Stephanie Pomboy & Grant Williams: Change Is Now Upon Us

And investors need to wake up to the reasons why

Here's a fun question:

What’s better than interviewing your favorite macro expert?

Interviewing BOTH of your favorite macro experts at the same time!

I'm happy & honored that today we get to sit down with Stephanie Pomboy AND her frequent partner in crime Grant Williams to hear their latest outlook for the economy and the markets, plus if we're lucky, a bit about sports and the meaning of life, too.

This is an amazing & highly important discussion featuring two of the most respected minds in macro.

And both agree: investors need to react to the changing environment else be caught flat-footed by it.

This one’s a real treat, folks. To hear the interview, click here or on the video below:

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Premium supporters receive my “Adam’s Notes” summaries to the interviews I do, the new MacroPass rotation of reports from esteemed experts, plus periodic advance-viewing/exclusive content. My Adam’s Notes for this discussion with Grant & Stephanie are available to them below.

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Adam’s Notes: Stephanie Pomboy & Grant Williams (recorded 8.13.24)

EXECUTIVE SUMMARY

• Stephanie believes that the U.S. economy is likely already in a recession and has been for some time. She points to several indicators, including inflation-adjusted retail sales, which have been stagnant for three years, an anomaly outside of a recession. Additionally, she highlights the decline in full-time employment and reduced average hours worked as signs that the economy is in distress. The collapse in full-time jobs, in particular, is a strong recessionary signal, as it typically coincides with broader economic downturns.

• Stephanie believes the Federal Reserve will act too late in responding to the recession, as it has historically done. She criticizes the prevailing market expectation of an "immaculate pivot," where the Fed cuts rates preemptively to avoid a downturn. Instead, she predicts the Fed will only cut rates once the recession is fully recognized, leading to a delayed response. This delay could result in a "risk-off" phase where financial assets, particularly stocks, experience significant declines before the Fed steps in with rate cuts.

• Grant discusses the growing divergence in global monetary policies, particularly focusing on Japan’s recent decision to raise interest rates as part of its move to "normalize" policy. This shift, while small in numerical terms (a 25 basis point increase), had significant market implications, causing the Nikkei to drop 12% initially and 25% from its peak within 16 trading days. He notes that this reaction underscores a broader trend where central banks are prioritizing domestic concerns over global coordination, leading to increased volatility in financial markets as countries like Japan, the U.S., and China pursue divergent monetary policies.

• Inflation has significantly reduced purchasing power in both the U.S. and the U.K. since January 2020, with Trueflation data showing a 25% decrease in the U.S. and a 37% decrease in the U.K. This loss of purchasing power is a direct result of the aggressive monetary and fiscal policies implemented during the COVID-19 pandemic. Stephanie also references John Williams of Shadow Stats, whose alternative measures suggest that peak inflation was over 18%, much higher than official statistics, further exacerbating the financial burden on consumers. She emphasizes that most Americans feel they are in a recession due to the severe strain on their real incomes, with sentiment surveys like the University of Michigan's showing a historically low outlook for real income growth.

• Credit spreads, particularly in lower-quality credit markets, have begun to widen, indicating rising concerns about the economic outlook. Stephanie warns that as the recession becomes more apparent, investors may be forced to sell highly liquid assets, including stocks, to cover losses or meet obligations in more illiquid holdings, such as private equity or venture capital. This could lead to significant downward pressure on publicly traded assets, exacerbating market volatility. The risk of a severe market downturn is heightened by the large and opaque nature of illiquid private markets, which could trigger a cascade of selling in more liquid markets.

• Stephanie forecasts that the U.S. economy is heading into a period of disinflation, with the potential to slip into deflation if the economic downturn deepens. She draws parallels to the Great Recession, where inflation quickly turned negative, and suggests that this scenario could repeat if the Fed continues to act slowly. However, she also warns that policymakers are likely to intervene aggressively before a full-blown deflationary spiral takes hold, using both fiscal and monetary tools to flood the markets with liquidity. This response could prevent deep deflation but would also set the stage for renewed inflationary pressures once the immediate crisis subsides.

• In anticipation of economic turbulence, both Stephanie and Grant advocate investors should