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Declining Workforce And Productivity. US Treasury Engagement. Druckenmiller, Jensen, And Roubini.

The under 55 US population fell 20m in the last 10 years

Lower Productivity lowers growth raises inflation

Tension Between Fiscal and Monetary Policy ….. US Treasury role expands

189 of the SP500s companies have reported an aggregate year-over-year EPS DECLINE of -3.3%

Stan Druckenmiller, Greg Jensen, and Nouriel Roubini Latest Videos

The Recession in the Productive Sector Is Here.
Daniel Lacalle

If we are emotional, subjective, and short-sighted, we only add to our troubles.
Ryan Holiday

Supply constraints are one of the components in rising inflation, even more so when productivity is weak. Productivity is simply production per hour worked. So if productivity declines, the cost of a unit of production is rising, and this feeds through to raising the general price level. While supply chains may now be easing, it is worth understanding that productivity is a different but related problem. It is a more deep seated problem which lasts longer, and in 2022 it has just fallen to a new low.

Productivity is a complicated issue, and I recommend the video linked to the chart above for a deeper analysis. One major factor in the productivity weakness may well be the extraordinary shift in the age of the US work force. The chart below shows that the population of the US under 55 year olds fell by 20 million over the last 10 years!

This clearly is a transformation of the labor force and explains both the residual strength of the labor market and wages post Covid. This is not an issue that can easily be fixed, and for the time being it is keeping the Fed in continued tightening mode.

Constant Intervention Has Lowered Productivity

Governments and central banks have become the lender of first resort instead of the last resort, and this is immensely dangerous. Global debt soars, inflation creeps in, and many of the so-called supply chain disruptions are the result of zombification after years of subsidizing low productivity and penalizing high productivity with increased taxes.

Tension Between Fiscal and Monetary Policy

While events have thankfully slowed down in the UK with a new Prime Minister, very little has been resolved. Politicians will always provide lip service to the key importance of low inflation, the policy required are unlikely to increase their popularity. The reason that debt has grown so relentlessly for decades is that debt management has largely been neglected. This is the case everywhere, not just in the UK.

At the same time the standing of central banks is much diminished following their policy error in letting inflation get out of control in the first place. Furthermore, their capital position has weakened substantially following their trillions of bond purchases at the lowest bond yields in history and then this year the collapse in the bond markets making centrals banks, broadly and deeply, technically insolvent.

Central banks no longer have the ability to employ capital if that is needed. However, their fight to get inflation under control involves raising rates at a rapid rate to higher levels than for decades. This almost necessitates breaks in the economy to get the job done.

The Treasury department clearly understands this and is already moving actively in the background to prepare to provide support:

IMF FUNDING REQUIRED AS EMERGING MARKET COUNTRIES FACE CRISIS DUE TO DOLLAR STRENGTH

QE DURING QT?

DOLLAR WINDOW OPENS

The Treasury Secretary also heads the board of the Plunge Protection Team in the case of financial or market instability. As we saw during the Covid crisis, Fiscal Policies of off balance sheet “CONTINGENT LIABILITY” accounting to “juice” the markets if they were to fall significantly below critical support levels, could be employed again if necessary.

Investors may well need to follow the Treasury Secretary as much as the Fed Chair as we move forward.

Track Records Matter

It is always worth following great track records. It saves time and gets you the best information. The following three videos provide great insight as always from Roubini, Jensen, and Druckenmiller.

The room for manoeuvre, and the stability of the current system should not be taken for granted. Volatility has increased and is likely to continue to stay high. The outlook has rarely been this uncertain. Investment management needs “Best Investor” metrics and techniques as never before.

Market and economic events are moving fast at this stage. If you need a quick review of the issues that you may need to know about for your own circumstances, schedule a FREE consultation today.

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Chris Belchamber is an IRMAA Certified Planner

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