http://www.zerohedge.com/markets/deglobalization-and-central-banking
Zoltan’s Warning
Zoltan writes his article after recently visiting his firm’s European clients. He broadly seems to disagree with many of his clients’ inflation and central bank policy expectations. To wit:
The expected path of western policy rates rests on two hopes: first, that inflation is about to peak. Second, that we are near peak hawkishness.
Per his experiences, many investors believe inflation is peaking, and central bankers will back off their aggressive monetary policy designed to fight inflation. Zoltan warns, as we do, that investors with such a view may get caught offside. As such, we need to consider some tough questions. For instance:
What if inflation proves persistent and doesn’t retreat by as much or as fast as investors expect?
What if central bankers have no choice but to keep administering the harsh monetary medicine that the markets are struggling to digest?
Three Pillars of the Low Inflation Era
To appreciate Zoltan’s concern for a new inflation regime, it’s worth sharing his opinion on what fostered the low inflation environment of the last 30+ years.
Zoltan posits that low inflation rates rest on three pillars.
First, cheap immigrant labor keeps service sector wages stagnant in the U.S.
Second, cheap goods from China raise living standards amid stagnant wages
Third, cheap Russian gas powering German industry and the EU more broadly
U.S. consumers were soaking up all the cheap stuff the world had to offer…. All of this worked for decades until nativism, protectionism, and geopolitics destabilized the low inflation world.
The Three Pillars are Crumbling
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