Not that Barron’s Magazine is a ‘blind hog’, but I get the impression the folks preparing the Up and Down Wall Street column are, at best, very short-sighted…ergo, the title of this post. They finally came up with something worth your attention. This acorn, (don’t be confused by the title–“Presidential Pretenders: Trump, Carson, Cruz and Clinton” — you will need a Barron’s or WSJ acct. to access this link), the second half of the article has some very interesting commentary on the potential reversal of global demographic and economic trends that have been affecting, not only inflation, but growing income inequality for more than three decades.
Inflation is coming!
There is absolutely no question in my mind about this proposition. It is just a question of ‘when?’ Besides the obvious widespread printing of money around the world, the Barron’s piece raises the important issue of key demographic trends that may soon be reversing.
Credits to Jonathan Laing (subbing for the usually misguided, Randall Forsyth), who, after a brief foray into the inanity of U.S. Presidential politics, brought to his readers attention an illuminating report issued back in September by Morgan Stanley . The write-up was based on the work of Charles Goodhart of the London School of Economics and, Morgan Stanley associate, Manoj Pradhan (“Three Major Trends that Shaped the Global Economy for Decades are About to Change — Bloomberg Business, September 28, 2015”). Those three would be: declining real interest rates, shrinking real wages, and increasing inequality.
The report delves into the impact of changing demographics on inflation, productivity and income inequality. And, according to Laing, “The macro studies have many smart folks we know on Wall Street buzzing.” This is interesting because, although I came at the question from a slightly different angle and with significantly less resources behind me (kortsession 7,”My Biases,..” 2/16/2013), my conclusion was very positive for the holder of equity investments.
What is Goodhart, et.al.’s conclusion?
According to Barron’s: “Leveling off or decline in working age populations in areas that count economically (read the U.S., Europe, China and the Asian dragons, such as Korea and Taiwan), is expected to lead to slower growth, higher interest rates and higher inflation. The demographic shifts are also likely to boost real wages, worker productivity and diminish income and wealth inequality both within and among countries.”
This is not a good thing for stocks?
Morgan Stanley points out that this will not be good for stocks, because the overall graying of the population might lead to slightly-slower economic growth with higher interest rates and inflation. Of course, Barron’s gleefully points this out. Try as I may, I can’t spin this negatively, unless the inflation we get is runaway and brings with it much higher interest rates.
To me, as this slowly plays out, we are looking at nothing but a positive economic and market environment.
Inflation is good for equities!
One of the reasons earnings growth has been so tough to come by is that inflation has been non-existent. Corporations have not had price as a tool to create additional profits. In the face of dogged global competition they have had to resort to financial engineering and cost cutting, much on the back of labor, to remain competitive and grow the bottom line. If the Goodhart’s work is correct, inflation and pricing is coming, along with a healthier consumer (higher real incomes) and growing consumer classes around the world (demand). This would all seem to equate to improved growth, rather than slower growth.
So, I made the point the point that inflation is good for stocks and all equity asset back in Session 7, “My Biases … “, and I’m sticking to it.
As for Barron’s Up and Down Wall Street column, they never disappoint even when they sniff out an acorn. They always come at the world from the dark side.
What’s your take?
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