The Fed Will Choose Inflation Over Recession | Vincent Deluard

Episode Summary

Executive Summary: Vincent Delouard argues recessions are increasingly unlikely in the 2020s because the U.S. economy is now service- and intangible-asset-heavy, policymakers reflexively stimulate instead of allowing downturns, and demographics create a strong baseline of nominal growth. He expects no 2025 recession, but sees a July market correction from tariffs, weaker liquidity, and disappointing Fed guidance, while remaining constructive on energy, gold, crypto, and other real assets.

Main Topics: Why recessions are becoming rarer (Priority: 5/5): Delouard explains that structural changes in technology, policy, and demographics have raised the economy’s growth floor and reduced classic recession triggers like inventory, credit, and investment cycles. Policy as recession prevention and inflation bias (Priority: 5/5): He argues modern governments and central banks consistently choose stimulus over unemployment, making policy structurally more inflationary and less recession-prone. MAGA, tariffs, and the burden on corporate America (Priority: 5/5): He frames current U.S. policy as a fight over who pays for fiscal promises: foreign countries, workers, or corporations. He argues tariffs ultimately fall on corporations and that workers are being protected through tax relief. Inflation, rates, and the new macro regime (Priority: 4/5): Delouard expects inflation to gravitate toward a higher long-run normal, with higher nominal growth and therefore higher long-term rates than in the post-2008 era. Stocks: higher valuations, lower margins, but no secular crash yet (Priority: 4/5): He sees a mix of higher valuation multiples due to no recession and margin pressure from policy changes, implying sideways-to-constructive equity returns with periodic corrections rather than a bear market. Energy, gold, and crypto as preferred exposures (Priority: 4/5): He is most bullish on energy equities and also likes assets that cannot be inflated away, such as gold and digital assets, in a world of fiscal dominance and financial repression. Short-term July correction call (Priority: 5/5): He predicts a double-digit equity correction in early July due to tariff headlines, earnings blackout periods, reduced buyback support, target-date fund rebalancing, Treasury issuance, and weaker Fed clarity.

Key Arguments: Recessions are less frequent because the U.S. economy has shifted from agriculture/industry toward services and intangible assets, which are less cyclical and less credit-intensive. Modern policy has a built-in asymmetry: when shocks hit, officials prefer inflation risk to recession risk, so downturns are increasingly cushioned by stimulus. Demographics create a strong nominal-growth baseline because entitlement and healthcare spending are rising rapidly, supporting demand even when cyclicals soften. Corporations are increasingly the financing source for the state via tariffs, retained profits, and taxes on corporate income; tariffs do not really make foreigners pay. The U.S. consumer and corporate sector have shown unusual resilience, with labor hoarding preventing layoffs and keeping the labor market stable. Tariffs likely hurt markets more than the broader economy in the near term, because companies can pass through much of the cost and consumers still have fiscal support. Long-run inflation should settle higher than the pre-2020 era, around a 3.5% to 4% average, implying higher long-term rates. Equity valuations can remain structurally elevated because recession is unlikely, but margin normalization and higher rates cap upside. Energy looks attractive because the sector is priced for bad news despite strong cash flow, dividends, and buybacks; growth and supply-chain shifts should support demand. Gold and crypto benefit in a regime of fiscal dominance, higher inflation, and attempts to dilute debt through nominal growth rather than austerity.

Data Points: 19th-century recession frequency: about 40% of the time - Used to contrast historical recession prevalence with modern stability Time without recession: about 16 years - Delouard says the U.S. went roughly 16 years without recession before recent scares Government health and entitlement spending growth: 10% per year since 2022 - He cites HHS and Social Security growth as evidence of a rising nominal growth floor Share of government budget / GDP tied to these sectors: about half of the government budget; about 20% of GDP - He argues this spending base alone contributes roughly 2 percentage points to growth Implied baseline growth from entitlement spending: 2% - 20% of GDP growing at 10% annually implies a 2% baseline growth contribution Long-run inflation expectation: 3.5% to 4% - He says inflation should average this range over time Ex-shelter inflation: re-accelerating - He suggests shelter is decelerating, but other categories are firming Corporate tariffs pass-through study: 80% pass-through - He references a Fed study of tariffs on New Jersey sales Corporate profits as share of GDP historically: around 5% of GDP for 100 years, rising to 14% in the mid-1990s - Used to argue corporate profits are the natural target for fiscal extraction Tariff revenue estimate: about $300 billion - Assumes about a 15% tariff rate on roughly $3 trillion of goods imports U.S. goods imports: about $3 trillion - Used in estimating tariff revenue Corporate income tax receipts in 2025: up 20% year over year - He cites stronger receipts despite unchanged rates Nominal U.S. growth since COVID: about 7% average - He says roughly 3% real growth plus 4% inflation since COVID U.S. deficit scale: $2 trillion - He argues a 7% nominal growth environment can accommodate a deficit of that size Foreign central bank Treasury buying: haven’t bought since 2014 - He links reduced foreign demand for Treasuries to post-Crimea sanctions and reserve diversification S&P 500 current multiple: about 23 to 24 - He says valuations are in the middle of a permanently higher plateau Potential correction target multiple: about 18 - He expects a July selloff to compress multiples Energy sector valuation: about 6 to 7 times free cash flow - He sees energy as cheaply priced with strong shareholder returns Energy sector weight in S&P 500: less than 1% - Contrasted with the sector’s outsized share of shareholder payments Energy shareholder payouts: 3% to 4% of shareholder payments - He says energy returns a larger share of cash to shareholders than its index weight suggests Dividend yields in some energy names: 7% to 8% annually - Used to highlight the attractiveness of energy equities April equity rally since then: about 22% - He says target-date fund rebalancing will be a factor because stocks rallied sharply from April

Pivotal Quotes: "I think the best we can manage is kind of a stackflationary drop." — Vincent Delouard: His view that the economy may slow but is unlikely to enter a classic recession "Corporations are going to have to pay." — Vincent Delouard: His core thesis on tariffs, fiscal burdens, and who ultimately absorbs policy costs "4% is the new normal, 2% is the floor." — Vincent Delouard: His long-run inflation framework and why he expects a higher inflation regime

Implications: Listeners should expect fewer classic recessions but more inflationary slowdowns, higher long-term rates, and periodic equity corrections. Policy and tariff shocks may pressure corporate margins, while energy, gold, and crypto may outperform in a higher-inflation, fiscally dominant regime.