The idea that the recent bout of inflation will recede into the rearview mirror by 2024 could prove fanciful, according to a legendary asset manager who saw hyperinflation firsthand when he ran Yale University’s endowment in the 1970s.
Loomis Sayles vice chairman Dan Fuss believes the global economy could witness something of a replay of the 1970s, albeit with some key differences and without the extreme double-digit acceleration in prices. “Almost every cost has gone up,” he said.
Oil prices were the main driver of inflation in the 1970s. This time the drivers are far more dispersed, he said. Labor tops the list.
“We’re looking at a movement of people and a shortage of people,” Fuss said. Some people who are moving don’t have the necessary skill set for jobs that are available.
In west Boston and its suburbs, there is a shortage of barbers and “a lot of jobs like that,” he said. Some people who have the technical skills lack the language skills, he added.
Two universal concerns, in his view, remain climate change and the shortage and migration movements of people. These are interconnected, as climate change makes more of the world uninhabitable, and will eventually force huge shifts in population, he said.
Fuss envisions an inflationary decade that plays out over two or three cycles, with the current cycle ending in a year or two with inflation bottoming out at 3% or 4%. That could be followed by another cycle with inflation falling to 4% or 5% in the middle of the decade. Finally, there could be a final cycle he calls “the crunch” around 2030, though admits it’s “all guesswork,” he said.
What isn’t speculation is that the global economy has moved from a decade of weak demand from 2009 to 2020 to an era of insufficient supply. Shortages of labor and commodities aren’t likely to disappear anytime soon.
But the biggest threat to global inflation and overall stability is the looming showdown between the world’s two superpowers, America and China, he said. Fuss described it a Thucydides trap, the historic tendency of an emerging power to seek to displace an established power dating back to Sparta’s defeat of Athens in ancient Greece. The most recent incident occurred with the Cuban Missile Crisis in 1962 and was resolved peacefully.
These encounters typically happen when “two parties are caught in a situation and no matter what they do” every action each party takes brings them “closer to a clash,” he said, speaking at a virtual event sponsored by Financial Advisor and The Money Show earlier this week.