Macro Digest: The Coming Stagflation Light Macro Digest: The Coming Stagflation Light Macro Digest: The Coming Stagflation Light

Macro Digest: The Coming Stagflation Light

Steen Jakobsen

Chief Investment Officer

Summary:  SaxoStrats is changing its outlook for the US from non-recession to stagflation, and this has consequences for our outlook for interest rates and stock markets. We see a 1 in 3 chance of FED (and ECB) cutting rates before yearend and a 2 in 3 chance it will happen during Q1/Q2-2024. The main changes stems from the big increase in real rates which leaves funding costs for US almost too high to carry as seen by recent Fitch debacle, but also the big increase in cost-of-consumption. The interest rates on everything from credit cards, new cars to mortgages is trading 2 times the long-term average and is almost punitive. Finally, job data and spending seems to slow down while inflation through wages and energy remains stubbornly sticky. Low growth and semi high inflation equal Stagflation, hence our call

SaxoStrats now call for a stagflation light to begin in Q4 2023, with its major impact in Q1/Q2 


  • The US and global economy are entering a stagflation light period. 
  • We see a 1/3 chance of the Fed and ECB cutting interest rates this year, and a 2/3 
    chance of cuts in Q1-Q2 2024.
  • We target the S&P 500 at 4,455 in the short term and 4,045-50 in the long term. 
  • Q3 and Q4 will be hard on corporate earnings as top-line growth comes down while 
    input costs (wages and energy) continue to be elevated. Margin compression is 
    expected. Q3 results in Q4 should be a turning point.
  • Modern Monetary Theory (MMT) is the modus operandi of governments and central 
    banks. This needs negative real rates, but the US has positive real rates - a big 
    negative change. 
  • Emerging markets have started to cut interest rates. EM often leads economic and 
    monetary cycles. 
  • The US consumer will be severely hit by exhausted savings and extreme cost for doing 
    capital spending. 

Changed Economic and Monetary Outlook 

This is a big change from our "no recession" call that we have been advocating through 2022 
and 2023. 

This also forces us to recalibrate our outlook for yields and the stock market. On yields, we 
recognize the "flooding of market" by the US Treasury, which means there is a risk of 425bps 
in 10Y US Yield, but we fully expect the impact of the 525 bps hikes to hit the economy as we 
publish this report. We think there is a 1/3 probability of ECB and FED cutting rates in 
November/December and 2/3 in Q1/Q2-2024. 

There is early sign of this already. Emerging markets led the world in restrictive monetary 
policy, but now they are starting to cut rates:
Source: Bloomberg
We expect Q3 and Q4 to be hard for companies in terms of earnings as top-line growth 
comes down, but input cost (wages and energy) continues to be elevated. The full impact 
from this shift should come with Q3 reporting in Q4. We have an S&P-500 target of 4.455 in 
the short-term and if our scenario plays out we see further weakness to 4.045-50.
We have been in the ‘no-recession’ camp since early 2022, as we realized that the biggest 
transfer ever from the public to the private sector during COVID would have long-term 
impacts on the US consumer and the ability of companies to expand price margins. However, 
as we enter the second half of this year, a number of factors are now deteriorating 
dramatically relative to the Nirvana economy outlook prevailing with most pundits. 

In SaxoStrats we don’t spend much time on things past, but more on how policy responses 
will change the dynamics of markets going forward. We also continue to work with “time” as 
a concept and put big weight on “time spent” in any scenario. Markets often get the "time as 
concept" wrong - The longer we are in a "valuation or phase" the more it will change 
behavior and impact and in extended time-phases it will evolve into exponential impact. We 
think we are moving into this phase as seen by the dramatic increases in consumer cost of 
capital to spend: 
US Consumer Cost of Capital to Spend - Source: BofA Global Research
Modern Monetary Theory is the modus operandi of governments and central banks - Source: Investopedia
The Economic and Political platform of todays is driven conceptually by MMT. The main focus of this policy is that debt in itself does not come with any economic downside. However, as we experienced during most of the 2010s, it comes with a need for negative real rates, as most of this debt-induced activity is being done with negative productivity. Put differently, the cost of MMT is a desperate need for negative rates to carry investments and in itself reduce the cost of financing that debt.

Over the course of the last week, we have seen that the market has reached what I would describe as "debt indigestion." As the US Treasury stepped up its issuance of short-term T-bills and announced an extremely aggressive funding scheme for the balance of 2023 and 2024, the market refused to accept the "MMT dictated low rate" that was forced on us by the FOMC, basically telling the market that they are done hiking interest rates. (Powell again showing he is a politician more than a central banker).

