Inflation Will Run Hot For The Rest Of The Decade, Says Vincent Deluard

Episode Summary

Executive Summary: Vincent Deluard argues inflation is not a temporary 2022 phenomenon but a secular force driven by deglobalization, aging demographics, labor scarcity, and the unwind of decades-long deflationary tailwinds. He expects inflation to settle around 4-7%, higher rates to persist, long-duration assets to struggle, and energy, healthcare, and financials to outperform.

Main Topics: Inflation as a secular regime shift (Priority: 5/5): Deluard argues inflation will remain structurally elevated because the major deflationary forces of the past 30 years are reversing, making 4-7% inflation the new normal rather than a temporary spike. Reversal of deflationary tailwinds (Priority: 5/5): He identifies three past forces behind low inflation—global savings glut, favorable demographics, and cheap migrant labor/China goods—and says each is now reversing, supporting higher prices and wages. Fed policy, 2% target, and financial repression (Priority: 5/5): He questions the sacredness of the 2% inflation target, argues it is politically chosen rather than economically ordained, and expects the Fed to eventually accept a higher inflation regime while appearing hawkish. Equities and the case for lower multiples (Priority: 4/5): Deluard expects the S&P 500 to fall meaningfully as higher discount rates and weaker earnings compress valuation multiples, with inflation and rates keeping pressure on long-duration growth stocks. Sector rotation: Holy Trinity portfolio (Priority: 5/5): He promotes a portfolio of energy, healthcare, and financials as a practical inflation hedge with strong valuation, yield, and resilience across inflation, recession, and rate-hike scenarios. Treasury market and duration risk (Priority: 4/5): He sees long-duration government bonds as vulnerable in a secular inflation world, citing the UK gilt crisis and broader sovereign-bond stress as signs the selloff could continue. Gold, Brazil, and commodity-linked opportunities (Priority: 3/5): He is constructive on gold as a hedge and especially bullish on Brazil as a beneficiary of commodities, high real rates, and potential future easing relative to global tightening.

Key Arguments: The main inflation drivers are not solved; supply-chain disruptions, China constraints, war effects, and geopolitical fragmentation still persist. Past disinflation came from cheaper capital, cheaper labor, and cheap goods; those forces are now reversing, making inflation more durable. Demographics are inflationary once large cohorts move beyond peak saving into retirement, because production falls while consumption and healthcare demand rise. A recession may happen, but it will likely be unusual and not enough to return inflation to 2%; inflation may only ease to around 4-5%. The 2% target is a relatively recent, politically adopted convention without deep economic foundations and can be adjusted if needed. Inflation between roughly 4% and 8% can coexist with strong growth and may help rebalance wealth from capital owners to workers. Higher inflation and rates should compress equity valuations, especially for long-duration growth stocks; earnings are also likely to weaken as costs rise. Energy, healthcare, and financials are positioned to outperform because they hedge the dominant macro risks: inflation, recession, and higher rates. Treasuries are poor hedges in an inflationary regime; commodities become the better diversifier for 60/40 portfolios. A higher-inflation environment may be painful for financial markets but socially beneficial by improving wage growth and broadening asset access for younger workers.

Data Points: Peak inflation: 9.1% - He said U.S. inflation likely peaked at 9.1% for this cycle. Expected inflation floor: 4% to 4.5% - He argued inflation likely falls no lower than around 4%, then stays elevated. Preferred inflation band: 5% to 7% - He repeatedly framed this as a plausible and even useful steady-state inflation range. Inflation-growth study: 3.8% average real growth - He cited his analysis showing real growth is stronger when inflation is 4%-10%. Inflation-growth comparison: 3.1% average real growth - He contrasted this with lower real growth when inflation is 1%-3%. S&P 500 target: 3,000 - His downside target implies roughly a 20%-30% decline from the interview period. Estimated EPS change: -7% - He expects earnings to decline next year based on rates, commodities, spreads, and dollar strength. Household net worth increase: $40 trillion - He used the post-2020 wealth surge to argue consumers still have balance-sheet support. Great Depression / Great Recession wealth loss: $8 trillion - He contrasted this with the recent $40T gain to argue the household balance sheet remains strong. Minimum-wage cost of one S&P 500 share: 4 days in 1982 vs 4 months today - He used this to illustrate how financial assets have become far less accessible to workers. Energy valuation: ~6x earnings - He described U.S. energy stocks as cheap relative to history and other sectors. Financials valuation: ~9x to 10x earnings - He cited bank valuations as attractive in his Holy Trinity portfolio. Healthcare valuation: ~15x earnings - He said healthcare is more expensive than energy/financials but still reasonable versus tech. Holy Trinity performance: +6% YTD - He said his energy-healthcare-financials portfolio was up despite a down market. S&P 500 performance: -20% - He referenced the broad market decline over the year to that point. Japan/Germany current account: Deficits in 2022 - He cited this as evidence the old global savings glut is fading. Boomer cohort milestone: Born 1946-1965; midpoint around 1955-1956 - He used boomer aging to explain the shift from peak saving to retirement spending. Mexican migration: About 10 million migrants in the 1990s - He framed this as a major deflationary labor shock that is no longer repeating.

Pivotal Quotes: "Inflation is actually the solution. It is the medicine that the global economy needs: inflation and financial repression." — Vincent Deluard: His core thesis on why higher inflation can rebalance debts, wages, and asset ownership. "The 2% target, it was bullshit all along. We made it up anyway." — Vincent Deluard: His blunt critique of the Fed’s inflation target as arbitrary and adjustable. "If you don't lose your job, you're fine." — Vincent Deluard: His argument that the labor market and household balance sheets remain strong enough to prevent a deep consumer recession.

Implications: Investors should expect persistent inflation, higher real-asset and commodity sensitivity, and ongoing pressure on bonds and growth stocks. Sector rotation toward energy, healthcare, and financials may outperform broad passive allocations.