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