Simultaneously, the high deficit financing and cascading of issuance is coinciding with US Real Rates rising to cycle high. The premise of MMT is endless financing but under negative real rates. Now we have positive real rates. Eureka! 
Source: Bloomberg
The MMT regime is also confirmed by the non-action from the US Congress. Here illustrated 
by the CBO – Congressional Budget Office projections of debt going forward as in their 
reports from 2007, 2011 and 2023. Effectively US Congress do not care about debt. They 
have turned US politics into an “Entitlement Game”. Stanley Druckenmiller has been on this 
issue forever and one facts stands out: 

Among other things, Druckenmiller outlined and detailed why he believes that without 
government spending cuts today, programs such as Social Security, Medicare, and Medicaid 
will have to be totally slashed in the future. 

The first part of the trouble is that the U.S. national debt stands at the famous $32 trillion 
level without factoring in these programs...”This is what really annoys me, how no one talks 
about it... Do you know that the $32 trillion assumes the federal government will never make 
another Social Security or Medicare payment? Only government accounting could think that 
the government is never going to make another payment, not one. Not to me... not to you 
guys when you get older”
Source: Bloomberg
Simply scary and a confirmation on how MMT was in play even before it became a “theory” 
(which its not really) 

“If they can get you asking the wrong questions, they don’t have to worry about the answers” 
- The Great American Novelist Thomas Pynchon, Gravity’s Rainbow 

This is my new favorite quote as it explains how politics works and since Greenspan how 
central bank operates. The policy makers force us to ask the wrong questions and hence until 
recently they have not worried about the answers. 

Basically, the “success” of central bankers and politicians has been to be able to get their 
“audiences” to ask the wrong questions: 

No one has focused on: 

o Lack of productivity 
o How ESG kills the ability to actually find a solution for the environment 
o How government is crowding out private capital and creating massive fiscal 
impulse through its IRA, the CHIP acts and Bipartisan Infrastructure Bill, but 
now most importantly how always and through time too much debt kills an 
economy’s ability to regenerate growth and increases in real income for ALL of 

Debt is ultimate consumption moved from the future to today! The US is adding 5 billion USD 
of debt per day, Interest payment is 1.000 billion a year and growing and the current- and 
fiscal deficit makes the US extremely sensitive to funding from overseas as its own saving rate 
comes in way short of what’s needed. 

This will have material impact on activity going forward with positive real rates capital will 
flow to better and higher return, but in the short term all the “support MMT acts” will crowd 
out private investments and create hollow growth which is unsustainable. 

YCC (Yield Curve Control) is already here 

We are also de facto in quasi-YCC (Yield Curve Control) monetary policy in the US. The 
Federal Reserve (Fed) does not want rates to go up for political and economic reasons. The 
US cannot afford a 10-year Treasury yield in excess of 500 basis points (bps), and Fed Chair 
Jerome Powell is very political, as seen by his "sudden focus" on inflation after being 
reappointed Chair in 2021. 

The Fed also does not want to lower rates because it is still dealing with a generational issue 
of a tight labor market driven by lower participation rates (more people retiring early). The 
short-term impact is a system where rates are approaching their maximum (500 bps in 10-
year yields?). We have reached the point where the "cost of carry" is growing exponentially 
because there is no outlook for either significant debt reduction or lower interest 

Here are some further economic data points:

  • The student loan forgiveness program ends in October 2023, which will mean that 40 
    million Americans will have to start paying an average of $200-300 per month again. 
    This is a huge loss of purchasing power at a time when the Fed's 5.25% interest rate 
    hikes are starting to impact the real economy. The White House estimated the cost to 
    GDP at 0.3%, but it is probably closer to 0.5%. 
Private savings have reached saturation and are now turning negative. Retail sales have turned negative - Source: Bloomberg
US imports are declining significantly (imports are an excellent proxy for future growth)
The US labor market is starting to slow down. One data point of value to me has been the big corrections in non-farm payrolls going back in time - Source: Bloomberg
Global container freight prices (a proxy for global spending) are "tanking" - Source: Bloomberg
The stock market is not good at estimating "turning points" in economic conditions, as seen in this WSJ article


We believe that the "time is up" for the current economic model. We have had a rolling 
recession since the exit from stimulus programs, and we now see it moving from global 
manufacturing to consumer spending. We still see sticky inflation (wages and energy) going 

The focus on MMT-like programs and concepts needs to "die" for the economy to regenerate 
and move towards productivity. The recent positive real rates are a good sign for this, as 
higher marginal costs of capital will now attract capital better but increase the threshold for 
return, effectively forcing productivity to be a big share of the investment. 

As a result, we believe that stagflation lite is now a very real possibility. This will mean that 
the US will experience a period of high inflation and slow economic growth. This will be a 
difficult period for the US economy, but it is something that we believe is unavoidable. 

So it's time for policy makers to be afraid of the answers to their questions: Debt is not free, 
economies do not grow from lack of productivity, and you cannot just leave voters and 
economic agents behind while the government's hand increases.
This coming stagflation will be a positive step towards resetting the economy to focus on the 
real challenges: better, cleaner energy, a bigger real economy, and much better education 
and social policies. 

Safe travels,


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