“Toto, I’ve a feeling we’re not in Kansas anymore,” said macro watcher after macro watcher in the 2020s, as inflation, wages and nominal growth all exploded higher across the developed world.

At the 30,000-foot level, the only macro question that matters is whether The Great Moderation is over for good or whether we’ll work our way slowly back to secular disinflation. A related question asks if we were wrong to characterize The Great Moderation as a “new normal” in the first place.

Relative peace and stability hasn’t exactly been humanity’s calling card over the millennia, so it’s certainly possible that the three-decade period of declining macro volatility was an anomaly and the 2020s in fact represent a reversion to the historical mean.

The jury is still out on those questions, and will be for some time. In his first note back from a month on the road, Nomura’s Charlie McElligott addressed them, among other hot market topics.

“Besides ongoing signs of deteriorating growth around the globe, along with generic ‘high for longer’ risks which create a fatter left-tail, the thing that giv[es] me higher conviction” on dovish rates expressions “is that there are signs of US labor market conditions finally beginning to show cracks,” he wrote.

The most obvious signs of cracking in the previously bulletproof US labor market are the big uptick in the jobless rate (albeit from 70-year lows) and three straight weeks of initial claims running the highest since October of 2021. For McElligott, though, the “even stronger signal” comes from the largest drop in average weekly hours since the financial crisis. And that as productivity declines.

Meanwhile (and notwithstanding all the “Greedflation” headlines), corporate America has seen three straight quarters of falling profit growth. The US is in an earnings recession, and some top-down strategists believe the situation could get materially worse as sales growth slows with waning pricing power.

As Charlie went on to note, that “only increases the likelihood” that the declines in hours worked eventually become “outright layoffs as the next step if / when margins are further challenged.”

This comes “just as the market has slashed a huge part of [the] implied Fed cuts over the next year,” McElligott pointed out.

That’s a hawkish repricing, and it seems “right” for now. But it’ll look offside if the macro deteriorates, of if there’s another SVB lurking out there.

Still, the higher r-star debate — the “Kansas” conversation as it’s held in academic circles — looms large, even for investors who believe that, over the long run, some version of Great Moderation dynamics will reassert themselves.

“Despite many long-term investors anticipating an eventual return to a thematic secular disinflation world driven by the realities [of] the 3Ds — Demographics, Debt and Disruption, potentially supercharged now by A.I. — many tactical macro investors continu[e] to voice conviction that it’s unlikely to be a smooth path back to ‘the old world,'” McElligott wrote.

Some investors, he said, believe we’ll “continue to see overshoots in positioning and narratives as the ‘Frankenstein cycle’ continues” around sticky services inflation, higher wage demands, commodities volatility and plain old base effects, as the disinflationary tailwind from last year’s comps starts to reverse course.