Is Inflation Overhyped? | Eric Basmajian

Episode Summary

Executive Summary: Eric Basmajan argues that macro markets are driven by a mix of secular forces (demographics, debt, productivity) and cyclical forces (growth and inflation momentum). He expects slower growth, moderating inflation, lower bond yields, a flatter curve, and a more defensive portfolio stance, favoring long-duration bonds and quality growth over cyclicals, while warning that labor and fiscal dynamics remain structurally weak.

Main Topics: Macro framework: secular + cyclical analysis (Priority: 5/5): Basmajan explains EPB Macro Research’s approach: combine long-term secular drivers like demographics and debt with short-term cyclical indicators to form actionable portfolio views. Long-term thesis: slower growth, lower inflation, lower yields (Priority: 5/5): He argues aging demographics and high debt reduce productivity and consumption over time, pushing both real growth and inflation lower and pressuring bond yields downward. Current cycle: growth peaking, inflation still elevated (Priority: 5/5): He says real growth peaked around March 2021 and has been declining since, while inflation has remained hot due to supply-chain bottlenecks and durable-goods price spikes. Inflation composition: durables vs. rent (Priority: 4/5): Basmajan emphasizes that CPI must be decomposed into components; durable goods inflation and rent inflation may offset each other, with durables being the key swing factor. Labor market and real income weakness (Priority: 5/5): He highlights stagnant labor-force participation, falling real disposable income, and weak private-sector income growth as evidence that the labor market is less healthy than headline unemployment suggests. Policy and liquidity: tapering, tightening, and yield-curve flattening (Priority: 4/5): He expects Fed tapering and broader global tightening to weigh on liquidity, flatten the yield curve, and eventually restrain nominal GDP and risk assets. Portfolio positioning: duration, defensives, selective growth (Priority: 4/5): He recommends overweighting long-duration bonds and defensive mega-cap growth, while underweighting commodities and cyclical equities in the current environment.

Key Arguments: Demographics and debt are the main secular forces: aging populations reduce consumption, labor-force growth, and productivity, which lowers trend growth and inflation. Short-term growth has already rolled over, with coincident indicators peaking in March 2021 and weakening each month afterward. Inflation is being driven more by supply-chain bottlenecks and durable goods shortages than by broad, durable demand pressure. Used cars and other durable goods were the dominant inflation driver, but that category likely has already peaked on Basmajan’s preferred six-month annualized measure. Rent inflation is likely to rise, but it should not be extrapolated mechanically into CPI because other components—especially durables—can offset it. Labor-force participation and employment-to-population ratios are more informative than the unemployment rate for assessing labor-market tightness and wage pressure. Fiscal stimulus can give a short-term boost, but its effects fade quickly; repeated debt-financed stimulus has diminishing returns and may even shorten the cycle. The bond market is not ignoring inflation; it is pricing lower future inflation and lower long-term real growth, consistent with a flatter curve and low long-run policy rates. QE and tapering matter more for financial conditions than for the real economy initially, but sustained tightening can slow money-supply growth and nominal GDP. In a low-growth world, scarce growth becomes valuable, so mega-cap tech and other durable growers should outperform cyclical/value sectors. Bitcoin is treated as a speculative liquidity-sensitive asset rather than a clean gold replacement; its correlation has recently been closer to equities, inflation, and steepening growth regimes. Inflation alone is not a reliable way to solve a debt problem in large economies because entitlements, trade retaliation, and indexed spending limit the strategy’s effectiveness.

Data Points: Six-month annualized inflation: 7.1% - Basmajan’s preferred measure showed inflation at the highest level in over 40 years. October CPI year-over-year inflation: 6.2% - Described as a 30-year high at the time of the interview. Durable goods inflation peak: ~20% annualized - Peak in June on his smooth six-month annualized measure. Durable goods inflation latest reading: ~16% annualized - Rose again due to used-car prices after briefly easing to about 14%. Long-term growth trend: ~1.8% - Pre-COVID trend for real disposable income per capita and broader real growth context. Real growth cycle length: 1.1 years up / 1.5 years down - Average duration of cyclical upturns and downturns over the last 25 years. CPI shelter weight: 33% - He notes rent is important but not the whole inflation picture. Durable goods share of CPI: ~10% - Used to argue that a big swing in durables can still materially affect headline inflation. Private domestic investment in structures and equipment: ~8% of GDP in the 1980s vs ~2% today - Used as evidence of declining productive investment. Government spending as share of GDP: ~20% in the 1960s vs ~40% after COVID (near 60% at peak) - Supports his argument that larger government size drags on long-run growth. Aggregate debt to GDP: ~150% in the 1970s vs close to 400% today - Used to contrast current leverage with the 1970s inflationary regime. Net national savings: 16% in the 1940s vs ~2% today - Explains why WWII-era deleveraging is not a good analog for today. Private sector savings spike during COVID: ~25% - Temporary rise that quickly faded back toward prior levels. Current savings rate: ~7% - Back near pre-COVID levels after stimulus effects faded. Long bond yield level mentioned: 1.79% - Referenced as a recent low where long-duration bond ETFs rallied sharply. Five-year rate: 1.25% - Used to illustrate how short-end rises quickly tighten financial conditions. Fed taper pace: $15 billion reduction in November and $15 billion in December - Initial taper schedule discussed during the interview.

Pivotal Quotes: "I try and marry the two and create actionable ideas and portfolio structure for investors that marries both long-term secular trends... and then cyclical economic trends." — Eric Basmajan: His description of the EPB Macro Research framework. "I expect that cyclical downturn in the rate of production and consumption to continue." — Eric Basmajan: His view on the near-term economic cycle and growth slowdown. "The long-term bond yields are basically saying that we're going to hang out here at a low level." — Eric Basmajan: His explanation of why the bond market remains anchored despite high inflation.

Implications: Listeners should expect a slower-growth, lower-yield environment with more volatility as the Fed tightens into weakening data. Portfolio positioning should favor duration and defensive growth, while commodity and cyclical exposure may need to be reduced.