https://nypost.com/2023/11/09/business/ken-griffi…
Billionaire Ken Griffin said stiff inflation could persist “for decades” as wars in Ukraine and Israel further push the world towards “deglobalization” — and warned of dire consequences as the US government continues its spending binge.
The 55-year-old hedge fund titan also pointed to pandemic-induced supply-chain disruptions and European countries losing access to Russian natural gas as reason that “a trend towards higher baseline inflation…could be for decades,” per the outlet.
“There’s many trends at play right now that are pushing us toward deglobalization,” he added.
saw this. not sure if I buy this thesis. obv i have childish views so correct me/point out if my thesis doesn't make sense. I am interested in AI + Africa EM
I condense the higher for longer thesis as follows:
after GFC several years of flat yield curve + very low rates.
globalization pushed up margins and cheap money. QE increased bank liquidity which creates bank liquidity and pushes up asset prices. tech + post-GFC monetary policy inflated equities and we just through the decade w/o much movement for treasuries.
Another factor present was fast growing EM nations which compressed rates. as savings accumulated faster in EM than their ability to provide save + liquid assets, they pumped liquidity into treasuries, which pushed down rates. people talk alot about "demographics" but I think thats a really shaky/unproven point to make, and if its at play it will be present in economic data.
also, many decades of geopolitical stability + low rates allowed the treasury to continue to ramp the deficit w/o any reasonable expectation of a default.
doomers might look to the fact that U.S. fell off GDP forecast since 2008, and that Basil/D-F/Frannie Mae as well as post-GFC monetary policy transformed the way wholesale banking works in US and we are not crediting at optimum, and these were perfect conditions to deflect flat-growth, but I don't think Ken G thinks this.
now we have:
- high fiscal deficit
- high neutral real rates
- high inflation
- lots of wars and global discontent
Pretty sure in the interview he said that w/ the state of the deficit, QT is gonna make it harder to cut w/ higher rates in the SR. His view is with the geopolitical prediction of more war/which would cause more fiscal spending, this could be a problem with high rates into 2025. Borrowing becomes more + more costly, and now we might actually need to borrow.
I can buy high rates into late-2024/2025 pushing up at 5%
This is pretty clear from this weeks auctions + QT RRP activity recently.
Right now we have lots of liquidity in inactive banks and a flat yield curve. RRP finally dipped under 1 tn and QT getting to work. T-Note auctions had issuance up less than expectations but still strong given a larger auction size. 30y and Ultra notes failed auction and fell quite rapidly. Fed has to fund high deficits w/ SR bonds, and will likely taper off bond issuance until late-2024. Also as QT programming ends we get more bank liquidity and they can start clearing bonds off balance sheet. Or if RRP goes to like 0.5 tn then we could see rates start to fall in late-2024. In conclusion, W/ higher auction sizes and the engaging of QT, we will see rates higher in the SR.
Eventually the yield curve is gonna need the curve to disinvert if they want growth bc we cant increase the deficit more. So coul see 10yr going up and 2yrs going down.
I think a few things need to happen for me to accept the higher for longer thesis
Particularly in Africa. In the little reading I have done on Africa, it seems that many African nations arent poised for economic growth like many of the US's EM partners after GFC. Many bankrupt/shitty govs. I could see there being a path to Africa pushing rates down like EM did for US during post GFC but that would rely on the stability of these states and also their ability for advanced economies to invest in them. Maybe the timing isn't as convenient as GFC, and this could have a more lagged affect on pushing down rates.
On geopolitical conflict. I think there needs to be greater global discontent for this really to be a problem. Yellon was on record the other day saying we could still fund pretty much any war we want. A little ridiculous of a claim, but its probably true. Something like US v China could be catastrophic for both states, given both have their own problems. I just don't think this is enough alone to make a serious affect on real rates unless something catastrophic happens. Maybe if we have a bunch of things like push towards renewables + global warfare + no EM's saving surplus then I could see Ken's deglobalization thesis playing a part, but not on its own.
I would watch out for Africa + AI. If Africa can be the savior EM and we get a tech punch w/ AI from compressed rates, we could get a regime just like 2008-2020 very quickly. None of this is opinion, but cautionary thoughts to agree w/ Ken's thesis.
who is ms'ing me tf
Guy above has a long paragraph, but it’s really just that there are loads of reasons for structural pernicious inflation to exist going forward. He mentioned a few, but if you think about the magnitude of reversed globalization, labor getting more power, harsher antitrust, slower rate of change with ability to increase fiscal or accommodative interest rate policy, there are lots of reasons to think inflation is here to stay. Labor is still tight and until labor isn’t tight, you will have wage inflation. Labor might be tight for a long time if you have to bring back all the jobs from China.
So Citadel is overall long inflation, got it
Reading macroeconomic thought pieces is really the equivalent of reading horoscopes for finance professionals
As someone who works at a macro fund, strongly disagree. Ultimately, you never have 100% certainty, but it became pretty obvious at a point that inflation wasn’t transitory and there was lots of money to be made off that recently.
Put another way, you are a moron if you think any outcome is binary and place binary bets. But if you think a macro scenario is more likely than not, you are stupid to not implement some sort of positioning around that. Take another example, if you bought a bunch of real estate with low rates and rumors of high inflation, that was really a bad call. All your shit could be close to or underwater right now even if you bought the best buildings.
Lot of structural inflationary drivers (labor gaining power, deglobalization which involves near shoring & dual sourcing, a less peacful world means more conflict and disruptions, energy transition is expensive)
The major deflationary force that we don't know how much it will impact stuff is AI and automation. 5yrs ago it was unheard of for major restaurant chains to have kiosks, now I'm seeing them everywhere. Even at Wendy's they are now rolling out a chatbot to help take your order at the drive through. If we can do more automation then that massively pushes inflation (since most of the labor inflation is blue collar vs. white collar). Even at white collar level, people's productivity has potential to skyrocket...and for some they will be out of a job and have less spending power which is also deflationary.
Other driver is potentially immigration, we've had record border crossings. While this sucks from a sovereignty standpoint, lot of them will roll over into unskilled labor (food production & processing, landscaping, etc). Better yet if we can provide work permits, that will go a LONG way to pushing down blue collar labor's bargaining power. Automation + more work permits for just the folks who have already crossed the border can solve that issue on the blue collar side
I don't think we need to accept 4% inflation post 2024. I think the days of 2% are probably gone -- though who knows how longer term AI and inflation impact the world -- but 2.5-3% could be pretty attainable. Just my crystal ball understanding of things
I agree that inflation will persist, but not principally for the reasons he cites. Inflation will persist over the next several years because the Boomers are retiring in en masse and large retired populations are inherently inflationary as they are spending without producing. The past 30 years the world has seen the largest working age population ever in history between the Baby Boomers and Millennials, and this has suppressed wage growth and kept inflation down. However, this is all about to not-so-gradually shift as the Baby Boomers exit and birth rates continue to decline. If you want more info do yourself a favor as an investor and read:
"The Great Demographic Reversal: Ageing Societies, Waning Inequality and an Inflation Revival by Charles Goodhart and Manoj Pradhan.
When you consider that most of it was written before the pandemic you'll realize how sharply prescient the authors are. I think this should be a must-read for any finance professional grappling with the macroeconomic headwinds of our time.
I just keep racking up wins on this.
His time with the Cincinnati Reds is underrated.
Cum nisi cumque non quia minima sed. Consequatur illo cum architecto fugit. Eius qui ducimus quo dolores ducimus voluptas rerum adipisci. Voluptate vitae esse rerum aut nihil. Necessitatibus quaerat numquam iure distinctio quo.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...