Is the Kaoboy right?
Historical inflation data tells us very little about historical inflation cycles, but are we at risk of touching off a higher secular inflation?
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Mike Kao’s recent Substack argues for the possibility of 9-15% structural inflation over the next five years, citing the convergence of factors such as the end of post-Cold War globalization, the decline of cheap Chinese labor, and millennial peak consumption.
I’m skeptical and believe a return to lower inflation is the base case, but have concerns about the Federal Reserve's intervention potentially causing unintended inflationary consequences.
Either outcome will require public sector intervention, highlighting the importance of investing in industrial growth and increasing the size of the industrial plant to tackle potential inflationary pressures. Historical data shows a neutral relationship between industrial production growth and inflation.
All the comments focused on the potential analysis of Accumulation/(Distribution) versus price action and I’m in active discussions with a few participants on a research study to push this further. Rather than address prematurely, I’d prefer to get the work done and then release as a full note. Stay tuned!
The Main Event
My good friend, Mike Kao (@UrbanKaoboy on Twitter), is out with a new Substack piece that I consider a worthwhile read. While I agree with much of the geopolitical outlook, I am skeptical of the “structural inflation” thesis for the reasons Mike articulates. I am also very concerned that the Fed has inadvertently sown the seeds of precisely the same for an entirely different set of reasons. Ultimately, both arguments will require public sector intervention, but in a very different manner.
Kao’s argument can be summarized as follows:
Three big pulses of inflation have been witnessed since World War II: post-WWII industrialization demand-driven inflation, peak boomer consumption demand-driven inflation, and the current period of the end of globalization and cheap labor meeting peak millennial consumption inflation.
A perfect storm of the end of post-Cold War globalization and the decline of cheap Chinese labor, combined with millennial peak consumption, suggests the possibility of 9-15% structural inflation over the next five years.
The ramifications of these factors on inflation include sticky inflation for a prolonged period, potential challenges in supply chains due to geopolitical shocks, and a growth story for North America as supply chains are reshored for increased resilience.
With Mike making a case for structural inflation, I’ll take the other side and suggest our base case should be a return to lower inflation. However, the Fed may very well have upset the apple cart with inappropriate intervention.
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