What If We Run It Hot...?

December 18, 2024

Sign Up for Kuppy’s Korner Updates

If you’d like to subscribe to Kuppy’s Korner, please enter your email

In the spring of 2022, Jerome Powell declared war on inflation. With the benefit of hindsight, let’s question what exactly he declared war on?

Was he upset that the bottom third were finally getting wage increases for the first time in decades?? Was he upset that cattle ranchers were earning an acceptable return after years of negative returns on capital?? Was he upset that oil firms were rapidly hiring and expanding, reinvesting their profits into new production?? Or did he hate that rural lumber mills were suddenly earning fatter margins than the homebuilding executives he met on the golf course?? Did he hate that steel prices screamed higher?? Or was he mad that long-haul truckers were now making as much as Wall Street bankers. Did Jerome Powell declare war on the CPI?? Or did he declare war on fly-over country, and the people who live there??

For over a century, the coasts have wanted cheap stuff, supplied by fly-over country. William Jennings Bryan’s “cross of gold” speech only codified what many felt as far back as 1896. This antagonism has continued since then, with the coastal elites mostly winning. Why is it that every time the denizens in fly-over start to prosper, the Central Bankers pull the plug on economic growth?? Why is it decided that these people will always be serfs on Blackstone’s Plantation?? Why can’t those guys have a decade of prosperity for a change?? Why does their success spell so much risk for the elites?? Why do we always seem to target anti-growth policies?? I get that the coastal elites mostly control the government, but if you continue to press down the crown of thorns onto the deplorables, they’re going to eventually revolt.

As I look at Trump’s victory, I see fly-over country emphatically declaring that their multi-decade recession, is finished. I see them asking; why can’t we run the economy hot for a change?? Why can’t there be 10% nominal growth, even if it leads to a higher inflation rate?? Why can’t fly-over country have their bull market, while unprofitable dog-walking apps finally have their bear market?? Why can’t the coasts pay a bit more for the things that they take for granted?? Why not let some of the money flow back to the center, and away from the coasts?? Why can’t we run this thing hot??

It’s easy to criticize his policies, but Trump is one of the few global leaders since the GFC to prioritize nominal GDP growth. In the past, governments wanted growth, but over the past few decades, many governments got bogged down with other priorities—priorities that often are opposed to economic growth. As I look around the globe, I see a lot of very unpopular governments, who are still trying to hold back growth. Interestingly, I don’t think those guys will be governing when their election cycles come due.

Pundits like to survey voters and credit consumer inflation with a recent increase in outsider ‘populist candidates.’ I think that’s an asinine conclusion. Establishment Western politicians haven’t been getting voted out due to inflation, they’ve been voted out because they took nominal GDP growth and smothered it. Even worse, they brought in millions of illegals who tamped down wages for the bottom third, while bringing crime and chaos to those communities. People are upset that the price of eggs tripled, but they’d ignore that, if their wages kept ramping at a faster rate. Look at the 2022 mid-terms, where an unpopular sitting president picked up seats. That’s normally unheard of, but voters took their cue from economic growth. Over the subsequent two years, voters didn’t reject inflation (which incidentally slowed), they rejected policies that tamped down on economic growth. They rejected austerity.

Do you remember the Tea Party?? Why are they not a thing anymore?? That’s because they wanted balanced budgets, and their policies would have reduced nominal GDP. Do you hear about balanced budgets anymore?? Of course not. Most voters are personally over-levered. They want inflation. They want nominal GDP. They want to see economic progress. They don’t care about the moneyed class and their desire for reduced interest rates—many voters cannot even qualify for personal loans. The voters don’t care about the cap rates on commercial real estate, they want governments to grow the economy. After a decade of moribund growth following the GFC, a wave of post-Covid stimulus opened their eyes to the possibilities of nominal GDP growth. 2021 and 2022 were great for fly-over country, and they want those good times back. They didn’t even realize that this was an option. Now, they want leaders who’ll promise to renew that period indefinitely.

America often leads the rest of the world. After a month of listening to Trump, and those whom he has appointed to various cabinet roles, it’s difficult to discern what his economic policy platforms actually are. In fact, most of his best articulated plans are contradictory. It’s as if there’s no plan. So, let’s go to First Principles here—what do we know about Trump?? He wants to cut taxes, cut regulations, and hopes that DOGE can find enough savings so that they don’t have a Liz Truss moment. He plans to run it hot. White hot. Trump wants nominal GDP growth, and he doesn’t care if our fiscal situation looks like Brazil’s. Everything else, from tariffs, to the Dollar exchange rate are secondary. He just wants it hot.

Now look at the other large economic blocks globally. No one has a clue what Xi is thinking. Maybe he really has a thousand-year plan, but without economic growth, he’s not going to get there. Japan finally seems to be coming out of their funk, after wasting three decades trying to make it worse. They’re clearly on a pro-growth path, no matter what happens to the currency or the government’s fiscal situation. Then you have Europe, where they’ve spent a decade fighting carbon to try and improve the weather. As recent elections have shown, the average voter doesn’t care about the jihad against molecules, they care about nominal growth. In multiple European countries, we’ve seen the so-called ‘far-right populists’ do well in the elections, only to have every party collude, and limit their ability to rule. Voters hate this, and I’m pretty convinced that the next cycle will see pro-growth candidates win decisively. We’ll look back and laugh at the carbon cultists. Europe wants to be free of Brussels. Maybe AfD and Marine Le Pen have very different policy positions on how to grow their respective economies, but at the core, these are pro-growth candidates. They’re selling something that’s seductive—especially to a continent that has been in a funk for over a decade. This isn’t about the ascendency of the of the right—remember, the Tea Party came from the right, and disappeared just as fast. This is about economic growth.

