Stumbling To Scarcity

In economic forecasting, reality is usually somewhere between the extremes. The best-case and worst-case rarely happen. That’s why, when they do happen, markets react so quickly to the “missed expectations.”

I saw this early in my career. Realizing we will “muddle through” most of our problems was immensely valuable and sometimes profitable. But as our problems grow in scale, I’ve had to change my attitude. Now I usually expect to “stumble through,” as we see more of those extremes, and more extreme reactions to them. We still make it, but with some bruised knees and painful scrapes.

Consider two views of the current US inflation outlook.

Some expect major economic growth as we subdue the coronavirus and stimulus spending moves through the economy. Prices will rise and generate significant inflation, due to both increased demand and supply chain disruption. That’s why the Fed maintains (and I agree) that we will likely see higher inflation but it will be transitory. Nine to 12 months from now, much of the supply/demand mismatch should be back in balance—at least in the US. Much of the world is far from that point.

Another view is that controlling the virus will simply send the economy back where it was in 2019, with low growth, low inflation, low interest rates, and already-excessive debt that is now far worse. People saw problems coming but thought they had time.

My view is somewhere in between those. I think we will probably have a few months of significantly higher inflation. It will fade but meanwhile it will hurt certain people and industries. It will be like one of those extremes causing bruised knees and volatile markets.

That means we must juggle two seemingly incompatible outlooks: We don’t need to fear generalized inflation, but localized inflation could be a significant problem just ahead. With some prices rising while others hold steady or even fall, there may be little change in the broad CPI and PCE benchmarks. You may not feel it personally, depending on your location, business, and so on. But it will be there.

Then we have to think about long-term changes. The trends that were underway in 2019 are still unfolding. Even as we put this horrible time behind us, the Great Reset of global debt is still coming—and probably sooner now because the debt is growing faster.

If we rationalize the debt, we will also have to rationalize the things the debt bought, especially in government spending. Think it can’t happen in a major country? Think 1993 in Canada and Sweden. Those were painful periods.

I hear some of you now: “But John, you’re Mr. Optimist! What are you saying?” It’s all about the timing. We can be concerned or even pessimistic in the short-term but long-range optimistic. That’s not inconsistent. Though, I’ll admit, it is a kind of fine distinction that is hard to make in the social media age. Today I’ll try anyway.

Now let’s talk about inflation.

Plastic Explosion

An inflationary economy is marked by widespread price shocks, often in products you don’t expect. And, less obviously, prices of other things may not rise, but they stop falling. We have all benefited from technology-driven lower prices for 30 years. It has been a deflationary/disinflationary positive environment of abundance. That trend is not going to stop during the decade, but simply slowing down for a year or so as we rebalance the supply chain will mean more inflation in some segments.

You know about more expensive energy, housing, food, labor, and healthcare. But here’s one you may have missed: plastics. And no, I’m not quoting Mr. McGuire giving his famous tip to a young Dustin Hoffman in The Graduate. Plastics really are hot.

Here’s a note from Bain’s Macro Trends Group that crossed my desk last week:

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