MacroVoices #387 Jeff Snider: On Deflation and Soft Landing
What this covers
MacroVoices Erik Townsend and Patrick Ceresna welcome Jeff Snider to the show to discuss the inflation story over one of Jeff’s infamous chart decks and whether the “soft landing” forecast that’s become popular is accurate. https://bit.ly/3QlP5RZ
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00:00:00 Intro 00:00:36 Macro Scoreboard 00:04:05 Feature Interview with Jeff Snider 00:49:48 Postgame – Markets Starting a Risk-Off Cycle? 00:50:15 Crude Oil 00:54:52 S&P500 00:59:42 QQQ 01:00:51 VIX 01:02:14 DXY 01:05:27 Gold 01:07:33 Copper
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Snider argues the 2021-2023 inflation was transitory supply-shock inflation, not monetary inflation, and the economy is entering a deflationary recession similar to 1946-1948, not a soft landing or 1970s-style stagflation, based on producer price deflation spreading globally and inverted yield curves signaling lower future rates.
- Supply-shock inflation has a distinct signature: rapid initial price surge followed by slow multi-year deceleration as purchasing power exhausts, which matches current CPI trajectory and historical 1946-1948 case, not 1970s monetary inflation pattern
- Producer prices are already deflationary globally (China, Europe, US), which historically leads consumer prices lower and signals recession, not soft landing
- Bond markets (US, German, euro curves) have been inverted since late 2022 and unmoved by Fed hikes or QT, consistently pricing deflation and lower future rates
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Supply-shock inflation and monetary inflation look identical in the short run but produce completely different long-term outcomes: supply shocks cause rapid consumer price surges that decelerate and stabilize at a higher equilibrium within multi-year periods regardless of Fed policy, while monetary inflation produces sustained year-over-year price increases that continue as long as money and credit growth remains elevated.
“Consumer Price inflation as we Define it as a supply shock which we'll get into here in a minute versus the monetary variety which is really legitimate inflation they look very different yes the end result is the same in the short run but how they work out in the long run could not be different”
The unemployment rate is not a reliable predictor of recession despite Fed policy and investor belief—historically, the lowest unemployment rate in US history occurred the month before a recession began—making the soft landing narrative's reliance on stable employment data misplaced.
“I think like the Federal Reserve Equity investors or a lot of people who are buying stocks have really focused in and have tunnel Vision on employment data because what did Janet Yellen say as long as the unemployment rate is low we won't have a recession and I think a lot of people believe that which is the wrong thing to believe you the lowest unemployment rate in U.S history was hit the month before a recession began”
The near-term forward spread (3-month rate today vs 3-month rate expected 18 months ahead) has been inverted since November 2022 and remains inverted, indicating the bond market expects substantially lower interest rates 18 months out, which is consistent with deflationary recession, not soft landing.
“by the by the time we get to November the near-term forward spread had inverted and that's about the time you stopped hearing anybody at the Federal Reserve or anywhere talking about it and since November it's gotten more and more inverted”
The nominal economy is rolling over as supply-shock price increases fade, reducing nominal revenues for businesses globally; without nominal price protection from the supply shock, companies will be forced to cut employment and hours, spreading the downturn.
“as the nominal economy starts to roll over we start to move out of the supply shock increasing prices therefore increasing Revenue to a lot of these businesses around the world they now have to normalize their their own individual operations to volume that is so much less than people realize so if you have no nominal protection from you know the supply shock nominal price increases what are you going to do you're going to start firing workers because not only do you not have work for them to do you also don't have the money coming in keeping all those things up”
Bond markets (US Treasuries, German Bunds, euro futures) have remained steady since June 2023 despite QT, rate hikes, and soft landing narratives, because the bond market is confident in supply shock and deflation outcomes, not swayed by Fed messaging.
“through all of that despite everything that should be highly negative to these bonds and not just in the US but all around the world everything that should be highly negative highly sensitive long-term uh treasury bonds and Government Bond instruments they really haven't done anything since last June which is when again going back to our macroeconomic data that's when everything really started to shift”
Eric believes the most important factor for determining whether current inflation is transitory or represents a new secular inflation is examining how the inflation characterizes itself and comparing it against historical supply-shock cases versus monetary inflation cases.
