The housing market is already on fire and inflation will soon follow, argues this former Morgan Stanley economist

The bond market has stabilized after a massive sell-off, which has reassured stocks. The technology-dominated Nasdaq Composite COMP,
+ 0.12%
has progressed for six of the last nine sessions, and the Russell 2000 RUT,
+ 2.29%
jumped 2.2% to bring the small-cap index’s rise to 35% since the US election.

Will the rest continue? Manoj Pradhan, formerly Morgan Stanley’s general manager in charge of the global economy and founder of Talking Heads Macroeconomics, said during a presentation held by fund manager Tabula Investment Management that inflation will warm up as the Federal Reserve expects it to cool. . , next year.

Pradhan argued that the breakdown of the Phillips curve – the traditional relationship showing that inflation rises as unemployment falls – occurred because of China’s entry into the global workforce. But he said demographics and the COVID-19 pandemic will fix it.

First, the demographics. The aging of the population of the US and the developed world will mean a loss of workers, and the aging of the population will also cause a surge in government spending. Pradhan also noted that caring for the elderly will be labor intensive. “We need technology to destroy jobs in other parts of the economy so that the labor that is released can be used to care for the elderly, with a similar skill level,” he said.

To the pandemic. Right now, he said, money supply signals are “the most extreme signals you have ever seen.” It has now not translated into inflation as the money circulation rate has collapsed and the savings rate has risen, closing both functions of consumers at home. Referring to the European Central Bank investigation, Pradhan said the rise in savings is ‘forced’ rather than ‘precautionary’.

As the economy normalizes, forced austerity will act as a delayed stimulus. Even now, the housing market is on fire and prices are on the rise all over the world. “This is a way of spending that can also take away some of that excess labor,” he said. But the rise in house prices is not reflected in official inflation indicators.

The Fed is already trying to address the challenge of upcoming inflation data which, in May and June, could show 3.5% to 4% year-on-year gains. “I’ll tell you that anything above 3.5% -4% will lead to a significant correlation breakdown [between stocks and bonds]because people haven’t really experienced inflation in a big way in the advanced economies over the past 30 years, ”he said.

“The real challenge will come in 2022, when a lot of spending will be in goods or housing, monetary aggregates will still be high as the rate accelerates,” he said. He expects the yield curve to steep further, and that if the Fed implements another Operation Twist or yield curve control, it will drive up inflation even further.

Return on assets will be harder to come by, inequality will diminish, but against a backdrop of weak growth, and central bank independence will come under increasing pressure, he predicts.

WeWork deal

WeWork, a shared office provider, has agreed to merge with dedicated acquisition company BowX Acquisition Corp. BOWX,
at a valuation of $ 9 billion. The Wall Street Journal reported that media startups Axios and The Athletic could merge and then go public with a merger with a SPAC.

The Ever Given container ship is still trapped in the Suez Canal, disrupting about $ 10 billion in trade every day.

L Brands LB,
+ 3.74%
increased its earnings outlook, citing sales trends expected to be driven by changes in consumer spending patterns due to government stimulus measures, a relaxation of COVID-19 movement restrictions, and other factors.

Personal income fell 7.1% in February – close to economists’ expectations – reversing much of the January 10.1% increase. Consumer spending fell 1%, while the PCE price index rose from 1.4% to 1.6%.

The goods trade deficit rose 2.5% in February, while inventories remained stable.

The Fed said the temporary limits on dividend payments and share buybacks will end after June 30 for most banks.

Another refreshment day?

US Equity Futures ES00,
+ 0.29%

pointed to a quiet start as the return on the 10-year treasury TMUBMUSD10Y,
rose to 1.67%.

Crude Oil Futures CL.1,
+ 2.36%
approached $ 60 a barrel, while the dollar approached DXY,
+ 0.33%
was stable.

Random reads

NASA is getting ready to fly a helicopter over Mars.

There’s nothing like the pandemic to inspire the contest for the all-important Barn of the Year.

Need to Know starts early and will update until the opening bell, but sign up here to get it in your email box once. The emailed version will ship at approximately 7:30 a.m. East.

Do you want more for the day ahead? Sign up for The Barron’s Daily, a morning investor briefing that includes exclusive commentary from Barron’s and MarketWatch writers.