The Case For Long Term Inflation

The Case For Long Inflation

While the fed claimed inflation would be “transitory” many people rightfully blamed the fed for inflation because of ultra low interest rates and “central bankers gone wild” attitudes with special programs since 2008 (TARP, TAF, TSLF, TOP, AMLF, CPFF, etc) and new programs under Covid (special purpose vehicles) the truth is a bit more complicated.

The case for persistent higher inflation than we have had in the past 20 years will likely arise from the demographic crisis the US has entered this decade. Between now and 2030, we will continue to have about 10,000 boomers retire each and every day. Take a look at the BLS worker demographic tables and look very closely at the column labeled 65+ and scroll down the list of how many people work in those areas and now imagine people leaving those jobs and never returning.

If that weren’t bad enough that is not the whole problem because when boomers retire and leave voids in the work force they will still continue to spend and consume as they receive income from social security and health benefits from medicare in addition to whatever retirement funds they have accumulated. Essentially we will have 70 million consumers with continuous income and medical benefits but we will have 70 million less workers in the worker pool.

By 2030 we will likely have 70 million less workers which will create work and wage pressure on the remaining working population. A “bidding war” for labor will continue to grow now thru 2030. We have seen instances deep pocket corporations like Costco, Bank of America, Amazon and others raise wages to attract workers.

It is not really a surprise that companies like Johnson & Johnson, GE, Toshiba, and others have started to splinter into separate companies. These firms are shrinking to focus on core areas and we believe that it is because it is easier to hire, train and retain employees when you have a core focus instead of stretching people across multiple directions and disciplines. We are still dealing with the great resignation as people reflect on their current life situation and take action to better their lives.

This situation has been building for decades and Covid has clearly exacerbated and accelerated the problem and it will continue to manifest in different ways. We foresee companies having to relocate to growing population centers instead of attracting talent to remote locations like North Dakota.

What does this hold for the future? We believe companies positioned in growing states with large metro centers with access to universities (and graduating educated workers) will be the ones that succeed. It is no coincidence that Elon Musk recently relocated HQ to Austin, Texas.

In summary, there is an “invisible broom” that is sweeping companies, people, and goods/services into areas where they have the best possibility of succeeding and we think this is all inflationary in nature over the next decade. We will have concentrated “bidding wars” for land, people, goods and services concentrated into a few metro areas around key states such as Texas, Florida, and California. We believe we will have inflation rates above 3% annually thru 2030. If our assessment is correct, we need to update and position the “ecosystem” of our investment portfolios to profit accordingly.

In our next post, we will make a case for deflation….

Addendum: We define “inflation” as higher costs in terms of dollars for wages, goods and services. If people were earning $7.25/hour as a standard wage 5 years ago but now earn $15/hour this is inflation. If a gallon of gas cost $2 two years ago but now costs $4 this is inflation. To us and for our investment strategy and portfolios, how we define “inflation” is the only definition that matters to us. Others define inflation in terms of credit expansion or contraction or other academic terms to illustrate that we are in deflation but we don’t care about academic theory or are interested in twisting definitions to suit academic or blogging needs. We care about money and making more of it in real terms and ideally to offset higher costs (inflation).