“I'm going to argue that maybe the most important thing is figuring out whether this inflation that we've clearly been having thing is transitory as a lot of people yourself included have said it's because of Supply shocks it's the aftermath of the pandemic this was to be expected it's not a new secular inflation then there's other people that are saying oh whoa but wait it is a new secular inflation it is a monetary inflation what's going to be driving this is going to be less supply of crude oil increasing Energy prices that's going to transmit to the rest of the economy it's going to be a whole monetary thing well if you're not sure which one of those it is because it's too early in the story to know for sure then I guess what you want to do is you want to look at the inflation itself and say well how do we characterize monetary inflation that might have long-term secular impacts and we might expect it to be persistent how do we characterize that or or differentiate or distinguish it from Supply shock inflation which we expect to be transitory”
The Federal Reserve's own messaging reveals bias rather than analysis: in July 2019 Powell testified to Congress that the economy looked weak, the yield curve was inverted, and global weakness was concerning, leading to rate cuts; in 2023 with nearly identical macroeconomic conditions (similar nominal GDP, lower real GDP, worse ISM, same unemployment rate of 3.6%), Powell claims a soft landing is likely, showing the Fed's interpretation has changed due to bias from recent negative years rather than data.
“if you think back a couple years to 2019 July of 2019 uh Mr Powell went up in front of Congress and told them that you know he was very concerned about the state of the U.S economy it looked really weak uh the yield curve was really flattening out some parts of it were already inverted”
The correlation between Chinese producer prices and U.S. wholesale/business-to-business sales is tight and consistent, suggesting that deterioration in Chinese PPI (demand destruction there) will continue to drag down B2B sales and disinflation in the U.S.
“where I've taken the Chinese PPI and measured it against U.S wholesale sales and once again we see a absolutely tight correlation with producer prices in China and business to business sales in the United States which suggests not just further disinflation but also further deflation in the US economy as it relates to Chinese producers who aren't producing as many Goods which is also consistent with a recessionary environment the reason why we say Chinese producer prices are such a good Bellwether for the economies you can correlate almost anything with a Chinese PPI it tells you about the direction of the global economy”
Chinese producer prices are declining at rates only seen a few times in modern history—equal to 2015-2016 lows and approaching 2008-2009 financial crisis levels—which is a bellwether for global manufacturing and trade demand, signaling the global economy is moving into deflationary recession territory similar to those prior crises.
“Chinese producer prices have been a Bellwether for Global not just not just global trade not just Global manufacturing but the overall direction of the global economy and we've already seen up to June Chinese producer prices that are declining at a rate we've only seen it a couple times in its modern history what Far and Away worse than 2020 we're about equal to the lows of 2015 2016 which was a devastating time for much of the world especially Emerging Markets we're getting into territory Exclusive Company like something like 2008 2009”
Equity markets are pricing in a soft landing because investors who have been underwater since late 2021 are desperate to re-enter the market, and as soon as the Fed signaled rate hike pause, they bought the soft landing narrative; this is not a fundamental signal but rather collective narrative trading that will collapse the moment employment data weakens.
“when did stocks hit their high that was late 2021 and so for the last year and a half everybody's been sitting back saying oh this sucks I need to get back in the market I want to get back in the market I need to get back in the market and as soon as the FED says we're going to stop hiking raids and it looks like a soft Landing everybody got back in the market why are we so surprised about that”
The goods price deflator for Q4 2022 through Q2 2023 has been thoroughly disinflationary, and is now at similar levels to Q2 2019, indicating that goods prices no longer pose an inflation risk contrary to Fed messaging.
“the implicit price to inflator for goods just strictly Goods for the last three quarters running that's the end of 2022 into 2023 thoroughly disinflationary consumer prices in Goods again consistent with what we saw in 2019”
Post-game: A record 17 million barrel drawdown from US oil storage in one week is unprecedented (or at least the largest since records began in the 1980s), but the surprise negative was building gasoline demand rather than expected drawing, suggesting demand destruction despite bullish inventory action.
“the EIA inventory eia printed a record 17 million Barrel drawdown as far as I know that's an all-time record...meanwhile...gasoline building building not drawing down but building 1.5 million barrels that was the surprise on the board”
Tech sector is very overextended with multiples at elevated levels relative to historical averages; smaller caps (Russell) are preferable to the NASDAQ, and significant downside correction (5-10%) is likely before meaningful upside is seen.
“Tech is very overextended and the multiples on P are very very high right now relative to historical averages and I favor the small caps in terms of the Russell over the NASDAQ so I'm not inclined to really buy any of these dips unless we see some substantial sell-off in the realm of five to ten percent”
Germany is already in recession—not just technical (negative Q4 2022 and Q1 2023 GDP) but real recession with Q2 2023 showing flat GDP and no recovery, with S&P Global PMI below 40 (matching 2020 and 2009 levels) and Zew sentiment much worse than current GDP, indicating Germany's recession will worsen.
