Viktor Shvets Declares Victory for Team Transitory and the Soft Landing

Tracy Alloway (0:10)

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

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, soft landing seems to have sort of...

Joe Weisenthal (0:20)

In the air.

Tracy Alloway (0:21)

It's in the air. It's almost consensus at this point. I mean, markets are rallying, shrugging off a lot of the survey data, which looks a little bit more pessimistic, which is all kind of strange because you still have big segments of the market, like bond yields, for instance, pointing towards recession.

Joe Weisenthal (0:39)

Yes, that's the really weird part to me. So risk assets, stock market, really nice start to the year. Much different tenor than it had in 2022

We are recording this January 18th as of right now.

The NASDAQ is up 7%. Of course, it got clobbered last year. But you look at something like the short end of the curve, three month, two year. Markets are pricing and rate cuts really soon. And to my mind, I'm like, there's certainly going to happen if there's a recession or some hard landing. Like it's hard for me to reconcile what we're seeing in different parts of the market right now.

Tracy Alloway (1:12)

Absolutely. And it does seem to have happened very quickly, this shift to, you know, everyone's focused on China reopening. That unfolded pretty fast. Lots of the soft landing talk seems to have sort of come out of nowhere. You know, two or three months ago, everyone was talking about entrenched inflation, the possibility of a wage price spiral. But given the shift in sentiment, I think we need to speak with someone who has been consistent in their view that the world could avoid a high inflationary regime.

Joe Weisenthal (1:44)

Absolutely. Because you have a lot of people going back and forth. I even saw something in the Wall Street Journal that's like, maybe it was transitory all along. And we hadn't heard that word, and no one dared uttered it for like six months. And everyone was ashamed at ever even having used that term transitory. And now suddenly it's creeping back that maybe that a lot of the inflation really was due to these, like, massive shocks we experienced, the pandemic and the war, and that as these things at least normalized to some extent, that the residual inflation, the entrenchedness, would not be as high as some people were concerned about.

Tracy Alloway (2:18)

Right. So today we are going to be speaking with someone who was always on Team Transitory, who never left and defected, like a lot of other people. I'm not going to name any names.

But someone who has been, I use that word, consistent, someone who has been sort of banging the drum of this idea that actually a lot of the pandemic-related disruptions might go away and we might return to more of what we saw over the past few years or so, you know, low interest rates, lower growth, that sort of environment. So without further ado, today we are going to be speaking with Viktor Shvets. He is, of course, global strategist over at Macquarie Capital, a repeat Odd Lots guest, one of our favorites. Viktor, thank you so much for coming on Odd Lots.

Viktor Shvets (3:01)

Thank you. Thank you for having me.

Tracy Alloway (3:02)

So what was it like being on Team Transitory for the past year or so?

Viktor Shvets (3:07)

I loved it.

For very simple reason, whenever everybody agrees, you know something is wrong. You know you need to get away from that. With inflation, I never felt I needed to get away.

And the primary reason for me was that inflation that we have witnessed really have nothing to do with demand. If you think of the global economy, we are still below the trajectory pre-COVID. In other words, global demand is less than what it would have been if there was no COVID. The only country that it's slightly different is the US. But even in the US, the aggregate demand is only about 90 bips higher than it would have been if there was no COVID. So it's not so much aggregate demand. Rather, it is a disruption, unprecedented disruption of the goods market, services market, labor market that was responsible for that. So if you think of the goods market, for example, if we go back 18 months ago, goods demand in the US and in Europe were about 10 to 15% higher than it would have been pre-COVID. So even if there was no disruption in ports, there was no disruption in supply, there was no way suppliers could have expected demand to be 15% higher than what it was. Today, if you think of Europe, goods demand is already below the pre-COVID trajectory. If you think of the United States, it's right back to where it should have been if there was no COVID. But then before we normalized goods, we started destabilized services.