Forward Guidance Podcast Summary
Title: The Bottom Is In For Yields, NOT Equities | Vincent Deluard
Host: Blockworks (Possibly Tyler or Quinn)
Guest: Vincent Delaware, Director of Global Macro at Stonex
Release Date: March 12, 2025
Introduction
In this episode of Forward Guidance, host Tyler or Quinn engages in a comprehensive discussion with Vincent Delaware, the Director of Global Macro at Stonex. The conversation delves into Vincent's insightful December report titled "Beware of the Ides of March," examining inflation dynamics, bond markets, economic outlooks, and global fiscal policies. The dialogue is rich with expert analysis, notable quotes, and forward-looking perspectives essential for investors navigating the evolving financial landscape.
1. Overview of the December Report: "Beware of the Ides of March"
The episode kicks off with a reflection on Vincent Delaware's December report, which forewarned about potential stagflationary pressures and their impact on equity prices. The host praises Vincent's accurate predictions, notably the reversal in the core inflation print.
Notable Quote:
“You get a hard cash number. It was up by 7% over last year.” — Vincent Delaware [16:20]
2. Inflation Analysis
a. Seasonal Adjustments
Vincent explains how seasonal adjustments can distort inflation data, particularly in January. He argues that traditional seasonal models, which benchmark against past data, fail in the current high-inflation environment.
Notable Quote:
“If we are in a 3, 4% world, that number is not going to be enough.” — Vincent Delaware [02:04]
b. Stagflation vs. Recession
The discussion shifts to stagflation—a scenario where inflation remains high while economic growth slows—and its implications. Vincent asserts that while economic growth is decelerating, the U.S. is unlikely to enter a recession, emphasizing demographic factors and sustained public spending.
Notable Quote:
“Recessions are going to be very hard in this decade.” — Vincent Delaware [14:13]
3. Bond Markets and Yields
a. Current Dynamics
Vincent expresses concerns about the bond market's underlying dynamics, noting that the recent sell-off in bonds indicates that the bottom for yields may already be reached. He highlights that recent yield drops are driven by temporary factors rather than fundamental improvements.
Notable Quote:
“My market view is I think the bottom in yields is in and the bottom in stock is not.” — Vincent Delaware [33:00]
b. Target Date Funds Rebalancing
The conversation delves into the mechanics of target date funds and their role in bond and equity movements. Vincent explains that as these funds rebalance, they will shift assets from bonds back into equities, potentially causing yields to rise again.
Notable Quote:
“Target date funds will have to sell bonds and buy stocks.” — Vincent Delaware [35:24]
4. Economic Outlook
a. Drivers of Slowdown
Vincent identifies several factors contributing to the economic slowdown, including fiscal retrenchment, reduced state-level spending, and residual effects from COVID-19 policies. He emphasizes that these elements are leading to a more stagflationary environment rather than a recession.
Notable Quote:
“It's the argument that 80% plus is something you can't touch.” — Vincent Delaware [07:43]
b. Recession Likelihood
Despite the slowdown, Vincent remains optimistic about avoiding a recession, attributing this resilience to sustained government spending and favorable demographics.
Notable Quote:
“I think if you're waiting for something like 2008 where the unemployment rate goes to 10%, I think you're not going to get that.” — Vincent Delaware [14:13]
5. Fiscal Policies and Data Analysis
a. State-Level Spending
Vincent analyzes the shift from high growth in state and local government spending over the past four years to a period of fiscal tightening. He explains that increased tax cuts and depleted reserve funds are leading to a contraction in government spending.
Notable Quote:
“State and local governments... have to balance the book.” — Vincent Delaware [07:43]
b. Daily Treasury Statement vs. Surveys
Highlighting the limitations of survey-based economic indicators, Vincent advocates for using hard data like the Daily Treasury Statement to gauge economic health. He criticizes the politicization of soft data and underscores the reliability of tax collection figures.
Notable Quote:
“I really wouldn't bet on a significant reduction of the US deficit.” — Vincent Delaware [19:58]
6. Federal Reserve and Monetary Policy
Vincent discusses the Federal Reserve's cautious approach to monetary policy, suggesting that the Fed may delay necessary actions due to previous missteps and overreliance on flawed survey data. He expresses concern that the Fed might be slow to respond to the actual economic conditions.
Notable Quote:
“The Fed is... they can't move policy before the actual real-time data.” — Vincent Delaware [24:13]
7. Potential Solutions and Theories
a. Century Bonds
The conversation explores unconventional fiscal solutions like issuing century bonds to recalibrate the duration mismatch in the Federal Reserve’s portfolio. Vincent remains skeptical but acknowledges the theoretical appeal of such measures.
Notable Quote:
“It's ugly. But what are your other options?” — Vincent Delaware [45:41]
b. Balancing Duration in SOMA Portfolio
Vincent explains the challenges the Fed faces in aligning the duration of its Securities Owned and Managed Account (SOMA) portfolio with current Treasury issuances. He warns of potential losses from long-duration bonds if yields continue to rise.
Notable Quote:
“We have to deal with a mess.” — Vincent Delaware [46:14]
8. Global Context
a. Germany and Japan's Yield Surges
Vincent highlights the parallel fiscal shifts in Germany and Japan, where increasing military and infrastructure spending is leading to higher yields. He points out that these global changes will impact the U.S. Treasury market by reducing external capital inflows.
Notable Quote:
“We're solving the trade stuff, if Europe is going to build its own weapons... the capital side is going to be impacted.” — Vincent Delaware [56:57]
b. Impact on US Treasury Market
The shift away from U.S. Treasury assets by foreign investors like Germany and Japan is anticipated to exert upward pressure on U.S. yields, counteracting recent declines driven by temporary factors.
Notable Quote:
“I think it's part of this kind of general era of rising yield.” — Vincent Delaware [51:48]
9. Market Implications
a. Long European Stocks, Short US Stocks
Vincent posits a trend favoring long positions in European stocks and short positions in U.S. equities, driven by divergent fiscal policies and capital flows. He suggests this trend may continue as global capital becomes more nationalized.
Notable Quote:
“It could be... I could see a path where... European stocks are performing and the Euro is outperforming.” — Vincent Delaware [59:36]
b. Fiscal Impulse
The reduction in fiscal stimulus and the introduction of fiscal austerity measures are expected to dampen economic growth prospects, further supporting the thesis of rising yields without corresponding declines in equities.
Notable Quote:
“The more time passes, the harder that line is going to be.” — Vincent Delaware [36:33]
10. Conclusion and Final Thoughts
The episode concludes with Vincent reiterating his optimistic outlook on avoiding a recession amidst rising yields and persistent inflation. He emphasizes the importance of monitoring hard data over survey-based indicators and encourages listeners to follow his research for ongoing insights.
Notable Quote:
“I really wouldn't bet on a significant reduction of the US deficit to the point that... looks like a 4 trillion industry target date funds...” — Vincent Delaware [33:24]
Where to Learn More: Vincent Delaware invites listeners to follow him on Twitter @VINCNTDeluard and access his weekly reports through Stonex. Interested individuals can reach out via email or connect through Stonex client channels for more detailed analyses.
This episode of Forward Guidance offers a deep dive into macroeconomic trends and their implications for investors. Vincent Delaware's expertise provides valuable perspectives on inflation, bond markets, fiscal policies, and global economic shifts, equipping listeners with the knowledge to navigate the complexities of the current financial environment.