“German Chancellor Olaf Schultz the German government put out a report that said Germany was going to avoid recession when even at that early stage Germany was already in recession and I don't mean a technical recession even though yes uh the fourth quarter GDP in the GDP in the fourth quarter of 2022 in the first quarter of 2023 turned out to be negative... but more so that Germany is in a real recession at the end of last year to the beginning of this year the numbers that just put out this uh last week for the second quarter flat GDP in the second quarter which means that Germany's not increasing not rebounding out of a technical recession into recovery instead Germany's already in the beginning stages of a recession and is likely heading into a worse shape moving forward”
I have become dismissive of inflationist views and am reaching a level of hubris that scares me, so I need to bring on disinflationists and deflationists (like Snider) to protect myself from overconfidence bias.
“I'm convinced that we're in the early Innings of a new secular inflation I'm so convinced of that that I've reached the point that I'm starting to become dismissive of the infidels who still see the disinflation story and can't appreciate my greater vision and wisdom okay that scares the crap out of me because that kind of hubris is exactly what gets us in trouble”
In 2023 we have a growing credit crunch, the opposite of monetary inflation, which contributes more to the deflationary recession outcome than any Fed policy intervention.
“in 2023 we have the opposite problem we have a growing credit crunch which I think contributes more to the deflationary recession which is already developing on its own terms”
The ISM Manufacturing PMI today (recording date August 3, 2023) came in with very concerning numbers, including the lowest employment index since 2020, indicating significant labor-market deterioration.
“I'm just showing you the ISM Manufacturing we're way way way below where we were in 2019 according to ISM and again the ism just came out today with a lot of concerning numbers including on employment lowest employment number for them since 2020”
Fed Chairman Thomas McCabe testified to Congress in August 1948 that the post-WWII supply shock would spiral out of control and cause great inflation if not immediately controlled through banking system discipline, but the supply shock resolved on its own before the Fed's anti-inflation authority was used, showing Fed intervention was unnecessary and supply shocks are self-correcting.
“fed chairman Thomas McCabe went up to Congress and said you know this is what we got we've got a supply shock he said in the view the pressure the current Goods you know continued shortages of many Goods limited capacity for increased output all of the things that we're familiar with over the last couple years they had that and then some in the late 19th in the middle 1940s so what he was saying is exactly what you would hear from Jay Powell today if we don't do something about these Consumer Price pressures and we don't do something in August of 1948 it's going to spiral out of control”
Market has completely ignored the Fitch downgrade of US sovereign debt from AAA to AA+, which is a material signal of deteriorating fiscal health; this dismissal is analogous to ignoring the debt sustainability problem that Stan Druckenmiller warned about, suggesting dangerous complacency.
“what I find just astonishing is that the market has almost completely totally ignored a major rating agency downgrading the credit rating of the United States of America which no longer enjoys a triple a pitch score as of this week I'm reminded of Stan druckenmiller's words of disbelief when everyone was focused on the debt ceiling extension rather than the much more pressing question of the unsustainable debt problem”
Three possible outcomes for inflation resolution: 1) deflationary recession like 1946-1948, 2) soft landing like early 1950s post-Korean War, or 3) great inflation 2.0; the evidence (global PPI deflation, inverted curves, supply shock mechanism exhaustion) points to outcome #1.
“three potentially different endpoints uh how does this resolve itself the first one is the one you know I I think that we'll see throughout the rest of the presentation here the evidence is pointing towards a deflationary session very much like 19 the 1940s there's also the possibility it ends up like the early 1950s where we had a relatively short supply shock it was really it was pretty severe but then it kind of just it went away dissipated into a soft Landing which you hear a lot nowadays and then the third possibility is you raised Eric earlier was great inflation 2.0 which I don't see really any evidence for that”
Fed policy will prove more hawkish than most participants expect, and this (not the treasury downgrade) will present a headwind for gold; gold has not rallied despite treasuries being downgraded because the Fed will not ease as much as markets anticipate.
“I think the Fed that policy is going to prove more hawkish than most participants expect that not the fundamental factor of U.S treasury is being downgraded is what's going to present a headwind for gold”
Employment data is the ultimate trigger for the 'trap' moment when soft-landing narrative collapses; the stock market will only care about negative payrolls or unemployment rising above 4%, despite other economic weakness (ISM, PMI, overseas weakness) being largely ignored until employment turns.
