Normal Reaction to an Average Recession
Low inflation, low growth
Monetary policies = easing = stimulate demand
Lower fed funds rate to stimulate demand / economic growth
E.g. early 2000s, 2008-2009
What is Stagflation
Low real growth but high nominal growth (aka lots of inflation)
Last strong case was in the 70s and 80s
Need to reduce inflation
Implement more restrictive monetary policy
Historical Treatments of Stagflation = Increasing FFR
Historically, monetary policies around easing during stagflation = MISTAKE
In the 70s: prematurely lowering FFR--> FFR < inflation --> inflation remains high
In the 80s: High FFR, even >inflation
Today's Economic State of Affairs
Today looks like stagflation with real GDP growth negative. FFR <0.5% too
due to a large net export deficit
CPI and PCE increasing rapidly at almost double digit growth rate
CPI is inflation for out of pocket expenditures, affects the low to middle income people the most (shelter, food, etc.)
PCE more heavily weights healthcare / financial services
Shelter
Higher mortgage rates, higher cost of home ownership
More rentals (seems more affordable)
Interest around rent stabilization regulations and policies
Inflation Expectations
1 year: Affects wage increase expectations
Has risen from 2-3% to 3-6%
Long term
Increased moderately but not as much
Wage increases
Biggest portion of the labor force hourly earnings growing 5-6%
Aggregate wages for private nonfarm increasing ~7%
Increasing wages and expectations push inflation even further up
Low supply, high demand
Nominal spending continue to be high especially since the government gave everyone money
Excess savings highest for rich people
Unemployment at historical lows
Overall labor market still tight with low unemployment rates, despite seeing layoffs recently
overall strong labor market, recovered to pre-pandemic with few unemployed and many job openings
actually lots of people voluntarily quitting
Loans / lending
Higher lending capacity! loan to deposits is much lower. Pre-pandemic was ~75%
Social Implications
COVID Created Generational Conflict
Millennials / Gen Z feel like they sacrificed years of their “prime time” for the old
The old want low rates to preserve asset value
Young people need inflation to wipe debt and accumulate wealth
Life of a Boomer vs Millennial
Boomer
Average childhood
Publicly funded schools are actually great schools
Rise of service sectors = lots of jobs = everyone becomes more wealthy
Low asset prices = can easily buy houses
High inflation = pay off debt easily
Burst internet bubble = rate cuts but can buy more houses
Pension payouts = good
Millennial
Education becomes increasingly competitive - those who were wealthy sent their kids to the best schools and then only they could go to the best colleges
Tuition skyrockets
Takes loans to cover tuition
Goes increasingly into more financial crisis and debt
Starts family later because of financial situation
Expensive costs for houses and healthcare - lives paycheck to paycheck
Affects future generations
COVID hits and everything goes more to shit
The Future is Ruled by Today's Young People
Our presidents are old as hell, their time of pushing inflation down is over
New influential political members will push for more "liberal" policies and economic governance surrounding healthcare/Medicare, inflation to cancel debt, environment, etc.
What Has the Government Done Differently vs 2008
Printed a hell of a lot of money and sent it to people instead of bailing out banks
What Does this Mean "Post-COVID"
Everyone will want to spend because they feel pent up
Food prices shooting up because of supply chain issues (can't cross borders)
Deflationary actions such as bankruptcies and layoffs
Effects of the Bull Market Run of the 2010s
Property prices skyrocket
Birth decline, fertility rates decline
Social reasons to justify not getting married and having babies/families = really messes up this generation
this has become hip and cool for both men and women to better value themselves and be single and hoard money for themselves
RESULT: Low growth, constant stimulus checks / liquidity injections, super high asset prices, fuck load of debt
Affected boomers too! rate cuts = bond portfolio future incomes are done, retirement savings into assets that have lost tons of value e.g. VC and EM
The Economic and Social Case for Stagflation in the Worst Case Scenario, Inflation at Best
Sad b/c hedge funds implode (Five arrow!), negative real yields, bankruptcies = tectonic shifts in the market
From a social POV: Assets need to be ultimately transferred (generational wealth transfer), debt paid off, households/families formed
INTL FCStone: Stagflation, Pershing Square