Viktor Shvets Declares Victory for Team Transitory and the Soft Landing

Episode Summary

Executive Summary: The episode centers on Victor Schwetz’s argument that recent inflation was driven mainly by pandemic-era supply and demand disruptions, not entrenched demand overheating, and that disinflationary forces—demographics, technology, financialization, and a cyclical reset in goods/services—should reassert themselves. He also argues deglobalization and ESG will be less inflationary than feared, China’s growth model is structurally slowing, and geopolitics and central-bank policy are likely to be less disruptive than markets assume, supporting a “mini Goldilocks” outlook for 2023-24.

Main Topics: Why inflation was 'transitory' (Priority: 5/5): Schwetz argues inflation reflected unprecedented disruptions across goods, services, and labor markets rather than excess aggregate demand, and that those shocks are fading as economies normalize. Disinflationary regime and embedded inflation risk (Priority: 5/5): He says structural forces such as demographics, technology, wealth inequality, financialization, and debt create a strong disinflationary backdrop that makes inflation hard to embed. Deglobalization, ESG, and inflation (Priority: 4/5): He contends deglobalization and environmental policy shifts will not necessarily be inflationary because labor is a smaller share of arbitrage, technology offsets costs, and services complicate simple reshoring narratives. China’s growth limits and reopening effects (Priority: 5/5): Schwetz argues China cannot sustainably return to 5%-6% growth because labor contributes little, capital efficiency is poor, and productivity is weakening; reopening may produce short-term demand but not a durable inflation shock. Geopolitics as a process, not a permanent shock (Priority: 4/5): He sees current geopolitical risks as episodic rather than continuous, expecting relative calm in 2023-24 even though long-run tensions remain elevated. Central banks, yield curves, and market pricing (Priority: 5/5): He believes markets are correctly pricing lower rates and disinflation; central banks will likely pivot toward growth support, end QT, and possibly restart QE if inflation falls faster than expected. Re-industrialization and US-China strategic competition (Priority: 4/5): He frames US industrial policy as a continuation of an existing re-industrialization trend, aimed at widening the technological gap with China rather than simply reversing globalization.

Key Arguments: Inflation was driven by supply-side disruptions and demand shifts between goods and services, not by a persistent surge in aggregate demand. Once shocks normalize, disinflation should return quickly because structural forces are still strongly disinflationary. Embedded inflation is difficult when corporate pricing power and labor pricing power are inconsistent and short-lived. Deglobalization is not automatically inflationary because labor’s role in global arbitrage has shrunk, services are more central, and technology lowers costs. China’s reopening could boost short-term demand, but China’s long-term growth is constrained by near-zero labor contribution, weak productivity, and high debt. China is unlikely to sustainably regain 5%-6% growth without either massive capital deepening or a productivity rebound, both of which look difficult. Geopolitical risk remains real over a decade, but it unfolds in waves, so 2023-24 may be calmer than feared. Central banks will increasingly shift from inflation-only messaging to a dual mandate emphasizing growth and employment as disinflation becomes more apparent. Yield curves and financial conditions still matter directionally, but in a digital, capital-rich world they can change very quickly and are less deterministic than in the industrial era. US re-industrialization is happening with more automation and less labor intensity, making it less inflationary than traditional reshoring narratives suggest.

Data Points: NASDAQ performance: Up 7% - Speaker cites the market’s strong start to the year as of January 18. US inflation rate (CPI): 6.5% - Mentioned as still high, prompting the question of whether Team Transitory can claim victory too early. Global/U.S. demand deviation: Global demand below pre-COVID trajectory; U.S. aggregate demand about 90 bps higher than pre-COVID trajectory - Used to argue inflation was not primarily caused by excess aggregate demand. Goods demand (U.S. and Europe, 18 months ago): 10%-15% above pre-COVID - Illustrates the magnitude of pandemic-era goods demand distortion. Goods demand (Europe today): Below pre-COVID trajectory - Supports the claim that goods-market overheating has reversed. Goods demand (U.S. today): Back to pre-COVID trajectory - Shows normalization of goods consumption patterns. Services demand (U.S., 18 months ago): 15%-20% below pre-COVID - Shows how services were depressed before rebounding. Services demand (U.S. today): Within 2% of COVID - Indicates services have largely recovered. Manufacturing output growth in the U.S. (1990-2007): 1%-1.5% per year - Compared with faster global manufacturing growth during deindustrialization. Global manufacturing output growth (1990-2007): 3.5%-4% per year - Used to show declining U.S. market share in manufacturing. Manufacturing share of U.S. labor force: Down from 9% to 8.4% - Illustrates re-industrialization occurring with less labor intensity. China’s share of global manufacturing: About 30% - Used to compare China’s current industrial scale to the U.S. in the 1970s. China debt: $60 trillion - Cited as a constraint on further conventional stimulus. China GDP growth: Sub-3% - Referenced recent official GDP figures as evidence of slowing growth. China labor contribution to growth: Virtually zero - Reason given for why China cannot easily return to high growth rates. Incremental capital output ratio in China: 8-10x - Indicates worsening capital efficiency in China. China manufacturing labor force estimate: 80-150 million - Compared with U.S. manufacturing employment to show productivity differences. U.S. manufacturing employment: 12-13 million - Used to highlight high productivity of U.S. manufacturing output. China’s agricultural workforce: 288 million - Shows the scale of China’s agricultural employment challenge. China oil demand increase forecast: 600,000 barrels/day - Macquarie in-house forecast for reopening-related demand growth. U.S. reverse repos: $2.2 trillion - Cited as evidence of surplus liquidity in the U.S. financial system. Private sector net savings in the U.S. (Sept. 2022): Almost zero - Used to argue the U.S. has largely drawn down private savings. Rest of world balance for the U.S.: Back to 4% - Presented as an accounting counterpart to U.S. dissaving.

Pivotal Quotes: "Whenever everybody agrees, you know something is wrong." — Victor Schwetz: Explaining why he stayed on “Team Transitory” while inflation consensus shifted. "The only problem if inflation become embedded in the goods market, in the labor market, in the wages market, as well as in the financial markets." — Victor Schwetz: Describing the conditions under which temporary inflation turns persistent. "I think 2023 and 2024 will be a period of lower pressures, not higher pressures." — Victor Schwetz: His outlook on geopolitics and near-term global risk intensity.

Implications: Listeners should expect a narrative of cooling inflation, lower rates, and more resilient risk assets than in 2022. The episode argues for cautious optimism: slower growth, but not a deep recession, with China, geopolitics, and central-bank pivots as the key swing factors.