Bridgewater just published an article on the state of inflation. The article
can read a bit dense, so here are notes you can read in 3min.
tl;dr
- 📈 it’s a demand shock we’re experiencing in 2021, not supply shortage
- 💵 high inflation is likely to be reasonably sustained due to continued lenient policies
- ✋ (my own opinion) if you hold assets, continue to hold post-covid. if you don’t, buy
more assets and increase your exposure to different asset classes
Summary
🏔 Landscape
- Current news headlines in Q3/Q4 2021 cover low supply
- BUT, MP3 has really driven an upward demand shock in consumer goods
- There are not enough raw materials, energy, productive capacity, inventories, housing, or workers
- Consumer goods demand is unlikely to sustain, but demand for services (aka employment) will continue to lag
- Continued service lagging puts pressure on a labor market
📈 More about MP3
Story for demand
- Government transfer massive amount of cash to households, more than offsetting lost income from covid
- Household balance shets are in materially better state than pre-pandemic
- This pushes up values of assets like equities, houses, crypto
- In short, houlsehods are wealthy, flush with cash and ready to spend
- Self-reinforcing surge in demand
Story for supply
- There is not enough raw materials. Example: metal
- Supply is much higher than in recent years, but prices are still rising
- There is not enough energy
- Prices of natural gas, coal, oil are all spiking
- But prices are rising because
- There’s not enough housing
- Not enough supply (of houses), so home prices are surging, as is rent
- Housing prices take time to reflect
- Extremely low interest rates and tight job market
- Not enough labor
- Half of all US firms cannot fill positions
Next wave of inflationary pressures
- Consumer good demand goes down
- Increase spending on labor-intensive services
- Ongoing shortage of labor will worsen
- Inflation will become increasingly self-reinforcing
For supply and demand to clear at levels that don’t lead to sustained price increases,
ther would need to be a massive investment in productivity for supply to catch up.
The gap between demand and supply is now large enough that high inflation is likely
to be reasonably sustained
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