Good morning. The minutes of the Fed’s meetings are dull, so I ignored them. If you disagree (on this or anything else), please email me: [email protected]

The new new normal, or the old new normal?

Christopher Smart, chief strategist at the Bank of Bahrain, thinks I It’s too big Economic data has slowed recently. He believes that investors have already begun to act. He emailed saying:

We know that data is slowing down because it cannot continue to accelerate. .. Investors focus on next year and the next year. If the Covid variant dissipates and policy support disappears, where will growth and inflation be resolved? Most of these will be a new round of “long-term stagnation” debate. Are we still lower in growth and interest rates as we did in the past 40 years, or is there something new in fiscal and monetary policy that can generate 2% inflation again? Whoever gets this right will retire early.

I will not retire early. I think I can bet on my portfolio in one way or another-such as using leveraged government bonds or cyclical stocks. But this is just a guess. Deciding whether we enter a new system or return to the old system is beyond my salary level (maybe higher than everyone).

Some people believe that the new alliance of currency and fiscal profligacy alone is enough to push inflation to a new, higher platform. A few weeks ago, Albert Edwards of Societe Generale summarized this view in his usual style:

The pandemic recession has allowed policymakers to cross the Rubicon of fiscal integrity and reach new ground—their existing currency profligacy can now be combined with fiscal debauchery. At the political level, I think that the sweet fruits of financial generosity funded by money have been picked and tasted, and there is no turning back.

I’m not sure that the spenders will win this day politically. But there are other factors to consider.

Economists Charles Goodhart and Manoj Pradhan believe that demographic changes will further tilt the balance toward inflation. Their work has become popular on Wall Street, so some readers may have made up their minds; however, I want to talk about the arguments here, because this is the only situation I have seen in the return of sustained inflation, except for “the central bank and the government coordinated Currency dumping”.

The core view of Goodhart and Pradhan is that as production shifts to low-wage countries, wages everywhere are depressed, and globalization has depressed prices for 30 years. However, as the population of China and other countries begin to level off, while the working-age population in developed countries declines, wages there will also rise; workers everywhere will be in short supply, and the deflationary effects of globalization will stop. “As the world ages, real interest rates will rise, inflation and wage growth will pick up, and inequality will fall” they Write.

This is the simple supply and demand relationship. As the supply of labor decreases, the price of labor will rise relative to available capital, and other prices will rise accordingly.

Goodhart and Pradhan believe that global aging will have another impact. It will reduce savings faster than investment, which will push up interest rates because of reduced capital chasing investment opportunities (health care expenditures for the elderly, especially in China, will be the main driver of the reduction in savings). The higher taxes required to maintain the social safety net will also lead to inflation, as scarce workers will be able to demand higher wages in response.

It is important to remember that to make this important to investors, Goodhart and Pradhan only need to be a little bit right. For example, a new inflation plateau of more than 3% will really make life difficult for investors — first, it will force the returns of bonds and stocks to be correlated, thereby canceling the hedging that has worked for decades.

The natural response to the demographic debate is only one word: “Japan”. The aging population has not increased inflation or real interest rates there. In fact, the situation is just the opposite. Goodhart/Pradhan’s answer is that what matters is not local demographic data, but global demographic data. Japan exports products when its labor force shrinks.This is Pradhan’s latest interview:

Japan is a very open economy, but it is very close to its huge neighbor China. In fact, when you look at the timing, what happened in Japan is not surprising: just as the Japanese population turned to the south, China was busy decompressing the entire world.

By the way, an interesting result of the Goodhart/Pradhan paper is that there was a political conflict on the way that pitted workers against retirees:

As they grow older, the elderly will become a powerful political force. We believe that it is this kind of political power that can prevent the government from betraying too much of its pension obligations. The main working-age population will gradually decrease, but they will have an important commodity whose prices may maintain an upward trend-labor. .. The political divide in the future will lie in the social safety net for the elderly to protect them and the actual after-tax income of the working-age population.

This doesn’t sound fun at all.

I am not a good enough economist to properly evaluate this argument. I really want to know what the readers think. However, it seems to me that Christopher Smart asked the right question. Sooner or later will we return to the same place before the pandemic (but with a higher debt burden)? Goodhart and Pradhan gave a principled case of not thinking.

Another way of thinking about shipping inflation

Two days ago i wrote Regarding the cost of shipping from China, and whether it will remain high.Tony Foster, who runs Ocean Capital, Manage shipping asset investment and reply via email. He believes that the higher prices will take a long time to subside. We know that there will be a lag before the supply of cargo ships catches up. But, surprisingly, efforts to decarbonize shipping are also a factor:

Large liner companies are chartering ships for five years at current (very high) charter rates to ensure tonnage. This illustrates a significant degree of confidence. Supermarket companies charter their own ships to ensure the certainty of supply. As you said, the new ship ordered will take at least two years to pass.Dry bulk [ship] Due to the perceived technical risks, the market is restricted (for new orders). The shipowner does not know what the future fuel will be and what propulsion/fuel storage system will be needed to achieve the decarbonization goal. Despite regulatory tightening (and upcoming carbon pricing), this investment restraint, coupled with the rapid rise in steel prices and ship prices, has exacerbated the continued strength of the freight market, even if the commodity market does not have extraordinary growth forecasts .

This situation is expected to exist for a long time.

Foster’s notes asked me two questions: What is the inflation rate in the fight against climate change? What does the central bank mean when it talks about “temporary” inflation?

There is also a word about Jay Powell’s stock portfolio

Several readers responded to my approval Generalize Dylan Grice believes that Fed Chairman Jay Powell’s large holdings of stocks should affect his policy judgments. The most common answer from readers is that Powell can put his wealth in a blind trust (which is obviously the practice of British officials).

Alas, it doesn’t help. Powell can safely assume that the man who manages the tens of millions of dollars he trusts is not a complete idiot. Given that bond yields are very low, this would mean a large allocation of stocks. This alone can ensure that a meaningful tightening of interest rates may make Powell poorer.

I don’t want to sound like a damn communist here, but letting a rich person chair the Fed is likely to distort policy. Sometimes, the job of the Fed chairman is to tell the market that they can smash the sand. For the rich, this is a difficult thing.

A good book

A good piece reason In New Yorker. I would say it missed a key point. Reason is not a state of mind, or even a set of habits. This is a promise, a religious pledge. We are more or less inconsistent, ignorant and confused. Reason is a promise to strive to do better, follow the rules, and acknowledge it when we can’t.

I spent too much time in graduate school.