Vincent Deluard: The “Magic Money” That Prevented Recession Is About To Disappear

Episode Summary

Executive Summary: Vincent Deluard argues the U.S. avoided recession in 2023 thanks to “stealth stimulus” from fiscal and quasi-fiscal channels, but growth should slow in 2024 as those tailwinds fade and higher rates finally bite. He believes inflation is in a higher structural regime, likely to reaccelerate, which favors labor, energy, healthcare, and non-U.S. assets over long-duration U.S. stocks and bonds.

Main Topics: Stealth fiscal stimulus supported 2023 growth (Priority: 5/5): Deluard says economists underestimated roughly $1T of support from Social Security COLAs, tax-bracket adjustments, CHIPS/IRA spending, higher Fed interest payments, and Treasury debt servicing costs flowing to private-sector income. Great Reset: a higher-growth, higher-inflation regime (Priority: 5/5): He argues the 2010s low-growth/low-inflation environment has been replaced by a fiscal-dominant 2020s with higher nominal growth, higher rates, and longer expansions but also more inflation pressure. Inflation is not over; a second wave is likely (Priority: 5/5): Deluard distinguishes CPI disinflation from the underlying inflation regime, expecting wages, healthcare, commodities, and fiscal impulses to keep inflation elevated around 4-5%. Policy tightening is delayed, not absent (Priority: 4/5): Higher Fed rates, QT, and the housing/corporate refinancing drag have been slower to hit because households and firms locked in low rates in 2020-2021, but he expects those effects to intensify in 2024-2025. Asset allocation favors the rest of the world over the U.S. (Priority: 5/5): He is bearish U.S. stocks relative to foreign equities, citing valuation, interest-rate sensitivity, and the end of a decade-long U.S. outperformance trade. Sector preferences: healthcare and energy over banks (Priority: 4/5): He likes healthcare as a secular winner from demographics and AI-enabled productivity, keeps energy as an oil-spike hedge, and is cautious but not outright bearish on large financials. China, Europe, and Japan offer different opportunities (Priority: 3/5): He sees China as overly pessimistic but structurally challenged, Europe as surprisingly resilient with cheap banks, and Japan as attractive for foreign investors if yen weakness and policy normalization continue.

Key Arguments: 2023 growth held up because fiscal support was larger than markets/economists recognized; the Fed was the “ball,” but fiscal policy was the “gorilla.” Social Security COLAs and tax-bracket adjustments acted like real income boosts because they were based on past inflation, creating a lagged stimulus effect. CHIPS Act and IRA spending drove private nonresidential investment, especially manufacturing/fab construction. Rising interest rates are themselves stimulative in part because the Fed pays more on reserves/RRP and the Treasury pays more interest to private holders of debt. Rate hikes have not hit as hard yet because households and corporates refinanced at very low rates in 2020-2021. Inflation is best understood as a multi-year social/economic regime, not just the CPI print; wage growth and fiscal deficits imply a persistent higher plateau. He expects 2024 to see the mirror image of 2023: less real income uplift from COLAs/brackets, less fiscal impulse, and slower growth. The market is underpricing the risk of a second inflation wave; break-even inflation and swaps are too anchored to 2%. A 2% inflation target is arbitrary and may be too low for an economy with structural deficits, labor scarcity, and higher nominal growth needs. Higher long-run inflation and rates should favor labor over capital, healthcare over old-economy sectors, and foreign equities over expensive U.S. growth stocks.

Data Points: 2023 Social Security COLA: 8.5% - Annual cost-of-living adjustment described as a major hidden source of income support for retirees. U.S. Social Security recipients: 67 million - Population receiving the 8.5% COLA boost. Annual Social Security spending: $1.2 trillion - Base spending level to which the COLA increase applied. Stealth stimulus estimate: about $1 trillion - Deluard’s estimate of total underappreciated support across fiscal and quasi-fiscal channels. Tax bracket adjustment: 7.5% - Inflation-indexing of brackets in 2023, framed as an effective tax cut. Current CPI context: about 3% - Used to argue that the 8.5% COLA and 7.5% bracket increase were real, inflation-adjusted gains. CHIPS + IRA spending: about $500 billion - Combined policy-driven investment support for industrial buildout. Fed reserves + RRP base: about $5 trillion - Balance-sheet liabilities on which higher rates raise Fed interest expense. Fed interest expense at 5%: $150 billion - Approximate annual transfer created by higher interest on reserves/liabilities. U.S. structural deficit: 6%-7% of GDP - Used to argue that higher inflation/nominal growth is needed to stabilize debt dynamics. U.S. international investment position: about $16 trillion net negative - Basis for his argument that higher U.S. rates can transfer income abroad through debt servicing. Bank loans and leases growth: about 5% YoY, flat since Jan-Feb - Used to distinguish real credit growth from broader bank credit measures. Inflation target: 2% - Described as arbitrary and possibly too low for the current regime. Preferred inflation regime: 4%-5% - Deluard’s long-term view of the likely inflation plateau. U.S. real GDP nowcast: 5.8% - Atlanta Fed GDPNow estimate cited as evidence of late-cycle resilience. Treasury/10-year yield context: above 4% on the 10-year - Higher rates used to challenge elevated U.S. equity valuations. S&P 500 valuation reference: around 21x earnings - Used to argue multiples were hard to justify if rates stayed high. European banks valuation: around 6x earnings and roughly 0.5x book - Evidence for Europe’s relative cheapness. Japan public debt context: mostly owned by the BOJ - Argued to reduce the economic relevance of gross public debt figures. China youth unemployment: 25% - One of the reasons he remains cautious on China despite excessive pessimism.

Pivotal Quotes: "“There was about a trillion dollar that somehow economists missed. A trillion dollar stimulus that really helped the economy this year.”" — Vincent Deluard: Explaining why U.S. growth surprised to the upside in 2023. "“I remain a long-term inflationista, yes.”" — Vincent Deluard: His core macro stance on the inflation regime and future policy environment. "“The biggest trade that I see happening in 2024 is the rest of the world versus US.”" — Vincent Deluard: Summarizing his preferred asset-allocation view for the coming year.

Implications: Listeners should prepare for slower U.S. growth, stickier inflation, and more volatile rates. Deluard’s framework favors foreign equities, healthcare, and energy, while warning that expensive U.S. stocks and long-duration bonds may face renewed pressure.