Mailbag: Fisher Investments Answers Your Questions on Wages, Inflation, Investor Sentiment & More

Transcript

Ken Fisher:

Let me just make this real simple, because I learned this stuff when I was a kid. Inflation comes from too much money chasing too few goods that come from central banks. Central banks do a lot of stupid stuff all the time. People send in questions and I always enjoy responding to them. I feel free to do that. You can just send them to our website—fi.com. And the reality is, you know, I call this the Mailbag. And I just try to give fast answers to each one.

So, the first one says, if we aren't going back to lower prices (inflation) when and how will wages catch up? That's a question that people always struggle with. And there's an actual fairly sort of maybe a little bit simple answer to it. When I was a young guy, a teenager in the 1960s, legendary economist Milton Friedman proved, which has been true ever since and no one believes, that inflation happens first—wages catch up later. That's always been true. People will say—and they're wrong— well, when wages go up, that's going to push future inflation. No, we've got a long history of inflation. We've got a long history of wages.

And we can say simply wages follow inflation; inflation doesn't follow wages. Is the time lag consistent all the time always? No. But the lag is. So, what we're seeing now, actually, is inflation on a global basis that's running lower than in America and at about just under 3%. Down from where it was, where at the peak, it was higher outside of America and inside of America. The fact is, with inflation down, wages are actually accelerating as we speak and will continue to accelerate until they've caught up. But exactly at what rate? That can't really be determined. In the long run, wages tend to catch up with inflation. The inflation doesn't tend to catch up with wages. It's always been that way. Will be longer than the rest of my life and probably longer than the rest of years.

So, there's one. What are your thoughts on the job market for the rest of the year? Well, I'm not going to be looking for one if that's your question. I hope I still have the one that I have. But I say all these stupid things, so maybe you don't think I should. But will there be job growth? Yes, there will be job growth. The fact of the matter is the stock market is a leading indicator of the economy. The economy is doing well and has had job growth, and since the stock market's leading indicator of the economy, you'll get through the rest of this year with job growth at a minimum.

And the stock market has already told you that by being a rising bull market this year, and exactly how much job growth, well, that's speculative, and in what parts of the economy, well, that's to be debated. But the fact of the matter is, we still remain in a world where if you're an able-bodied, employable person, on a broad basis, it's not that hard to find a job compared to most times.

Do you think the 2017 tax cuts set the stage for inflation? Or was it predominantly supply chain disruption in 2021 followed by government stimulus?

I think all that's nut job stuff, I think that's all wrong. I don't think it's any of that stuff. Let me just make this real simple, because I learned this stuff when I was a kid: Inflation comes from too much money chasing too few goods. That comes from central banks. Central banks do a lot of stupid stuff all the time. They don't mean to do stupid stuff. It's just inherent to being a central bank. And the fact is, the inflation that you're feeling came from. The US central bank and global central banks increasing the quantity of money drastically in response to Covid, which was a stupid thing to do since the government had locked down business. And then from that, too much money chasing too few goods creates the inflation. The other things are just happening at the same time.

Government spending? Well, let me just say that if the government spends money, we're going to pay for it one way or another, but sometimes, the central banks create money that offsets the government spending, sometimes they don't. But it's the creation of the money by the central banks that creates the inflation, not government spending. Otherwise, we just make interest rates go up or we make taxes go up, or both. When the government is spending money, they either borrow for spend or they tax for spend, but in and of itself, is not inflationary, despite many, many, many, many people thinking it is. It's just wrong. And likewise, tax cuts don't create inflation. They just create more government debt, which creates potential pressure on interest rates but don't create inflation unless the central bank monetizes by increasing the quantity of money.

It's the central banks of the world increasing the quantity of money. Now, I just touched on another point that's important to know. Inflation today is a largely global event. It is not so much other than small single countries that are backward torpedoing themselves in some inflation spiral, like let's say, Pakistan's had in the last couple of years. On a global basis, if you just think of the major blocks of economies around the world, they tend to have rising and falling levels of inflation at similar times as central banks tend to offset each other. But it's still the same source. It's the money creation in big major blocks of the economy that create inflation there, that then ripple around the world to create a form of, if you will, averaging of all those major economies.

They create the average global rate of re-export inflation overseas from America, Europe exports inflation. The fact of the matter is, most all the stuff we've got one way or another that's made, is made in multiple countries today and is not mostly pure from one single country. And so, the inflation ripples around the world. And that's been more true longer than most people think it is. But it's still coming from central bank creation of more money. Too much money chasing too few goods. The market reacts short term to inflation movements. Does the equity market correlate with inflation long-term? Pretty much so. The fact is pretty much so.

Time lags vary, but in the long term, stocks are a price. In the long term, stocks are a price that reacts to the price of inflation, of the stuff they make, of the stuff they use to make the stuff, whether it's goods or services. And so, yes, in the long term, stocks tend to not in the short term, but in long term, stocks tend to adjust for and include inflation and more.

How do you see the average portfolio sector and/or industry allocation shifting as we begin to see Templeton's euphoria beginning to reveal itself? Do we stay invested where we are or do we reshuffle?

Whoa whoa whoa whoa whoa whoa whoa whoa whoa whoa whoa, wait a second. Who said we're entering euphoria? I never said that. In fact, you know, I've just spoken here this month on sentiment, and I think we're not in pessimism anymore. Going back to John Templeton. Pessimism. Bull market borne on pessimism, grow on skepticism, mature on optimism and die of euphoria. We're a long ways away from euphoria. We're someplace straddling skepticism to optimism. Maybe early optimism, that's still a long way away from euphoria.

So, you know what you do? You ask me this again when we get closer to euphoria. Right now, as I've said, I think we're in a period where having had growth lead for a long time, which I've been a big advocate of, as 2024 progresses into 2025, we're going to begin to see like a toggle switch, not an on-off light switch value increasingly becoming stronger in the marketplace while growth not being weak. But, be that as it may, I do not see us as anywhere close to that point where you worry about what do you shift to in euphoria, because we're not in euphoria, we're not close to it yet.

And then finally, my last one. How can gold act like a highly volatile stock the way you say it does when gold only goes up 15% of history and stocks go up over 70% of history? Please explain. That's an easy one. It's an easy one. It's just the way you frame the thing. Gold is a single thing. There's just gold. Gold is gold. Gold is gold. Taylor Swift is Taylor Swift. Joe Biden is the president of the United States. Might not be come 2025. These are all things you can say. They are or they aren't. Okay.

Stocks are plural, not singular. They're stocks like this, stocks like that, stocks like the other. And the stock market is all of them there together as one thing averaged out. The stock market rises most of the time, but while the stock market's going up, some real volatile ones are going down. When the stock market is going sideways for a long time, some real volatile ones are going through the roof. Individual stocks vary greatly from the total index. The fact is, the market as a whole is averaging all those stocks because stocks is plural, gold is singular. That's the difference. Thank you very much for listening to me.

I hope you found this month's mailbag useful and educational. Feel free to send in all the questions you want. I'll try to answer them next month or the month thereafter. I appreciate you listening. Thank you.