‘The Secular Script’ For An Inflationary Epoch

"An era of extraordinary monetary policy is over," BofA's Michael Hartnett declared, dusting off a hodgepodge of go-to charts for this week's installment of his popular "Flow Show" series. His tone was categorical. "Inflation is a secular reality not a cyclical theme," he said. (So, you're telling me it wasn't "transitory"?) Those two propositions -- that the easy money era is over and that we've seen the dawn of a new, inflationary epoch -- were part of what Hartnett called "the secular scrip

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16 thoughts on “‘The Secular Script’ For An Inflationary Epoch

    1. I actually think it’ll be the opposite. We are still very early in the decade, and this all strikes me as recency bias. We are going through a highly volatile time, but what happens if the trends in electric vehicle adoption and renewable resources continue to expand rapidly? Green bonds would make sense in that case, but higher energy prices would just increase the pace of the shift to renewables and electrification.

      I know I keep banging this drum, but I wouldn’t ignore what’s happening in tech either right now. The big tech companies will benefit from both the sale of generative AI as well as the computing power it uses. There is also a host of new generative AI companies being formed across industries. This isn’t blockchain. There are a vast number of real-world use cases and the technology is advancing faster than past cycles. I keep waiting eagerly for H to do a deep dive into generative AI the same way he did with crypto, but something tells me he’s already doing his research.

      These themes might hold for another year or two, but I think we’ll see a different set of themes in the latter half of the decade.

        1. Yeah, absolutely, love the new artwork 🙂

          I guess I should clarify that my wishful thinking was that we’d get an expose of your experience using generative AI similar to what you did with crypto and defi, but I’m probably getting ahead of myself.

        1. This will apply across a lot of industries, but this also opens up content creation to everyone in a new way as H has shown. I could never have created my own illustrated comic before, but now I could if I chose to do so.

          The same principle will apply to starting a business. Imagine how much easier it’ll be to start a business if AI can help with so much of the basic set up from coding to legal to sales. Not sure what the overall implications are other than as you say, corporate profits and 1%er wealth will likely go up.

          1. Yep. But thankfully there apparently are many fine job vacancies in the leisure & hospitality and healthcare industries to absorb the displaced artists. Well, until many of those are automated away as well.

            The lucky ones will find work at hard to automate jobs at nursing homes, day care centers, waste management companies and prison security. And driving for Uber or Door Dash, of course.

            That said, it’s inevitable, but I wonder how long the populace will remain so peaceful as this plays out.

          2. Presumably many or most of the appx 2MM call service / remote customer service jobs in the US are available for AI-limination.

            After spending two hours being transferred among eight different departments of the customer service call/chat center of a fiber internet carrier, trying to schedule a new service install after no technician showed up for previous appointment, my angst about the lost jobs is lower than it might otherwise have been. Make that nine.

      1. Great article.

        So what is keeping a floor under equities at this point? Irrationality? Recency bias of the TINA generation?

        There ARE viable, low risk alternatives and air raid sirens blaring (figurative and literal), yet we still sit at p/e 18?

  1. For the last decade I’ve been reading how the demographic transition, rising inequality, and decreased productivity growth were driving the natural rate of interest to near zero. Now I’m reading a number of articles like this suggesting a reset of r* and multiples. Other than “inflation is secular”, what are the larger drivers of this new era? Is the thesis really as simple an endogenous secular cycle?

  2. “Until then,” he said, “cash is as good as bonds and stocks”+.
    Very early last summer. I thought I would wait till this March to see what was really going on. Basically not much has changed even though there has been plenty of drama since then.
    Don’t fight the Fed now means cash or bonds select stocks at your own peril .

  3. I’ve been thinking about what kind of name should work in a secular higher-inflation and higher-rate environment. Seems you’d want as many as possible of the following characteristics:
    – Higher pricing power i.e. volume less elastic to price
    – Higher gross margins, higher operating margins
    – COGS less exposed to inflation i.e. more of COGS is fixed cost, D&A, and inputs that are deflationary, less is materials and labor and other inflationary inputs
    – Opex less exposed to inflation i.e. more of SGA is
    – Debt is okay if fixed rate and relatively less need to issue new debt, refinance

    Think of other characteristics – e.g. to build screens on?

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