Jon Turek on the Macro Outlook for 2022

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

Tracy, it's been a long time since we've done like, a sort of like, I don't know if it's been too long. It feels like it's been a while since we've done like, a pure sort of macro episode. We obviously do a lot of micro, and that's been one of the fun things about 2021

But I think it's time to switch back to the macro.

Tracy Alloway (0:37)

I was gonna say, we've been distracted by the micro in attempting to put together a better picture of the macro, in all fairness. But yes, you are right. It's been a while since we talked about the general outlook for the economy and for markets.

And of course, we are looking ahead to 2022, and there are a lot of things going on and a lot of things that people are concerned about. So obviously we have inflation worries, and then we have a slowdown in China as well. And then we have, of course, the Fed's reaction function. And there are still a lot of questions over what exactly it's going to prioritize going into next year.

Joe Weisenthal (1:19)

Yeah, exactly right. And I think the other thing about this environment and this kind of applied, it's like nobody has any familiarity with this type of economic environment. I mean, it's pretty new. So yes, we've seen periods of elevated inflation before, for sure.

But by and large, this is not like the 1960s or the 1970s. It's different conditions. Employment is growing extremely fast. We had a pandemic. We're still in a pandemic. And so that is totally new.

The policy responses that we've seen are new. So I think kind of what makes this interesting is just like, yeah, everyone can like sort of reach for analogies, but there's no real experts who can say, you know, this is the playbook or anything. Everyone is on some level dealing in uncharted territory.

Tracy Alloway (2:06)

Yeah, it's a very unusual business cycle. And we've talked about this before, but we basically squeezed in like an accelerated business cycle right after the pandemic. We had a very short, sharp recession.

And then the recovery started almost immediately, largely thanks to the stimulus efforts from various governments. But of course, the question is, what does the cycle look like? Does it behave like other cycles? I've already seen lots of people talking about how we're a late cycle. All the signs point to a late cycle. And it's like, well, it's been, what, two years since this started. That would be a pretty fast cycle.

Joe Weisenthal (2:45)

Yeah, and then I guess the other sort of mediumish to long-term question is, does something change meaning flee? And I'm thinking about, say, in inflation. And obviously, prior to this, we had great moderation or disinflation, or Fed could never hit 2%. Now, we have over 6% inflation. But is this mean river, does it just go back to the old way, or do we enter into some sort of new regime where inflation is persistently above and there's much more inflation volatility?

These are all kind of difficult questions to know right now, but the big ones that people will be asking over the next year and beyond.

Tracy Alloway (3:24)

Yes, indeed.

Joe Weisenthal (3:25)

So I'm very excited to have as our guest today, the perfect guest for a macro conversation. He's been on Odd Lots before at least a couple of times.

And in terms of sort of macro thinkers, I think one of the clearest and most useful guests that we speak to, pleased to welcome back on the show, Jon Turek. He is the author of the Cheap Convexity Blog and the founder of JST Advisors. I think maybe this is his third time on the show, but someone who I always get a lot of insight reading his stuff and having him on the show. Jon, thank you for coming back on Odd Lots.

Jon Turek (4:02)

Hey guys, thank you so much for having me.

Joe Weisenthal (4:04)

We're gonna talk about 2022, but what for you was the sort of big surprise of 2021? Like what was your lesson? What was your takeaway from what we saw this year?

Jon Turek (4:15)

You know, I think that one of the things that really kind of changed, and this is pretty obvious, you know, ex post is kind of the stickiness we've seen in inflation this year. You know, going back to before the year, there was kind of this obvious forward-looking effect that inflation would be higher given the supply bottlenecks and also given the base effects from 2020 and the pandemic, negative oil prices, et cetera. The kind of seeing the stickiness and broadening out of inflation, when we really haven't seen that in, you know, almost 20 years. I mean, there's this famous joke for the US that really the only thing that goes up in price is education and healthcare. And that's not been the case this year. And I think especially as this relates to Fed policy is we kind of entered this year with this thinking of like, okay, was the Fed reaction function, especially as it changed post-Jackson Hole 2020, and they introduced this idea of flexible average inflation targeting.