Charts of the Month - November '22

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The Hollowing Out

Paraphrase a bit from a recent Dr. Ben Hunt interview about this chart… something he calls the ‘Hollowing Out of Markets’.

I suggest you listen to the interview to get the full context, but here are my notes below:

• The chart represents the relationship between businesses (GDP) and those with money (wealth holders).
• It illustrates the divide between how we’ve grown our economy, and how we’ve grown our financial assets – the gap between the two as well as the slope disparity (the wealth line growing at an increasingly higher rate over the GDP line) is what is different about today.
• The almost 1:1 relationship began to break down during the Greenspan era, when global central banks decided, consciously, to keep interest rates lower than they should. Greenspan wrote about this in his memoir - “We did it because we wanted people to be richer”.
• They (Greenspan, the subsequent Fed chairs, and other global CBs) believed and then eventually realized that they could continue this benevolence, keeping rates artificially low, without creating inflation.
• And he/they were right, on paper. The problem was that each successive chair went from giving a little to giving a lot (lower and lower rates, more and more QE), causing the rate of increase in wealth to significantly outpace the growth in the economy.

The period from the mid-1980s to the Great Financial Crisis, where we saw large productivity increases without inflation is a time called ‘The Great Moderation’. Central banks were able to keep rates low, causing asset prices to rise while the economy grew, albeit slower than asset growth, because of one ten-dollar word: globalization.

In this context, all globalization means is that money flowed to countries with cheap labor and where companies could build factories for cheap to make stuff that was... cheap (i.e. the key focus was to compete on price). That’s what kept inflation low for 30 years. (This is still paraphrasing so I’m sure if asked directly, Ben would also admit that the growth in technology and its deflationary effects had an influence as well).

But now, globalization has begun to reverse:

After WWII, we saw an exponential rise in goods and services traded around the world, culminating in China’s entrance to the WTO in 2001.

But, Ben argues, COVID has officially broken the trend. Our own Jacob has written, tweeted, and spoken about, across multiple platforms, the rise of the multipolar world. And this chart puts all of this into perspective.