The inflation link: energy, housing & wages


    There is an inflationary relationship between energy, housing and wages.

    Louis Gave, co-founder and CEO of Gavekal Research, recently said that most economic activity is simply converted into one type of energy or another. Modern economies developed as we found more efficient sources of energy, from coal to oil to natural gas and nuclear power.

    Now we want to switch from carbon to renewable energies such as sun and wind. Ultimately, this can bring great benefits, but has so far led to low investments in fossil fuel production capacities.

    Just look at US slate production. It crashed last year and has not yet recovered.

    Source: Gavekal

    This can be a problem as inventories are low and fuel demand increases as more people move around.

    We can import oil to make up for lost domestic production, but that will add to the trade deficit and weaken the dollar (which is also inflationary).

    In the meantime, other countries will also reopen, which will further increase global oil demand. This is likely to drive up energy prices significantly.

    That alone is inflationary, but the consequences can be even more.

    Rising energy prices will lead to higher property prices as fuels are required to manufacture and transport large quantities of heavy and bulky building materials.

    As housing becomes less affordable, wages must rise. In previous recessions, wage growth has always been slow, if not the reverse. We are trying to get out of a recession where wage growth has never fallen, which is historically unprecedented.

    Source: Gavekal

    You can see in the graph above how wages fell during the recession in 2000 and even more noticeably in 2008-2010.

    Note that this does not include the millions of Americans who have lost their jobs and whose wages have dropped to zero.

    In a typical recession, even those who keep their jobs will see wage cuts or at least no raise. Not this time. Unless you were a laid-off service agent, you saw little impact on your salary.

    So, in general, wages have not decreased and are increasing in some segments.

    You might expect employers to respond with more automation – but we also have a serious shortage of microchips that is reducing automobile production. This in turn increases vehicle prices and further exacerbates inflation. Replacing human workers with robots may not be a short-term solution.

    Louis believes this is causing a 180 degree change in the economic wind, from deflation to inflation. As he wrote in his closing slide at Mauldin Economics’ Strategic Investment Conference 2021:

    Source: Gavekal

    Personally, I’ve been in the disinflation / deflation camp for decades. Any quick look at long-term interest rates and inflation since 1980 shows that this was the right position. It was really natural.

    But if you look at the current inflation data, you have to be ready to see that any trend, no matter how unstoppable, has come to an end.

    Even the Federal Reserve, which has stubbornly protested that all inflation is temporary and should be ignored, admitted in the minutes of its April political meeting:

    Multiple participants recommended The if the economy continued to make rapid strides towards the goals of the committee, it Makes Be decent Sometime in upcoming meetings too begin to discuss a plan to adjust the pace of asset purchases.

    If I read this correctly, at some point in the future they will think about thinking about inflation.

    Well, I damn well hope so. Announcement of a zero interest rate policy for more than 30 months, no matter what, is the height of the madness. You have no way of knowing the future. What if things change Do you remember the days under Fed Chairman Ben Bernanke when you said you were “data dependent”?

    Current Fed policies have pushed policymakers into a corner that is fraught with financial repression, destroying the value of savings, damaging retirees, and exacerbating income and wealth inequalities – not to mention helping to reduce mortgage and wealth Drifting real estate markets that have no need of help.

    Far be it from me to criticize those who are better economically, but they risk losing the narrative (read: market confidence). They will also dramatically increase volatility in all sorts of markets if they don’t admit they don’t know what the future will bring.

    I predict an unprecedented crisis that will lead to the greatest loss of wealth in history. And most investors are unaware of the pressure that is building up. Find out more here.


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