Thread by @NathanDallon

Lets talk about the Hoisington Investment Q1 2021 review and outlook shall we?

hoisington.com/pdf/HIM2021Q1N…

Its deflation people.

1/25

1) Inflation is a lagging indicator.

I believe this is a critical observation to incorporate into policy and commercial decision making. From the report:

"The low in inflation occurred after all of the past four recessions...

2/25

"...The low in inflation occurred after all of the past four recessions, with an average lag of almost fifteen quarters from the end of the recessions."

This is an empirical claim that is either true or false. Other economists like @EconguyRosie have confirmed...

3/25

...the observation that inflation lags the business cycle.

pragcap.com/inflation-is-a…

It seems obvious, but is a powerful fundamental that is easily overlooked (including monetary policy reform proponents, Fed Chairmen, and politicians).

4/25

Consequently, the price spikes we see in the data today reflect conditions in the past. Critical to understand as observers move through 2021 and try to forecast financial and economic moves.

5/25

2) Productivity rebounds hold down inflationary forces.

It stands to reason that tight financial periods, like Q2 of 2020, innovation occurs at the lowest levels of decision making in economies. Firms of all sizes get smarter and more efficient under stressed conditions.

6/25

bls.gov/news.release/p…

(Note, base effects in productivity and labor costs in 2020 caused Q3 and Q4 to seem as though costs were rising compared to the collapse in costs of Q2).

7/25

3) Supply chain restoration.

One of the overlooked (and misunderstood) cause of rising prices in certain sectors was the disruptive effect of international shutdowns on supply chains, causing uncommon price spikes.

cips.org/supply-managem…

8/25

Many attributed, and continue to attribute, those spikes in prices (such as lumber) to monetary and fiscal policy.

Although the Central Planners of the World are indeed the direct and proximate cause of the price spikes, the monetary/fiscal policy isn't the culprit.

9/25

It was the lockdowns and other public health measures enforced across the G20 countries.

venturemagazine.me/2020/12/the-tr…

10/25

As the lockdowns reverse, the supply chains come back online, and prices decline. Or so Hoisington deduces. (I happen to be persuaded by the logic of an impending price war between international and local producers).

11/25

Prices drop as supply surges and supply chains straighten out.

4) New technology will continue to press deflation down.

Hoisington isn't the only firm to notice the deflationary effects of technological evolution.

12/25

@RealVision had a great interview between @JeffBooth and @RaoulGMI touching on how COVID has accelerated the deflationary forces of technology.



(As an aside, Jeff is fantastic on tech/finance. Give him a follow).

13/25

5) Broken glass fallacy.

As the economy recovers, many observers will "price in the fix" and "leave out the costs" of the 2020 recession.

investopedia.com/ask/answers/08…

Small/medium/and new firms will be hampered for years before they recover and bring real growth with them.

14/25

GDP and large quarterly profits reports will give the fallacious impression that the economic recovery has become an historic economic boom.

Yet, other date will suggest weakness outside the headlines (credit, underemployment, labor force participation).

15/25

6) "The disinflationary/deflationary consequences of the debt levels conform with scholarly research from the 19th century to the present that indicates that high debt levels undermine economic growth."

16/25

This is the biggest and most powerful idea championed by the deflationists.

As TOTAL debt in an economy rises, deflation prevails. Why? The velocity of money drops and the debt and dollar diseases strengthen each other.

https://twitter.com/NathanDallon/status/1340055396149551106?s=20

17/25

If anyone has an empirical critique to this observation (that high secular debt levels collapse money velocity and always lead to deflation) I would love to hear it. I haven't seen much counter arguments to it. (some story telling arguments, little data driven analysis).

18/25

"The historical record is consistent with research that the government debt multiplier is negative, not positive, and the high levels of gross government debt has a deleterious effect on real per capital GDP growth."

Perhaps the most important claim in the whole report.

19/25

7) Continued demographic deterioration around the world.

"As the birth rate falls population growth will weaken further, while the average age of the population will
continue to rise. Such negative demographics...

20/25

"... will restrain real investment and economic growth while placing downward pressure on inflation."

Fewer consumer and workers with ageing populations make for difficult environments for businesses.

@the_allocator

realvision.com/shows/the-big-…

21/25

8) "When money increases and velocity falls, the money is trapped in the financial markets and has only a minimally lasting impact on the real economy."

This is the BIG one. If you only take away one thing from the whole report, let it be this sentence.

22/25

@MetreSteven did an excellent job at explaining the "liquidity trap" to @ErikSTownsend and @PatrickCeresna on the @MacroVoices a few weeks ago.

macrovoices.com/960-macrovoice…

23/25

Monetary AND fiscal policy will continue to drive down money velocity. The newly created money (whether printed or borrowed) will be trapped in financial markets and won't get into the broader economy.

24/25

The implications are enormous. Deflation, unemployment, and wage depression for the masses, and ENORMOUS gains for the rich.

Just an absolute mess from the policy makers worldwide. THE MORE the central planners spend/pump/QE/auctions the DEEPER we fall into deflation.

25/fin