Contrast that world to today’s environment, where households are just starting to leverage themselves up like it’s 2002. The current housing boom is characterized by short supply and big down payments. But in late 2022, the U.S. economy could close the output gap as it approaches full employment.
Some may write off today’s inflation picture as the byproduct of temporary supply-chain bottlenecks, commodity market imbalances and generous stimulus checks that are about to expire. In reality, it’s more complicated.
The labor market is the diametric opposite of what it was 10 years ago. Since the pandemic began, Amazon has hired about two million workers starting at $16 an hour or more. Other employers have found themselves in stiff competition for a shrinking pool of workers. The upshot is that the effective minimum is $15 an hour and people who once had low-paid jobs in the hospitality and retail sectors are finding more attractive offers higher on the employment ladder.
Weisman doesn’t doubt that inflation will be lower 12 months from now than it is today. But he suspects it will last a little longer and settle somewhat higher than the 2.0% long-term rate the Fed is projecting.
Specifically, he expects it will run at a 2.4% clip during the remainder of this expansion after things settle down. That's about 0.7% higher than the last business cycle.
That’s hardly cause for alarm, but it does have significant implications for bond pricing that markets seem to be ignoring. Weisman’s relatively benign outlook doesn’t assume some kind of exogenous shock that could send prices higher next after price increases stabilize in a post-reopening 2022.
He acknowledges that money supply growth will normalize next year, but that could be offset by a much higher velocity of money than we’ve seen in decades. “You’ve created a lot of kindling,” he said. “Does anyone have a match?”
What happens when the Fed starts to withdraw stimulus is anyone’s guess. Corporate America has been “selling a lot of equities, but equities don’t fall,” Weisman noted. The Fed and others have been buying a lot of bonds, but rallies for most fixed-income securities have been anemic. “It’s too asymmetrical,” he said.
What could the market be pricing in? There are several possibilities in his view. One scenario is that the market is reasoning that the Fed will have to raise rates and “things will peter out” and the economy will enter a recession in 2024 or 2025.
Another possibility is a much more robust scenario, one not cited by Weisman, is that forces like technology and globalization that caused disinflation for the last three decades will reassert themselves and trump shortages in the labor and commodity markets.
But there are other ramifications if current market conditions remain in place. Specifically, Weisman said, if negative real rates become a permanent fixture on the financial landscape, allocating capital will become a daunting challenge.