“Deficit spending has taken the baton from Federal Reserve’s quantitative easing, but the net result remains stimulative capital flowing through the economy. There may come a time when the “public,” whether domestic households or corporates—or foreign buyers—recognize the unsustainable path of U.S. finances and require a higher risk premium (i.e., interest rate) in order to purchase the debt. At this point, the two most viable options will be to balance the budget, which would probably have near catastrophic consequences on the economy, or revert to quantitative easing and shift funding back into the Federal Reserve balance sheet.
The fiscal quagmire co-exists with other structural variables that suggest that era of abundance has given way to an era of increased scarcity. The combination of these factors is highly likely to result in a prolonged era (decades) of higher structural inflation—a reality that is widely unappreciated by the market.”1 (bold added)
The scarcity issue is not new to us or our clients – it’s something we’ve been talking about in different ways for nearly 5 years (we’ve even held some small client events related to this theme). We’ve lived through 30 – 40 years of abundance in materials and labor, which included turning China into the world’s manufacturing subcontractor. We agree with the view that we are now in a different era. At best, falling commodity prices and labor costs will no longer be a tailwind for corporate profits.
For example, here’s Statistica’s history and projection for China’s working age population2:
What’s not scarce? U.S. dollars.
Adjusted for CPI, the purchasing power of $1 in 1980 had fallen to just 28 cents by the end of 2022.3
Said another way…during an incredible 40+ year period of abundance – characterized by declining commodity prices, lower labor costs, lower taxes, lower interest rates, and lower inflation - the world’s reserve currency still lost…yup, 72% of its purchasing power.
So…for the next 20/30/40 years of “probably not abundance” – where all the factors cited above could stall (at best) or start moving in the opposite direction…how are you going to protect your purchasing power?
3. First Trust ETFs | Weekend Investment Highlight | Persistent Inflation, April 30,2023
The views expressed represent the opinions of Bluestone Financial Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
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