Mercer actuary David Knox says the data used to determine the old age dependency ratio is “totally out of date” and overstates the severity of the problem.
From their inception, SMSFs have always attracted more than their fair share of criticism. Now it’s an ageing membership that’s being used to restrict their numbers.
The 2021/22 Inflation Mirage
We believe the important investment factor for 2021 will be managing the inflation scare, followed by its likely disappointment.
Nucleus Wealth spent the month of January shifting into stocks and bonds that will protect investors more if inflation expectations rise.
January trades included selling consumer staples and growth stocks and buying value stocks like travel, banks, cyclical industrials and energy.
While rising inflation expectations were a minor feature in January, February markets reflected higher inflation expectations and we expect this to continue through the next 12-18 months.
Inflation spurt will likely be temporary
In many countries, “extend and pretend” has replaced the threat of bankruptcy as someone who can’t pay their rent is not evicted but allowed to accrue debt. Don’t foreclose on those who can’t pay their interest. Instead, build-up their interest payments into a larger debt burden.
The end game of this practice will be a cohort of zombie consumers and businesses. Weighed down by debt burdens too massive to ever pay off, but supported by interest rates low enough to keep them from defaulting.
Policymakers have decided on “zombification,” that is, limit bankruptcies; increase debt; and never raise interest rates again. It doesn’t make for a healthy economy, but it limits short-term pain that appears to be the current goal of most politicians.
This zombification is inflationary in the recovery phase but deflationary soon afterwards as over-supply swamps demand. We are, therefore, suspicious that beyond 2021/22 we will enter a new inflationary cycle, as some have posited.
For almost the past 15 years many economists have been forecasting a dramatic return to inflation driven by central bank largesse. The most fearful of these suggest that inflation is an inevitable consequence of quantitative easing and that Weimar Germany/Zimbabwe-style hyper-inflation is not far off.
So far, they have been wrong.
They are about to have their day in the sun, or at least a few hours on the beach: inflation will bounce hard over the next six months, especially in the US on the back of a number of factors, including:
• Shortages from supply chain disruptions and lockdowns
• Structural changes in consumption following COVID
• Structural changes in supply chains following COVID
• Inventory cycle rebuild
• Government stimulus giving money to people who aren’t working
• The increased minimum wage in the US
• Lower US dollar
The value stock rotation lives and dies on this narrative. It can continue with inflation and rising market interest rates or end without it, culminating in a return to growth stocks.
At Nucleus we are positioning for a run to Value that lasts for 6-12 months. For it to continue, we will need to see more policy innovation, especially the putative integration of fiscal and monetary policy worldwide.
For the past dozen years inflation has disappointed, continually falling below central bank expectations, for many reasons, including:
• Low expectations
• Technology advances
• Globalisation leading to a flatter supply curve
• High levels of debt
• Inequality
• Falling lending growth in China
With this in mind, we believe the important investment factor for 2021 will be managing the inflation scare, followed by its likely disappointment.
There are a number of factors that could extend the duration of the elevated inflation, the chief being government stimulus. We are expecting it to be six months or more before it is time to switch back into the stocks that are resistant to deflationary pressures.
