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Forever Inflation?
I argued repeatedly last year that inflation might become stochastic in 2023 and beyond.
Much as I'd like to claim profundity and originality, the rationale wasn't terribly groundbreaking, and I borrowed the stochastic characterization from Zoltan Pozsar (with whom I most assuredly don't agree about the future of dollar hegemony).
The inflation case is easy to make. There's a war going on in Europe that doesn't look like it's inclined to stop, there's a prospective war brewing across the Taiwa
About that coming human-robot war. As a middle school kid the first seriously interesting book (actually a play) I read, along with a gob of Nero Wolfe mysteries, was R.U.R. wherein the word “robot” was first coined by the playwright Karel Capek. He saw a revolution. I just see a mess. People have to eat. We can’t make them all go away. And as many current efforts in AI show, our prowess in passing on our brains often doesn’t go well. Anyway, if robots don’t learn how to drive, how will they get to the prom?
It is more viable to replace Chinese workers with robots than with workers. The United States and Canada already have labor shortages, which are not going away anytime soon. There are more baby boomers than zoomers. Re-shoring will be expensive, and impossible without new technologies.
Or immigrants. If they still want to come…
The declining need for human workers will mean that we might be close to peak global population.
I recently read that the CCP put out a mandate requiring all local governments to use human workers wherever possible, even if machines would be more efficient. That goes for ditch difgers to office workers.
I have no idea if this is bullish or bearish for equities.
H-Man, maybe 3% or 4% is the new number on acceptable inflation. There is no rule that 2% is mandatory.
Indeed, and since 2% is the AVERAGE target, then if the Fed can get it down in the 3-4% range, they could plausibly claim success, that inflation can run “hot” for a little while since we ran cold for quite a while. And then, in time, if there’s nothing too unbearable about 3-4% inflation, it can become the new target without causing much rumpus.
Here are a few more trends that are probably on net inflationary vs. deflationary:
Climate change – insurance losses and insurance premiums are way up
Decarbonization
Increasing percentage of older age population vs. working age population – older people require more services (medical) but produce less stuff
Higher inflation implies higher nominal revenue growth in many industries. Some will have pricing power (as consumer staples demonstrated in the past year) while others will lose margin (but with supply chain bottlenecks easing, fewer than over the past year). Implies terminal growth assumptions can move up.
If the Fed acquisces to higher inflation, rather than raising rates higher, then discount rate may not need to move up.
That implies higher valuations.
But you have to believe the Fed will choose to abandon its inflation target and credibility, just to avoid a recession and higher unemployment.
Sounds familiar? We are back to the debate of mid 2022, when investors were hopefully being that the Fed would cease tightening to spare the economy. Jackson Hole Powell brought investors back to reality. I doubt anything since then has changed Powell’s priorities.