“War, protectionism, de-globalization… higher inflation, higher rates,” BofA’s Michael Hartnett wrote.
In the latest installment of his popular weekly “Flow Show” series, Hartnett reiterated the suggestion that the world has changed, and with it, the investment landscape.
The 2010s (and really, the entire period since the mid-80s) were about the 1%, Wall Street, inequality, QE monetary largesse, faith in the “invisible hand,” financial repression, deregulation, globalization, buybacks, democracies and peace, all of which were deflationary.
The 2020s, by contrast, are about the 99%, Main Street, inclusion, QT, fiscal largesse, the “visible fist,” redistribution, isolationism, wealth taxes, dictatorships and war, all of which are inflationary.
It’s a familiar tale, and you’ll note that our deep-seated inclination to sing the praises of the post-80s/pre-2020s decades is in part attributable to the fact that the investor class was spared the domestic ills of globalization in developed economies, and benefited enormously from the rise of shareholder capitalism.
In a world defined by the juxtaposition between i) subdued growth rates on Main Street in developed markets and ii) elevated returns on capital from offshoring, buybacks and deregulation, the Piketty equation was skewed towards the perpetuation of inequality.
The implications of the macro and socioeconomic regime shift illustrated above are obviously far-reaching. One consequence for monetary policy is a likely rethink of long run neutral rates, but if you ask Hartnett, the end game in the US may (paradoxically, given the tension between bond-buying and inflation), be the institution of yield-curve control.
“[The] fiscal stimulus panic (energy price caps and rebates, bailouts and nationalization) was very successful in averting recession in the early-2020s, but deficits are rising again,” he said, citing the UK, the US (as discussed here last week) and Europe, where the cost of the energy bailouts is very high+.
Hartnett described a “clear secular deterioration” in US government finances, on the way to suggesting that “the great irony of the inflationary 2020s will be [that] in the next recession, the Fed [is] forced to resort to YCC to bail out the US government.”
That, Hartnett said, is “when the next great bull market in risk begins.”
