Re: Inflation-Demographics & Secular Stagflation.

I've been mulling a thread on Demographics for some time, but @FedGuy12 beat me to it and did a great job. I build upon his thoughts here.

I agree with @FedGuyI2 that DEMOGRAPHICS are going to be a key driver of SECULAR INFLATION, but I arrive at slightly different conclusions regarding the primary drivers.

I'm a little skeptical that continued CONSUMPTION at a time of labor shortages will be the key driver. In the early 2000’s, I was a big fan of Harry Dent’s demographic work, and this chart of spending patterns for US households comes to mind:

@FedGuyI2 cited Professor Goodhart’s paper, which I thought was fascinating. To me, the most eye-opening part of Goodhart’s analysis is the impact of China/Eastern Europe’s Demographics – NOT just US Demographics.

Specifically: How integration of China/Eastern Europe's young workers into the global economy led to "a one-time increase of 120% in the
workforce available for global production."

MY THESIS: integration of their massive labor forces into the global economy in the 90’s at a time the Boomers were just entering their peak spending years allowed the US to have the BEST of both worlds: consumption-led growth by the Boomers, powered by cheap labor from without.

Combine this with the massive capital surpluses from the Boomers, and we had an EXPLOSIVE period of economic growth with NO INFLATION.

Questions about why aging demographics have NOT led to inflation in JAPAN are valid. My counter: Japan had a BABY BUST instead of a BABY BOOM following WWII, so they never had a consumption-led boom.

And now that their demographics are in terminal decline ALONG WITH CHINA’S AND EUROPE’S, they have the WORST of both worlds: consumption DROUGHT coupled with HIGHER GLOBAL INFLATION of everything from labor costs to commodities.

EUROPE AND CHINA ARE IN THE SAME DEMOGRAPHIC VISE. @Peterzeihan has done some great demographic analyses around the world. This chart of China’s demography is sobering (Europe’s looks similar, so I won’t repeat):

Combine this with the RETIREMENT of the Boomers and the mass WITHDRAWAL OF CAPITAL from markets and you have the makings of a SECULAR STAGFLATION: STAGNANT growth from flagging Boomer consumption + INFLATION powered by both labor shortages AND capital scarcity.

Oh, did I mention the starvation of long-cycle projects in Energy happening at the same time?

Incidentally, this is why I think the USD Wrecking Ball may continue for some time, as the other major DM economies all face DEMOGRAPHICALLY-INDUCED STAGNATION and will be forced to adopt easier monetary policies vs. the Fed.

The most delicious/pernicious part of the irony is coming:

These last 3-4 decades of high-growth/non-existent inflation have led the Fed & markets to believe that "ALL FINANCIAL CRISES ARE SOLVABLE BY QE WITH NO REPERCUSSIONS." THIS GAVE BIRTH TO THE LIQUIDITY LOTTERY.

What cohort benefited MOST from the LIQUIDITY LOTTERY? You guessed it. The Boomers. Timing is EVERYTHING.

Now that the Boomers are retiring, they will be WITHDRAWING CAPITAL from Risky Assets and doing 1 of 3 things with the proceeds: 1) living off the proceeds, 2) keep higher CASH balances, 3) redeploy across LESS RISKY ASSETS like FIXED-INCOME.

In fact, I think the biggest headwind my Bear Steepening thesis faces might be a demographic one:

That all said, wouldn’t it be ironic if the Boomer Fedheads who created the biggest LIQUIDITY LOTTERY of all time (that inured mainly to the benefit of said Boomers) now created more benign conditions for RETIRING Boomers in the form of HIGHER FIXED- INCOME YIELDS??

In the final analysis, I arrive at the same conclusion that @FedGuyI2 albeit for slightly different reasons: that we are in an era of SECULAR STAGFLATION THAT DOES NOT NECESSARILY CORRELATE WITH ECONOMIC GROWTH.

THE TAKEAWAY: Those expecting a quick pivot back to QE just because growth stagnates might be in for a big RUG-PULL. THE LIQUIDITY LOTTERY IS ENDING AND MIGHT NOT BE BACK FOR A LONG TIME.

I’ll end by citing two other Inflation threads that I wrote:

"Ride of the Volkyries": BEWARE “BAD IS GOOD” RALLIES IN A “GOOD IS BAD” REGIME

The Case for Bear Steepening/Why The Fed Won’t Pivot Soon