Shaoul: Anticipating Inflation, But Not Stagflation

0:00Joining us now is Michael Schaul, who's the portfolio manager at Ion Macro Fund, very good morning to you, Michael. From a macro perspective, how are you watching this conflict in Iran and this energy shock right now? You know, I think it really matters how long it lasts. I think that as volatile as the front end of the oil curve has been, as you say, we've been well over $100 a couple of times. You know, so far, the energy market seems to believe that this is maybe 16, 19-day story and the back end of the curve that, you know, late 2026 or 2027, you know, still has much lower prices. So I about that really, you know, if I'm looking at something to try and work out what's changing on any given day, you know, I think it's first back end prices, which are much less volatile. You know, that will really give you a signal market expectations are changing. You know, on Friday, we got an update on GDP, not just from the US, but also the UK.

1:01That failed to grow as far as that economy, which was the backdrop of going into this energy crisis. And then that revision basically cut in half here in the States to 0.7%. I mean, what do you make of the macro environment going into this conflict now with respect to the energy shock that could be leading to possibly stagnation? You know, I mean, I think we're talking about the States. The overall economy is okay. You know, the economic data is somewhat messy. It's, you know, it's never very reliable in all times, but let's not forget that we still have all the distortions of the government short that shutdown in the in the fourth quarter. But, you know, I think we have a sloppy somewhat stagnant labor market and everything else is, you know, look somewhat okay. You know, I think the idea was of stagnation. You know, if this word has been wheeled out, I don't know how many times over the last 50 years. I'm very open to the idea of inflation, the stack part of it. I don't see right now.

2:04And I don't think anything's really changed so far. Okay, so you don't see much of the stack part? No, no. Right. Understood. And that is based on what exactly? I mean, where are you seeing that the strength coming through? Because, you know, to your points, I mean, Michael, we did come into 2026 looking pretty optimistic around productivity. But I just feel like with this global reprising of oil, this global reprising of rates, we've also had somewhat a degree of a global reprising of growth expectations too. I'm just wondering, you know, where you anticipate that strength to come from that resilience in the economy? I mean, I push back on the idea that you've seen a major reprising of rates. I mean, it's true that rates came down a lot and then we've gone back up again. But, you know, the tenure effectively really hasn't gone anywhere over the last six months. Most economic data really hasn't gone anywhere over the last six months. And what we're really seeing is a bit of the overoptimism that some people had coming into the,

3:08I think somewhat a facile idea that the tax cuts of last year would need to an automatic re-exceleration at the beginning of this year. I mean, I don't think that's going to happen. But, you know, so far, I don't think we, it's realistic to expect any impact from, you know, what's happened in energy prices, which again, you know, apart from the front end, there's still a still within normal levels. So granted, a lot of things could go wrong over the next few months. I certainly would allow for that. But the idea that they've already gone wrong, I think is a fallacy. Right, I mean, you're right in saying that, I mean, obviously with respect to the 10-year here, I mean, it's still pretty much range bound. I mean, it's a sort of short-term round trip at the start of the year. But, I mean, you know, in the sort of mid-420s, it's looking pretty stuck at this stage. But, I mean, if you take a look at the guild's market, I think there's been like a 50 basis point move or something over in the UK. So maybe repricing in other markets.

4:08I'm just wondering how much as we look ahead to the FOMC, of course, likely to sit on their hands this week, Michael, how much headroom you believe the Fed has right now? I mean, I think the Fed's in a difficult place. If it wants to do something, I don't think you could really justify the sort of rate cuts that the Trump administration's been talking about. But I don't think that was ever really realistic. I don't think the point that they need to consider a rate height to fight what they see is happening. I think it's one of these situations. I think the decision from the Fed is very easy. The justification of the decision in the press conference follows. I don't think any of us would want to be J. Powell stepping into that room. It's going to be a very messy discussion with lots of imponderables and unanswerable questions thrown at him. But I think he is very unlikely to do anything in the last few weeks of this tenure. As we've said, we have seen that backing out of rate cuts throughout the course of the year.

5:11I believe the market thinks we're going to see at least one rate cut perhaps around September at least. I'm just wondering, I know you pay a lot of attention to what's going on with some of these ISM manufacturing surveys. We discussed that last time. What do you make of that? As far as some of the stickiness in that input pricing, does that concern you? Or do you think the productivity of sets that? I do think we're in a period of reflation. I felt very strongly, even before this war of events started, that the raw material costs were very likely to go higher. And I do think that however this conflict is resolved, even though it was resolved tomorrow, I'm sure we'd get a very quick repricing of the front end of the crude market. But I'm equally sure that we wouldn't go back to where we were, say the day after Venezuela. So I don't think Cruz going back to 55. I don't think any of the industrial metals are going back to where they were a year or two ago.

6:15And as I say, I think we're still in this period of rolling reflation. But I think generally that correlates with stronger industrial profits, certainly stronger profits for commodity producers. And possibly a problem for some of the more defensive portions of the market. Okay, yeah, look something to watch. I mean, we have been talking about a commodities bull market in 2026. Michael, always appreciate your input. Thank you so much for your time today. Michael Shaul, today, follow your manager. I'm your macro fund.