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Which is why I am naturally suspicious of a Fed who believes they can control the burn of inflation. Muscle memory tells me otherwise.  A controlled burn, as any firefighter knows, can quickly become out of control. Rising inflation and slow growth courtesy of the 1970s can be only one policy mistake away.

During the prosperity of the late 1980s and 1990s, I was younger.  Optimistic.  Carefree.  The most important contributor to economic growth during the second half of the 1990s, was improving productivity which allowed for wage growth without putting upward pressure on inflation.  Think: the perfect storm for the iconic yuppies of the 1980s and 1990s.

Fast forward to 2021.  Walt Disney Company is a snapshot of increasing productivity in real time.  The company is adopting COVID procedures permanently and leaving an increasing amount of the client experience digital.  Though they have announced that they will be hiring a few hundred more employees with the parks open and at full capacity, the company is staffed at approximately 15,000 associates vs. 32,000 pre-COVID.  Talk about productivity – virtually half the workers are running the parks post-pandemic.

If companies continue to invest in tech capex (which improves worker productivity) we may well be able to see a 1990s like expansion, ex bad policies out of Washington.  Too much spending, increasing taxes on individuals and corporations and potentially excessive regulations will put the breaks on the expansion.  Remember, economic growth is all but certain to slow next year simply because of the massive reopening growth in GDP and corporate earnings produced in 2021.  It’s just math. 

Consequently, the last thing we need as growth slows naturally, is bad policy coming out of Washington. Unfavorable policy changes could include:

  • The Fed raising rates
  • Washington imposing a doubling of the GILTI tax; this would hurt healthcare and technology – which includes the chip makers.
  • Additional increases in the corporate tax rate – which raises prices for consumers.
  • Increasing the tax burden of individuals and families – which reduces disposable income.

This is not a narrative about tax policy, but as our dear friend, Dr. Arthur Laffer, rightly points out, collecting and then redistributing a single tax dollar costs the government (and therefore, by definition, the taxpayer) a significant amount above the actual taxes paid. Read this report from the Laffer Center.  Taking those dollars out of the real economy only slows growth further.  Slow growth reduces employment opportunities and so the spiral begins.

Fiscal policy has already resulted in the largest transfer of payments to individuals in U.S. history (9x greater than in 2007-2009!).  We all understand the reasons for the stimulus and applaud the effect.  However, transferring dollars into consumer wallets was bound to be inflationary and if we expect to see inflation subside, adding to those transfer payments will only fuel the inflationary fire. 

In the chart below (Download report for all charts) from Dr. Jeremy Siegel, you can clearly see the implications – M2 (think: savings) grew at a record pace in 2020.  Historically, there is a strong correlation between M2 growth and inflation.  Today we are experiencing a record difference.  Dr. Siegel estimates that there will be an additional 20% or so in inflation to work through the system in the coming years.  If he is right, inflation will be hardly transitory.

Though we are worried about sticky inflation sticking, we expect to see productivity improvements continue, if not moderate some.  But we do know that stimulus-boosted demand is still outpacing supply. 

So, we are watching.  Carefully.

We believe, as we have telegraphed for some time, that the value trade is cyclical, and the secular trends still favor growth stocks trading at reasonable prices.  We have been transitioning our portfolios accordingly.  Companies with growing dividends are central to our equity portfolio holdings.  Our alternative strategy – Global Revolution – is focused on the sweet spot of a transition to green energy hedged with – what else? – oil. 

Arthur Laffer, Jr. has a long-term track record running our Dynamic U.S. Inflation Strategy.  Our Convertibles and Fixed Income strategies also serve an important place in portfolios.  Contact your relationship team if you’d like to discuss any of the Laffer Tengler Investments strategies.

I combed the rest of Bob Dylan’s My Back Pages lyrics in hopes of finding a suitable closing but, apparently, I am not that deep.  Or perhaps, I am just too young.  When I discovered the song in the 70s, it seemed to make perfect sense.

Ah, but I was so much older then…

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