The bond market has stabilized after a huge selloff, and that has given comfort to stocks. The technology-dominated Nasdaq Composite
COMP,
has advanced for six of the last nine sessions, and the Russell 2000
RUT,
jumped 2.2% to take the small-cap index’s gains to 35% since the U.S. election.
Will the tranquility continue? Manoj Pradhan, formerly a Morgan Stanley managing director in charge of global economics and the founder of Talking Heads Macroeconomics, said at a presentation held by fund manager Tabula Investment Management that inflation is going to heat up just when the Federal Reserve expects it to cool down, next year.
Pradhan argued that the breakdown of the Phillips curve — the traditional relationship that shows inflation rising as unemployment falls — occurred because of China’s entrance into the global labor force. But he said demography and the COVID-19 pandemic will fix it.
First, to demography. The aging of the U.S. and developed world population will mean a loss of workers, and the aging of the population also is creating a surge in government spending. Pradhan also noted caring for the elderly will be labor intensive. “We need tech to destroy jobs in other parts of the economy so that the labor it releases can be reallocated into looking after the elderly, at a similar level of skill,” he said.
Onto the pandemic. Right now, he said, money supply signals are giving the “most extreme signals you’ve ever seen.” It hasn’t translated into inflation now, because the velocity of money has collapsed, and the savings rate has surged, both functions of consumers being shut at home. Citing European Central Bank research, Pradhan said the savings surge is “forced” rather than “precautionary.”
As the…
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