Keeping it Simple | Ep.32: Variable or Variant Weather?
Jan 16, 2024
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Tian Yang of Variant Perception joins Mike and Harley for a 2024 outlook. They discuss aging populations and inflation, analyze Modern Monetary Theory and its implications, compare Variant and pre-COVID conditions, and debate R star and its relationship to labor quantity and productivity.
Companies hoarding labor may lead to sudden deterioration in employment.
Uncertainty remains regarding the impact of aging populations on inflation.
The level and rate of change measures both matter when evaluating liquidity dynamics.
Deep dives
Labor Hoarding and Consumer Spending
Despite deteriorating demand in certain sectors, companies have been hoarding labor and consumers have maintained high levels of spending. This is likely due to a false sense of job security among consumers and companies' reluctance to layoff workers. However, as profit margin pressures increase, there is a risk that labor cracks will lead to sudden deterioration in employment.
Inflation and Demographics
There is a belief that the aging population, specifically the baby boomers, will lead to increased inflation as they retire and spend less. This is due to the transfer of wealth from the older generation to the younger generation, resulting in increased demand and reduced supply. However, there is uncertainty regarding the impact of aging populations on aggregate demand and whether it will truly result in higher inflation.
The Impact of Liquidity and Fiscal Stimulus
The availability of liquidity has played a significant role in postponing the negative impact of tight credit conditions and high borrowing costs. However, the question remains whether additional fiscal stimulus will be provided to further support the economy. The potential for a structural shift in asset allocation and an increase in inflation due to political factors and changes in credit allocation are also key considerations for investors.
Implications of fiscal policy and the role of the Fed
The podcast discusses the implications of fiscal policy and the role of the Federal Reserve in the current economic climate. The speaker emphasizes that the effectiveness of fiscal policy depends on how it interacts with other economic factors. They compare the current situation to the 1967 soft landing scenario, where the Fed played a crucial role in preventing a recession by implementing preemptive rate cuts. The speaker also touches on the concept of Modern Monetary Theory (MMT) and acknowledges its descriptive accuracy in representing a fiat-based model. However, they highlight the importance of how the money is spent, noting that productive investments yield different outcomes than inefficient spending.
Understanding liquidity dynamics
The podcast explores the concept of liquidity and its impact on market dynamics. The speaker references the hierarchy of money framework proposed by Perry Merling, which provides a perspective on how different layers of the monetary system interact. They mention that central bank interventions have disrupted the traditional hierarchy and emphasize the need to measure the ratio between high power money and lower quality money as an indicator of liquidity and margin of safety. It is noted that while current levels of liquidity indicate a neutral margin of safety, the negative rate of change suggests a potential impact on market conditions. The speaker highlights the importance of considering both level and rate of change measures when evaluating liquidity dynamics.
Tian Yang of Variant Perception joins Mike Green and Harley Bassman to discuss what opportunities and pitfalls 2024 may hold for global markets and investors.
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