Dario Perkins on Real Cycle Risks & When the Macro Consensus Gets It Wrong | Global Macro | Ep.95

Episode Overview

• Dario Perkins challenges the prevailing "soft landing" consensus, arguing the economy more closely resembles the inflationary "no landing" scenario of the late 1960s than the productivity boom of the 1990s.
• The discussion explores the dangerous incoherence of current government policies, which simultaneously stimulate demand through fiscal spending while constraining supply through tariffs and immigration controls.
• Perkins debunks the narrative that AI is currently driving a structural productivity boom, explaining recent data as a cyclical labor market adjustment that policymakers are using as an excuse to cut rates.
• The episode provides a critical reassessment of the bond market, warning that the era of "lower for longer" yields is over and bonds may no longer serve as reliable hedges for equity risk.

Key Concepts

• The "1967 vs. 1995" Framework The market is pricing in a 1995 "soft landing" (Greenspan era), where inflation cools without recession. Perkins argues the data actually mirrors 1967-1969. In this scenario, the Fed panics about a recession that isn't happening, cuts rates prematurely, and causes the economy to re-accelerate ("no landing"). This leads to a resurgence of inflation and a more toxic economic environment down the road.

• Policy Incoherence (Demand vs. Supply) A major driver of future inflation is the conflict between opposing policies. Governments are injecting massive fiscal stimulus to boost demand. Simultaneously, they are enacting supply-destructive policies (deglobalization, tariffs, immigration caps). Stimulating demand while damaging supply capacity is a textbook recipe for sustained inflation.

• Cyclical vs. Structural Productivity Perkins refutes the idea that AI is currently creating a structural productivity miracle. The recent jump in productivity data is cyclical: companies hoarded labor post-COVID, and are now squeezing efficiency out of existing workers rather than hiring. This is a temporary correction, not a permanent tech revolution like the internet boom.

• The "Stall Speed" Illusion The US labor market has stopped adding jobs, hitting what economists call "stall speed"—a point where economies typically tip into recession. However, Perkins believes this hiring freeze is artificial, driven by business uncertainty regarding elections and tariffs. Once clarity returns, hiring is likely to resume rather than collapse, supporting the "no landing" thesis.

• Resurgence of the Term Premium The bond market has undergone a secular shift from a regime of falling yields to one of "higher highs and higher lows." Because supply shocks create inflation volatility, bonds are becoming less effective as a hedge against stock market drops. Consequently, investors will demand a higher "term premium" (extra yield) to hold long-term debt, structurally elevating rates.

Quotes

• At 0:00:28 - "I think Europe can see this [defense industry] as a catalyst for growth... The countries that benefit most at the moment are places like France and the UK which don't have a particularly good growth story." - Highligthing how re-militarization serves as a disguised form of economic stimulus.

• At 0:04:47 - "Either things are going to deteriorate more... and we'll slide into a recession, or much more likely in my view, with all the policy stimulus that's coming in the world, we'll actually see the bottom of the K start to recover." - Predicting the end of the 'K-shaped' unequal economy due to massive fiscal intervention.

• At 0:06:14 - "Now I think this is looking a bit more like the late 60s... Under enormous political pressure to get interest rates down... the Fed cut interest rates quite aggressively, the economy started to re-accelerate... within 12 months, the inflation problem starts to come back." - The core historical parallel warning against premature rate cuts.

• At 0:11:36 - "They believe in this sort of AI productivity fairy that is going to rescue them from any of the inflation consequences." - Critiquing policymakers for relying on unproven tech narratives to justify loose monetary policy.

• At 0:15:37 - "It's not that global investors are suddenly dumping their dollar assets, but they've got these exposures and they're starting to hedge them... this constant succession of examples of incompetence in the US, I just don't think that's helpful." - Explaining how eroding trust in US governance is subtly impacting currency markets.

• At 0:17:33 - "I think [Kevin Warsh] has these credentials... he was once a monetary hawk... I think he's probably got a better chance of actually getting the rest of the committee to do what the President wants them to do." - Analyzing why a former hawk is the most effective political tool for implementing dovish policy.

• At 0:26:38 - "I think this is just an entirely cyclical story... companies went on this huge hiring spree... and then you come into this year... they stop hiring and they start to force efficiency gains on their workers." - Clarifying that current productivity gains are due to labor cycles, not AI.

• At 0:28:46 - "My big problem with this whole AI productivity story—'let's do another Greenspan story'... is that it's just not an honest description of what actually happened under Alan Greenspan." - Correcting the historical revisionism regarding the 1990s economy.

• At 0:35:56 - "We haven't seen any job growth in the US for six months... typically once the US economy stops adding jobs, it breaks below this 'stall speed' and then trips over into a recession." - Defining the specific labor market risk signal currently flashing red.

• At 0:42:35 - "If you're in a world where you start to think more about supply shocks... that bond-equity correlation starts to change... bonds aren't such a good equity hedge anymore, and the term premium has to widen." - Explaining why long-term interest rates must rise structurally.

Takeaways

• Prepare for Economic Re-acceleration: Do not position solely for a recession or a "soft landing." The most likely outcome of current stimulus and rate cuts is a "no landing" scenario where the economy heats up again, bringing a second wave of inflation.
• Rethink the 60/40 Portfolio: Bonds can no longer be trusted as an automatic insurance policy against equity drawdowns. In a supply-shock world, stock and bond correlations may turn positive, requiring new hedging strategies.
• Fade the "AI Justifies Rate Cuts" Narrative: Be skeptical of claims that technology has permanently suppressed inflation. Recognize that productivity data is currently distorted by labor cycle dynamics and does not yet justify aggressive monetary easing.
• Monitor the "Bottom of the K": Watch for signs of recovery in lower-income demographics. Policy stimulus is pivoting to lift this segment, which will likely be the driver that prevents a recession but fuels inflation.
• Anticipate "Stealth QE": Expect the US government to use non-standard tools (regulatory tweaks, short-term debt issuance) to stimulate credit and bypass traditional monetary constraints, effectively running Modern Monetary Theory (MMT).
• Ignore the "Stall Speed" Panic: Do not view the current lack of job growth as a guaranteed recession signal. It is likely a temporary "hiring freeze" due to uncertainty; once political and tariff clarity emerges, hiring demand should return.