Rosenberg: From Inflation To Deflation
By DAVID ROSENBERG, GLUSKIN SHEFF
I have been laying out the groundwork for the next phase of this cycle, which is good news for Main Street even if not that great for Wall Street or my long-held belief in the longevity of this secular disinflationary cycle … which I think is now in its mature stage.
I think the people that write off the prospect of cost-push inflation are taking on a very myopic view. Inflation is a process, and it takes a long while to build. There is evidence that the consumer deleveraging cycle is largely over. Subprime auto credit is up 30% from a year ago. We are up to a 20% share of mortgages being originated with downpayments of less than 10%. CLO (collateralized loan obligation) issuance is back to 2007 levels. In the corporate space, fully one-third of high-yield debt issues this year have been centred in firms with the weakest balance sheets. At some point, money velocity and the money multiplier will stop falling. No doubt fiscal drag will take a chunk out of GDP growth in the near-term, but this too shall pass and the reality is that the aggregate supply curve (and this is true globally) has become increasingly inelastic. The pool of available skilled labour is shrinking rapidly and after five years of the weakest growth in the private sector capital stock, we are starting to see the lagged ill-effects on productivity growth. Potential non-inflationary growth had already been pared, in my estimates, to 1.7%. And the only way we could have experienced a drop in the unemployment rate in the past year from 8.2% to 7.4% in the face of sub-2% economic growth strongly suggests that we are now on our way to a potential non-inflationary speed limit of just 1%. Very European indeed.
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