was right all along." — Victor Schwitz: On his view that the inflation surge was largely over by early 2023 "It’s a hot pop. It’s not a coronary attack." — Victor Schwitz: Describing the yen carry trade unwind as non-systemic absent contagion "We live in a world of excess surplus capital." — Victor Schwitz: Core framework for why policy errors are less destabilizing than in past cycles

Implications: Listeners should expect slower growth but no recession, lower rates, and still-supportive liquidity conditions. Markets may stay range-bound, with rotations mattering more than broad direction, while geopolitical and political volatility remain persistent background risks.