“I think it all falls apart the moment we get a negative payroll print or the unemployment rate jumps above four percent and continues to rise I think the employment numbers which is what everybody bases their narrative on once they turn that's going to be the oh this is a trap moment”
The S&P 500 has broken above its 100-day and 200-day moving averages on a sustained basis, which spells the beginnings of a new bull trend, though the sustainability of this rally depends on whether dips continue to be bought or if distribution begins.
“the breakouts above the 100 and 200-day moving average which are now sustained uh definitely Spells at least what looks to me like the beginnings of a new bull Trend”
Gold could see additional downside to retest June-July 2023 lows, and might consolidate in the third quarter at those lows while broader markets experience some risk-off, potentially setting up for a bull move later when financial conditions ease.
“a consolidation over the span of the third quarter where gold can retest February March lows as it remains muddled in in a period where we might see a little bit more risk off in the broader markets”
The Biden Administration has given up on refilling the Strategic Petroleum Reserve and is scapegoating OPEC, claiming they'll wait for lower prices that are probably not coming, which implies a change in U.S. energy reserve policy.
“the Biden Administration has given up on refilling the spr scapegoating OPEC and changing market conditions saying they're going to wait for lower prices that are probably not coming so I don't think we're going to see the spr refilled”
The US Dollar Index has reversed above a prior support level that was acting as resistance, signaling a false breakdown of the July weakness and re-establishment of the year-long consolidation range; the next big tell is whether the dollar can rally above 103.75.
“a false breakdown reversing above the prior support level to re-establish the prior consolidation range the next big tell is whether the dollar can rally above 103 spot 75 which would signal a trend reversal to the upside”
U.S. crude production is holding steady at 12.2 million barrels per day, unchanged from the prior week.
“U.S production holding unchanged at 12.2 million barrels”
Copper broke out above $4/lb but the breakout was decisively rejected; bulls must show up and push copper back to highs, otherwise further weakness will retest May-June lows and copper will have to wait longer in its cycle.
“we had a very definitive breakout attempt above four dollars on copper which was decisively rejected...the question now is whether this trend line does get broken and whether or not copper is destined to somehow go and retest the lows from May and June”
Eurodollar University (founded 6 years ago in 2017) has grown from basic explanatory content into 50+ hours of detailed educational material covering monetary system fundamentals, yield curve mechanics, collateral dynamics, and global reserve currency failures.
“we started out eurodolla University back in 2017 to really try to explain what the monetary system is how it works and why it matters and then over the years I've developed it into a much more detailed process a much more detailed output where you can go to eurodollar.university sign up for memberships and research subscriptions...there's about 50 hours of material at the unit dollar University website”
If the S&P 500 breaks below the 4500 level and closes below it, a fast flush to 4400 is likely, with potential support around 4350 and 4300 if the correction runs deeper (similar to February and December corrections of 300+ points).
“if we do break below that 4500 Mark and stay below it on close we likely see a fast flush down to that 4400 area”
Implied volatility (VIX) has been at multi-year lows (even 12 handle on intraday basis) but has consolidated around 13, indicating complacency; recent spike to 16-16.5 from selling is still near lows but starting to price in more risk.
“we saw multi-year are lows on the vix as we saw even the 12 handle up one point on a couple intraday basis but uh really a consolidation along the 13 level”
Transitory disinflation is a term that emerged in early 2023 as markets and the Fed sought to distinguish between brief disinflationary pauses (transitory) and sustained deflation (not transitory), but this terminology is confusing and masks the underlying supply shock mechanics.
“we've got any number of you know commentators saying that you know inflation is going to to pick up again what do they call it transitory disinflation that was a term that came up earlier part of this year”
Apple and Amazon earnings this week are critical because they are mega-cap tech holdings that dominate the index; a weak report could trigger a 'fast flush down' to 4400 and 4350 support levels.
“that might coincide with Apple's earnings tonight if they have a weak report which should sell the market off into tomorrow”
NASDAQ currently has call walls above at 3850 and 4090, put walls at 3700, with key resistance at 4000 and 4090 (all-time highs) and key support at 3700, based on options-market positioning.
“we have a call Wall above at 385 and a wall just below at 370. the implied move for the August 18th Opex is plus minus 12 points so the upper expected move would be 387 and the lower expected move would be 363 approximately now we have resistance just above at 400 and then at 409 which are the all-time highs and key support just below at 370”
Darius Dale (a bear strategist) predicted a stock market 'blow off top' would occur first (before the decline), which is playing out; a right-tail equity event could reverse oil and commodity strength.
“I still don't discount the possibility of that blow off top in the stock market that Darius Dale predicted if that were to happen it could result in a reversal of everything and we could still see new lows on oil”