Deep, Long-Term Inflationary Trends

[Notehound7]

I ordinarily disregard everything I hear on Bubblevision (CNBC) unless it comes from one of the market experts I trust and/or respect.

Among those who match that description are Dr. Mohamed El-Erian of Allianz, Prof. Jeremy Siegel of Wharton, Prof. Larry Summers of Harvard, Jeffrey Gundlach of Doubleline, and Jamie Dimon of JP Morgan.

One knowledgeable voice I rarely hear and hardly understand (due to his heavy Hungarian accent) is that of Thomas Peterffy, multibillionaire founder and chairman of Interactive Brokers. He certainly has access to some of the most important market data in existence, by virtual of his Interactive Brokers (IB) trading platform and the market-moving participants who use the IB platform for their purchase and sale of everything from bonds and equities to options and currencies.

In a brief interview after Chair Powell’s comments, Peterffy suggested that the Fed’s efforts are unlikely to bring inflation under control (or to reduce inflation to 2%), because of the following “DEEP, LONG-TERM, INFLATIONARY TRENDS” and influences:

1. De-Globalization

2. ESG (Environmental, Social, and Governance trends)

3. Shortage of Skilled Labor

4. Continuous Deficit Spending

5. Rise in the Cost of Debt Service

Upon review of the factors highlighted by Peterffy, I must admit that he has crystallized the very influences that will make it nearly impossible for the Fed to bring infation under control anytime soon.

Neither an increase of interest rates or efforts to stimulate the supply of goods and services to meet current “excess demand” created by profligate money-printing will be likely to nullify the inflationary affects of the above-listed combination of circumstances.

In the end, I think we will find that the extraordinary amount of cash poured into the economy by the Fed and by the government, along with the inability of monetary policy to overcome the productivity-killing effects of the above-listed factors will together make excessive inflation more intransigent than transitory over the next several years.

After hearing from Jerome Powell today, I hope that the Federal Reserve finally is serious about tackling inflation. However, I still am not convinced that the Fed will succeed and/or persist in raising rates until the overall inflation rate falls to 2% because of what Peterffy described.

[inparadise]

I heard similar on Bloomberg.

However, I still am not convinced that the Fed will succeed and/or persist in raising rates until the overall inflation rate falls to 2% because of what Peterffy described.

The consensus seemed to be that in 18-24 months, or so, the Fed will have to reset their target inflation to 4-4.5%.

We decided that we will hold on to our house as a fall back position for Youngest in case of layoffs, as well as to give us a more secure position, rather than sell and simply rent 30 day+ rentals. Still going to travel, putting our house on the home swap network, but we will have a place to come back to if rents start getting excessive, gaining points in the process towards stays elsewhere. (Summers and Winters are lousy here, IMO, as I hate the heat.) Love that 2% 30 year fixed rate mortgage and now is not a good time to give up our inflation hedge or take on more cash we don’t know what to do with.

We went without home ownership for 8 years while we were in corporate housing. Happily not having a mortgage or rent allowed us to save a considerable amount of money, which basically balanced out not owning a home in that time frame. Not going to repeat that. We will sell when we are ready to buy.

IP

[Leap1]

I think Peterffy is outdated.

De-globalization? That was China’s job when they were becoming the center of manufacturing. Now that is our job.

The rest of it is really outdated supply side econ stuff. If we hold ourselves back he will be right. We are not going to be holding ourselves back.

[qazulight]

1. De-Globalization

2. ESG (Environmental, Social, and Governance trends)

3. Shortage of Skilled Labor

4. Continuous Deficit Spending

5. Rise in the Cost of Debt Service

When you think of inflation as a formula like thing of v(m)where v equals the velocity of money and m equals the amount of money in a economy you get a different take. Of course v(m) does not live in a vacuum and inflation tends to be if v(m) is greater than output you get inflation. If v(m) is less than output you get deflation.

In our time v is the outlier. For a generation it has been falling, falling for a number of reasons.

We will start with globalization. When you globalize, money flows in a broad deep river. The velocity slows down. With de globalization, the river gets narrow and shallow, so the velocity increases. This leads to higher v(m). On the surface higher inflation. But, this higher inflation is only the difference between v(m) and the change in productivity.

So point one. De- Globalization would seem to be inflationary all other things held the same.

I am not going to talk about point two. It is just too squishy.

Point three.

Shortage of skilled labor. The shortage of skilled labor is real. However, the shortage of skilled labor is like the gas shortage of 1973. We used gas inefficiently and produced ot poorly as the price was near or below replacement cost. When we start paying people and training people to do skilled labor, we will get more productivity and get more people. Somehow I hear labor shortage laments and automation taking over job laments at the same time. It is Ridiculous!

This shortage will have two excellent effects. It will create businesses that increase labor unit productivity, and increase v. That increase in v has another beneficial effect. Taxes or based on flow, not m. Labor pays more taxes.

That brings up point four, deficit spending. With increased labor cash flow we get much higher tax receipts. Deficit spending is just not a problem.

That brings up point 5. The rise in the cost if debt service. It is given that we will have inflation. 2 percent is the target, 4 or 5 percent is likely. So, we will monetize the debt. This hurts, but we will also grow the economy, and fast. If you raise general income, you raise the ability service larger debt.

So, yes, inflation. It is like rain. Thank God for rain! And get an umbrella.

Cheers
Qazulight (Did not mention deflationary pressures as outlined by ARK investments)