The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Thursday, February 24, 2011

Is this the perfect inflationary storm?

Think about it:

  • We have the No. 1 and No. 2 economies in the world growing at above trend;
  • We have the biggest private investment boom in modern history;
  • We have full, and falling, employment;
  • We have a more rigid labour market than pre-2007/08;
  • We have had a sustained fall in productivity;
  • We have reduced immigration creating more skills shortages just when we need more skills;
  • We have irrefutable evidence of accelerating wages growth to inflationary levels;
  • We have an external oil price shock, which will raise inflation expectations;
  • We have an unprecedented commodity price boom, which has been very inflationary in the past;
  • We have imported core trading partner inflation;
  • We have an AUD that has possibly come close to maxing out;
  • Today we learned that in 2012 we will have carbon price inflation; and
  • We have significant internal price shocks care of tragic natural disasters raising headline inflation, and boosting consumer expectations of future inflation.

So what are the mitigants?

  • Maybe the AUD, but unlikely;
  • Maybe prolonged consumer conservatism, but this is unlikely;
  • Maybe China and India blowing up, but unlikely in the near-term;
  • Maybe a much tigher May budget (a possibility);
  • Maybe labour market flexibility, but unlikely;
  • Maybe productivity, but unlikely.

So you want to invest in assets that are (a) a good inflation hedge, and (b) a good hedge against a collapse in commodity prices and the resources boom, and which benefit from a radical reduction in high interest rates, when it comes.