Happy 2024.
As I look out to the year ahead, there's only one question on my mind. I think it's the only one that matters for 2024 and beyond:
Will we return to the 2010s regime of low inflation and low rates?
Virtually every market in the world hinges on the answer to that question.
In 2023, markets swung between both possible answers.
Lately, markets have been signalling a return to the world of low rates and low inflation. It's something that's kicked off a screaming rally in equities and bonds along with a flight out of US dollars.
But only eight weeks ago the market was in a very different mood, fretting about stuboorn inflation, high rates and government debt.
You can certainly see which one markets like better and even if low rates and low inflation means low growth it also means high leverage and that's something this market is infatuated with. The 2010s playbook is also a familiar one.
I think we're ultimately still in a low inflation world and the trends at year-end 2023 extend through 2024 and beyond but it's not a sure thing.
The two big risks to inflation are:
- Wage gains
- Rising commodity prices
Either of those could easily filter back through into inflation, causing central banks to revert back to a hawkish stance.
However the big picture still features some deflationary tailwinds:
- Globalization continues, albeit at a slower pace
- Automation will continue to lower costs and enhance productivity
- AI is undoubtedly deflationary
In the longer term, there's a great debate about whether aging demographics will be inflationary or not. The conventional wisdom is that it will be disinflationary, with many pointing to Japan as a prime example. However I would be careful about drawing any economic conclusions from Japan on any front. There's a good argument that Baby Boomers will spend far more in retirement than other cohorts and will keep the jobs market perpetually tight.
