Labor Shortage

Wage inflation in the United States has increased dramatically since the US economy emerged from from the depths of the pandemic. Tim explores when will this parabolic wage growth in the United States top out and how fast it decline as the Fed raises rates.

Secular vs. Cyclical

On the back of recent CPI data, markets have rallied but Fed comments aren’t quite so bullish. In this article, Tim covers WealthVest’s stance on whether current inflation trends are secular or cyclical and highlights some headlines from top news stories to help illustrate our stance.

The Enduring Link Between Demography and Inflation 08/04/2022

To better understand the driving forces behind today’s inflationary pressures Tim dives into an analysis of age structures and their impact on inflation from the Bank of International Settlements. Their analysis looks at 22 advanced economies from 1870 to 2016 and shines a bright light on what inflationary pressures could be facing the US in the coming decades.

As a Portfolio Manager or Financial Advisor, losing money in a bear market can be painful, but in my experience, not nearly as agonizing as losing money or even just not participating amid market strength. The latter comes with a feeling of embarrassment and a sense that everyone is making money except for your clients. But as a fiduciary, the number one goal always must be to preserve capital. Warren Buffett once said, “The first rule of an investment is don’t lose money and the second rule of an investment is don’t forget the first rule.”

As anyone who has been a reader of our work knows, we believe that there are several distinct structural forces that will lead to higher long-term inflation. We’ve written about energy underinvestment and declining productivity as contributors to the thesis. This week, we want to throw another factor onto that list and this one is more counter-intuitive than those previously discussed: declining populations. I say counter-intuitive because, like many, I had always looked at the example of Japan as evidence that declining populations would yield declining inflation.

It’s over. That’s the message from Blackrock’s 2022 Midyear Outlook. The economists and strategists at the world’s largest asset manager with a tidy $10 Trillion of AUM wrote,

Let’s start with what we already knew coming into this week. We knew that financial conditions have gone from historically easy to historically tight in an incredibly short period of time. We knew the Fed isn’t letting off the gas until clear signs emerge that inflation is under control. Don’t forget, that includes wage inflation. While commodities might be breaking down and that helps, the Fed is a long way from seeing the kind of labor market softening they are going to need to start jawboning to the market that they might be pulling up on rate hikes. As evidenced by the yield curve inversion, fear of an imminent recession has trumped fear of runaway inflation.

The most important thing I learned this week (besides never grab hold of a skillet on a 500 degree grill) is that the people arguing that Fed will lose their nerve early and Fed Funds wont get over 3% are going to be wrong. I say that even in the context of observing commodity disinflation and continued leading indicator weakness that suggest we are sliding toward recession and curve inversion. Chairman Powell, Cleveland Fed's Mester as well as the Bank of International Settlements, which issued their annual economic report this week, are all singing from the same hymnal.

The Fed will successfully destroy demand. Gasoline prices may not come down meaningfully anytime soon due to the structural supply issues we discussed last week. Job openings may well stay elevated for months to come and consumer spending will continue to benefit from the dwindling stockpile of savings from fiscal stimulus and the vestiges of QE. But in one very important sector of the economy, the Fed's efforts to cool demand are already playing out. That sector is housing (OER/Shelter) which represents roughly 40% of the data that goes into CPI. To state the obvious, interest rates matter to housing and a doubling of long-term interest rates matters a lot.

The Fed will successfully destroy demand. Gasoline prices may not come down meaningfully anytime soon due to the structural supply issues we discussed last week. Job openings may well stay elevated for months to come and consumer spending will continue to benefit from the dwindling stockpile of savings from fiscal stimulus and the vestiges of QE. But in one very important sector of the economy, the Fed's efforts to cool demand are already playing out. That sector is housing (OER/Shelter) which represents roughly 40% of the data that goes into CPI. To state the obvious, interest rates matter to housing and a doubling of long-term interest rates matters a lot.