I’m not a fan of Lacy Hunt.
But, paradoxically, I don’t hold that against him. There are less than two-dozen people who could count me as a true “fan” and all but maybe three of them have been dead for quite a while.
Lots of investors like to read Hoisington’s “quarterly reviews.” I’ll confess I don’t know why. They’re always the same. You get maybe three paragraphs recapping what happened over the preceding 90 days, two pages of basic economics masquerading as “analysis” and the rest is just deflation propaganda and a reiteration of a bullish case for bonds.
Last year, after I critiqued one of Hoisington’s reviews, I received an irritable email from someone declaring that “Dr. Hunt has forgotten more than you ever knew!” It’s possible that person was a friend of Lacy’s, but I seriously doubt it. More likely, that person was a fan and was offended on Hunt’s behalf. I used it as a teaching moment. “I can promise you,” I told this person, “that Lacy Hunt cares even less about your hero worship than he does about my critique, which is really saying something because he doesn’t care about me at all.”
One of the most important lessons I’ve learned as I’ve aged is that because the vast majority of humanity lives in a perpetual state of self-delusion, telling people the unvarnished truth in a calm, straightforward manner is infinitely more effective than responding to vitriol with more vitriol. The truth, it turns out, is positively devastating for most people.
Anyway, Hoisington’s latest grabbed the usual below-the-fold coverage Friday, so I thought it was worth a mention this weekend, especially because (oddly, given the above) I actually like it.
Regular readers are apprised that I’m not totally enamored with the consensus narrative on inflation in developed economies. Specifically, I’m skeptical about the notion that runaway inflation can develop when output gaps, labor market slack, structural damage (from the pandemic), legacy debt, new debt, technology and the usual demographic overhang, all argue for the opposite. When you toss in the fact that capital being capital, wage gains for labor are extremely unlikely to keep pace with any transient surge in prices, you’re left to wonder whether the hyperinflation crowd might be even more wrong than usual.
Hunt lays it out in the very first paragraph. To wit, from Hoisington:
Contrary to the conventional wisdom, disinflation is more likely than accelerating inflation. Since prices deflated in the second quarter of 2020, the annual inflation rate will move transitorily higher. Once these base effects are exhausted, cyclical, structural, and monetary considerations suggest that the inflation rate will moderate lower by year end and will undershoot the Fed Reserve’s target of 2%. The inflationary psychosis that has gripped the bond market will fade away in the face of such persistent disinflation.
He could (should?) have just dropped the proverbial mic and walked off stage right there. Because that’s really all you need. That’s almost surely an accurate description of what will happen. But far be it from me (among the world’s worst offenders when it comes to carrying on needlessly for thousands of words) to criticize someone else who may not be “into the whole brevity thing.”
There are five main points Hunt makes before he launches into the standard debt diatribe. Here they are, summarized (you know, for “brevity”):
- Inflation is a lagging indicator, as classified by the National Bureau of Economic Research. The low in inflation occurred after all of the past four recessions, with an average lag of almost fifteen quarters from the end of the recessions
- Productivity rebounds in recoveries and vigorously so in the aftermath of deep recessions. The rise in productivity [holds] down unit labor costs
- Restoration of supply chains will be disinflationary. Low-cost producers in Asia and elsewhere were unable to deliver as much product into the United States and other relatively higher cost countries. The low-cost producers will want to regain market share while the high-cost producers whose fortunes were unexpectedly helped will try to hold market share. This will lead to price wars.
- The pandemic greatly accelerated the implementation of inventions that were in the pipeline. The technology du jour is not the same as the technology of a year ago. This will also serve to act as a restraint on inflation.
- Eye popping economic growth numbers, based on GDP in present circumstances, greatly overstate the presumed significance of their result. Survivors and new firms take over their markets, this will be reflected in GDP, but the costs of the failures will not be deducted.
Again, I’d agree with (almost) all of that, although I think it would be fair to quibble with point number three. It’s not entirely clear that supply chains will, in fact, be “restored.” Rather, the pandemic has forced a rethink of supply chain management and even as the Biden administration looks to reengage with the world, elements of the administration’s domestic economic proposals retain much of the nationalism inherent in Trump’s agenda, only without the poisonous xenophobia and minus the tacky, bumper-sticker jingoism.
The rest of Hunt’s latest is just a turbocharged version of his usual talking points, but I’d note that in this case, I’m not being pejorative with the “turbocharged” characterization. If you buy the idea that debt and demographics are a drag on inflation, then it’s hard to argue with the following (from Hoisington):
While the huge debt financed programs were a response to the pandemic, the end result is that global nonfinancial debt increased to a record 282% of GDP in 2020. While this debt may be politically popular and socially necessary, it will weaken growth and inflation after a transitory spurt, which will lead to even more disappointing business conditions than existed prior to the pandemic.
US population growth dropped precipitously from 1.15% per annum in 1990 to 0.35% in 2020, wage pressures eased sharply and so did inflation. The US had rapid population growth in the 1960s, 1970s and 1980s, which contributed to wages and inflation accelerated rapidly.
In a note dated April 7, Oxford Economics noted that three quarters of the decline in the pace of US population growth last year was down to a drop in immigration.
The pandemic simply accelerated a decline sparked by Donald Trump’s policies (figure below).
“An increase in the foreign-born is critical for overall population and labor force growth in the years ahead as the US population ages,” Nancy Vanden Houten wrote.
She sees US population growth dropping to 0.2% this year “before increasing to 0.5% annually by 2023 and 0.6% toward the end of the decade.”