Thanks for your insights as always into the markets.

I didn't fully understand what you meant by 'social media inflation' and wondered whether you could expand on this?

All the best

Eoin Treacy's view

Thanks for this question which may be of interest to subscribers. I’m pretty sure I said socially driven inflation but in an hour long broadcast I could certainly have been subject to a Freudian slip. The essence of the question is if technology is inherently deflationary and commodity use represents a fraction of its former influence on the economy, what will be responsible for driving a fresh inflationary cycle? 

I think this is about the biggest question there is in finance today. The global economy has been in a secular period of disinflation for nearly 40 years driven by technological innovation and globalisation. The result has been the evolution of emerging markets as a dynamic investible asset class as more countries adopt capitalist socioeconomic models and deliver on higher living standards for their people. This has been achieved by developed countries consuming more and in many cases running up debts and accumulating liabilities like pensions and social programs that have helped fund consumption growth. 

This model has exacerbated the gap between rich and poor. There are a large number of reasons for this but rather than engage in political diatribe lets simply focus on how companies compete. In a global economy capital will flow to the most attractive assets and locations based on a complicated formula of energy, labour, regulatory, environmental, transportation costs as well as considerations like skills, geopolitics and security. If regulations are lax in emerging markets and labour is cheap the way companies in developed markets compete is to come up with ways to skirt costly labour market laws and regulations. This article from Politico is well worth reading because it highlights just how pervasive this practice is. Here is a section: 

In some cases, the Katz-Krueger data confirmed what was already known about the labor market, such as that construction is a highly subcontracted industry; about a quarter of construction workers were contingent workers in 1995, a share that has stayed roughly constant over the past 20 years. But in many other industries, they found the curves had begun to bend sharply upward. Among “transportation and material moving workers,” a category that includes everything from taxi drivers to flight attendants, the share of contingent workers had doubled: In 2005, it was 9 percent; it was 18.2 percent by 2015. Among health care support workers like Diana Borland, it nearly doubled, from 9.5 percent to 17.9 percent. The share of food preparation workers in contingent work had quadrupled. And this trend wasn’t limited to blue-collar jobs: The rise in contingent work was as large for people with a bachelor’s degree as it was for those without a high school diploma.

It was also clear from the Katz-Krueger data that the shift to contingent work wasn’t driven by the rise of the sharing economy. Just 0.5 percent of workers are in the sharing economy, accounting for at most 10 percent of the labor market shift over the past 10 years. In other words, for all the concerns about Uber and other sharing economy companies using independent contractors to skirt state and federal labor laws, the shift toward these workplace arrangements predates those companies. They’re followers, not leaders.

And 

“Initially, I focused a lot on gig workers because here you have these hot new companies that seem to be transforming the traditional notion of work,” he said in an interview. “What I found when I dug a bit deeper … was this was the next iteration of something that had started in the 1990s where corporations decided that every function that was not core to their mission would be outsourced.”

This is an example of how the experience of many people with their work environment has changed over the last few decades and it has contributed to the disinflationary environment that has prevailed since the early 1980s. However, despite a lack of agreement in Washington on how to classify contingent workers the reality is these people vote. In 2016 they voted for tax cuts and paying less for health insurance. In the UK they voted for Brexit in an effort to get back more autonomy. In France they voted for Macron’s promise of an economic reboot. In Germany they handed Merkel a set back and boosted her opponents. These are symptomatic of a rebellion against the status quo. 

The rallying cry for all these people is they want more money. That is currently being manifested in a range of different populist, xenophobic, racist and isolationist but the common thread running through these themes is a desire for a better standard of living that is tangible. 

Technology is inherently deflationary and the commodity prices have to move a lot to create inflationary forces but social factors where voters move progressively further away from the middle ground represented by the status quo represent the clearest source of inflationary pressures. These factors are only just beginning to coalesce but they suggest politics is going to become even more polarised, bond yields are likely to rise and we will need to monitor equity markets for changes in leadership.