Now go to South America, who are the leaders that are most respected?? Bukele and Milei. Who does everyone want to replace their current leaders with?? Strong-willed guys, who are doing stuff. Those two inherited terrible hands, but they’re doing the best they can. What happens when Brazil, Chile, Colombia and Peru all swing hard-right in the coming elections over the next 2 years?? Have you seen the approval ratings for Lula, Boric and Petro?? South America is done with the Socialists. What if pro-growth candidates take over??

We’ve lived through a strange three years after Covid. First, governments stimulated too much, then they panicked over the resulting inflation. I don’t know about you, but a bit of inflation actually felt good for the economy. Maybe the wage growth screwed with Blackstone’s IRRs, but for the average worker, it felt good to get wage growth, and a bit of inflation against fixed personal debt levels. For the first time in decades, fly-over country got a taste of the economic growth that us on the coasts take for granted. Now, they want more of that.

Instead, the response to an increase in nominal growth, was a dramatic spike in interest rates, and a multi-faceted war on inflation. What if inflation is the cure for what ails us?? What if the over-indebted Nation-State needs a bit more inflation?? What if the coastal elites need to share for a change??

I don’t invest based on what I want to happen, I invest on what I see happening. I see the growth candidates winning, and the prior generation; the Deflationists, the Malthusians, the Obstructionists, and the Socialists getting trashed in the polls. Just this week, we saw Trudeau effectively shown the door. He hated economic growth, unless it was yet another condo tower in Toronto—that’s not real growth.

This is a global trend, and one by one, the anti-growth candidates are getting turned out of power. Even Xi seems to be getting with the program, and starting with a bit of stimulus.

Ever since I got into finance, they taught me that inflation is the cruelest tax, as it is the most regressive. What if for a change, the bottom third experiences wage growth, and us hedgies have to pay a bit more for our gardeners?? What if inflation is actually a tax on the wealthy?? Our profit margins and equity multiples compress, while our personal expenses go up.

I am still torn on the answer to the question of what’s best for society. At the same time, I’m increasingly convinced that my view doesn’t matter. We’re going to get inflation, whether I like it or not. The question really is, will governments try to tamp down on it, and buy a few more years for their over-levered buddies in finance?? Or will they embrace it, through embracing nominal GDP growth.

As I scour the global polling data, it seems as though the peasants want to give nominal GDP a chance. The candidates promising nominal GDP are all in the lead. This science experiment is now unfolding. Each recent election outcome seems to prove that change is in the air, and it’s a global phenomenon. America often leads. It seems as though Trump wants to run it hot. What if everyone else follows him??

I know that Trump wants to be seen as the bull market president, but MAGA is not a bull market set of policies. Sure, he’ll be great for some industries, but those are the industries that are beaten down and unloved. He’ll create bull markets where there have been epic bear markets. Meanwhile, accelerating nominal growth, along with high interest rates, are terrible for the sorts of businesses that are dominating the markets today. What if 2022 was a dress rehearsal for what the rest of the decade looks like?? Think back to what worked then, and what didn’t work. I think we’re about to have an inflection back to the strategy book of 2022. If so, we’re going to catch a whole lot of investors offsides, because no one is ready for a world with accelerating nominal GDP growth.

I keep asking myself, what if we simply run the world hot for a change….

DISCLAIMER

Information or statements provided in this blog (“Communication”) are opinions of the author and may not represent the opinions of Praetorian PR LLC or its affiliates (collectively, referred to as “Praetorian”). Furthermore, the information is for educational and entertainment purposes only and does not represent investment advice. No information is warranted by Praetorian as to completeness or accuracy, expressed or implied, and Praetorian assumes no obligation to update or revise such information if the information becomes inaccurate or obsolete. Certain information may be based on third party sources and, although believed to be reliable at the time of publication, has not been independently verified and Praetorian is not responsible for third-party errors.

The investments discussed herein are not meant to be indicative or reflective of the portfolio managed by Praetorian but rather meant to exemplify the execution of certain aspects of the investment strategy of the author or Praetorian. While these examples may reflect successful trading, not all trades are successful and profitable. As such, the examples contained herein should not be viewed as representative of all trades made by Praetorian or the author. Nothing set forth herein shall constitute an offer to sell, or a solicitation of an offer to purchase, any securities.

External links, if any, may re-direct you to a privately-owned web page or site (“site”) created, operated and maintained by a third-party, which may not be affiliated with Praetorian. The views and opinions expressed on the site, other than those presented by Praetorian, are solely those of the author of the site and should not be attributed to Praetorian. We have not verified the information and opinions found on the site, nor do we make any representations as to its accuracy and completeness as to the third-party information. Further, Praetorian does not endorse any of the third-party’s products and services, or its privacy and security policies, which may differ from ours. We recommend that you review the third-party’s policies, terms, and conditions to fully understand what information may be collected and maintained as a result of your visit to this web site.

FULL DISCLAIMER

What If We Run It Hot…?

Sign Up for Kuppy’s Korner Updates

Sign Up for Kuppy’s Korner Updates

Sign Up for Kuppy’s Korner Updates

Gas Stimmys…

The Fed Is Fuct Part 3

Hey JOE–Where Ya Goin With That Land Over There…