Tight Labor Markets Versus Crippling Debt

The following is an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

The potential for trade wars and tech regulation is increasing. And these are real market risks. But so far, it’s all talk and speculation. They remain low probability events. We need to closely monitor them but not overweight them in our decision making.

Currently, the key driver of market direction over the near-term is interest rates and thus inflation expectations. This is why we’ll need to keep a close eye on inflation indicators in the coming months.

The cyclic environment is currently supportive of building inflationary pressures. The economy is maxed out, as measured by capacity utilization and the GDP gap.

The labor market is tight and this is beginning to drive up wage pressures.

The US dollar, which has shown an increased correlation (or causal link) to inflation these last two cycles, is signalling a jump in inflation over the coming months. Lower dollar = higher inflationary pressures through the commodity price channel. Dollar is inverted on the chart below.

But on the other hand, we have disinflationary pressures coming from a deleveraging China, which is showing in falling exporter producer prices.

There’s also still the issue of a world awash in debt. And debt is naturally a deflationary force.

The developed world is only beginning to chew through the massive debt load it accrued over the previous two cycles. This is why developed market credit growth has been so anemic lately.

In my eyes, the inflation picture remains mixed.

Pressures are building in the economy which is typical this late in the cycle. But it’s to be seen whether this will be strong enough to counteract the disinflationary pressures of the global debt load and a deleveraging China in any meaningful way.

My base case is that we see inflation continue to rise modestly but not enough to make the Fed ramp up their hawkishness.

Of course, I could be wrong. I think the big tell will be the US dollar which is now at a critical inflection point. If it takes off on another leg lower then we’ll see commodities run up, giving a boost to inflation.

This would shorten the last phase of this bull market…

The primary trend in global markets remains up. But we’re likely to go through a gestation period while the last vestiges of overly bullish sentiment get washed out. This should result in continued volatile chop for some time (a few weeks to months) while a new base develops from which the market can launch its next leg up.

The key here will be managing our risk and not overtrading. We don’t want to get chopped up in the sideways action. We’ll be selectively adding starter positions in trades that have a low correlation to the broader market.


  • The inflation outlook is a mixed bag. There are inflationary pressures building from an economy that is operating at/above full capacity and an increasingly tight labor market that is slowly pushing wages higher.
  • But these inflationary pressures are being counteracted by persistently high debt levels in advanced economies and a deleveraging China, that is feeding into lower export/import prices to the rest of the world.
  • Our base case, which could very well be wrong, is that inflation will continue to firm but only modestly. Not enough to push Powell’s Fed to become more aggressive in hiking rates.
  • The big tell that we’ll have to track is the US dollar. The dollar has become highly correlated with inflation over the last two cycles. The recent fall in the dollar should put upward pressure on inflation through the commodity pricing channel. If the dollar embarks on another leg lower, that’d greatly increase the odds of us entering an inflationary regime which would translate into a violent bear market.
  • Expect equity markets to continue to chop around and go through a gestation period for a while. Overly bullish sentiment needs to be reset. Q1 earning surprises are likely to eventually drive the market on its next leg higher.

The above was an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.



Subscribe To Our Newsletter

Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.