The housing market is already on fire, and inflation will soon follow, argues this former Morgan Stanley economist.


The bond market has stabilized after a big selloff, and that has comforted stocks. The Nasdaq Composite dominated by technology

COMP

has advanced for six of the last nine sessions, and the Russell 2000

RUT

it rose 2.2% to bring the small-cap index’s gains to 35% since the US election.

Will the tranquility continue? Manoj Pradhan, former Morgan Stanley managing director in charge of the global economy and founder of Talking Heads Macroeconomics, said in a presentation by fund manager Tabula Investment Management that inflation will heat up just as the Federal Reserve expects it to cool. , next year.

Pradhan argued that the collapse of the Phillips curve, the traditional relationship showing that inflation rises as unemployment falls, came about due to China’s entry into the global workforce. But he said demographics and the COVID-19 pandemic will fix it.

First, to demographics. The aging of the population of the United States and the developed world will mean a loss of workers, and the aging of the population is also creating an increase in public spending. Pradhan also noted that caring for the elderly will be labor intensive. “We need technology to destroy jobs in other parts of the economy so that the labor it frees up can be reallocated to caring for the elderly, with a similar level of skill,” he said.

About the pandemic. Right now, he said, the money supply signals are giving the “most extreme signals you’ve ever seen.” It has not translated into inflation now, because the speed of money has collapsed and the savings rate has skyrocketed, both consumer functions are closed at home. Citing the European Central Bank investigation, Pradhan said the savings increase is “forced” rather than “precautionary.”

As the economy normalizes, forced savings will act as a delayed stimulus. Even now, the housing market is on fire, with prices rising around the world. “This is a form of spending that can also carry away part of that surplus labor,” he said. But the rise in house prices is not reflected in official inflation measures.

The Fed is already trying to tackle the challenge of upcoming inflation readings which, in May and June, may show year-on-year gains of 3.5% to 4%. “I will tell you that any value above 3.5% -4% will create a significant break in the correlations. [between stocks and bonds]Because people haven’t seen inflation really big in advanced economies for the last 30 years, ”he said.

“The real challenge will come in 2022, when a large amount of spending has been invested in property or housing, the monetary aggregates will remain high and the velocity will increase,” he said. He expects the yield curve to get even steeper, and that if the Fed implements another Operation Twist or yield curve control, it will push inflation further.

Asset returns will be harder to extract, inequality will fall, but in a context of weak growth and central bank independence will be increasingly threatened, he predicts.

WeWork Offer

Shared office provider WeWork has agreed to merge with special-purpose procurement company BowX Acquisition Corp.

BOWX

at a valuation of $ 9 billion. The Wall Street Journal reported that media startups Axios and The Athletic could merge and then go public with a merger with a SPAC.

The container ship Ever Given is still stuck in the Suez Canal, disrupting approximately $ 10 billion in trade per day.

Brands L

LB

it raised its earnings outlook, citing sales trends it expects to be driven by changes in consumer spending patterns stemming from government stimulus controls, a relaxation of COVID-19 restrictions on movement and other factors.

Friday’s data calendar includes personal income, consumer spending and the PCE price index for February, as well as preliminary analysis of trade and inventories.

The Fed said temporary limits on dividend payments and share buybacks will end for most banks after June 30.

One more day?

US Stock Futures

ES00

NQ00

pointed to a quiet start as the 10-year Treasury yield

TMUBMUSD10Y

rose to 1.67%.

Crude futures

CL.1

were approaching $ 60 a barrel, while the dollar

DXY

it was stable.

Random readings

NASA is preparing to fly a helicopter over Mars.

Nothing like the pandemic to inspire competition for the all-important shed of the year.

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