A friend passes along this interesting interview with Peter Thiel, who runs a macro fund in San Francisco. (Macro funds are hedge funds that make investment decisions based on an analysis of global economic conditions, including the policy environment in various countries.)
Thiel presents what is rapidly becoming the mainstream view among Wall Streeters and finance pros: that many countries are headed for deflation. He discusses in general terms the factors that can lead to destructive deflation (fiscal austerity and private-sector deleveraging), as well as “good” deflation (technology-driven innovation that increases productivity and makes life easier to afford).
This is quite a sharp change from six months ago, when the prevailing conventional wisdom was predicting a 10-year T-note yielding more than 5% by the beginning of 2011. Instead, rates have fallen.
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Thiel suggests that many people are still very frightened of a big burst of inflation in the US, ignited by the Fed’s massive money-creation programs. I think that most people have now (quite rapidly) swung around to his view. And of course, you know I’ve been singing that tune for two years now.
Alan Greenspan, of all people, kicked up quite a fuss last week by taking a decidedly different view. He came out in favor of substantially higher government revenues, including a call to let all the Bush tax cuts expire at the end of this year. Because Greenspan is a central banker and actually knows what money is (unlike the vast majority of people), I’m reading this to mean that he that he fears that an economy-killing spike in long-term interest rates will come if we keep up the money creation. To call this a heterodox view today would be a strong understatement.
So far this year, professional investors as a group have completely misread the macro picture. I don’t know how Thiel is doing, but plenty of big funds run by really smart guys are only flat on the year. A lot of people factored in a strong economic recovery, and were stung when the economy stalled out.
The opposite view is starting to set in now, and it would be just like the market to pull a head fake and burn everyone again. I don’t expect a return to economic strength, but I do expect some commodity inflation, as the US becomes less competitive in global markets. You’re going to start seeing odd stories about how wages are stagnating, unemployment isn’t getting better, but prices for meat, milk and gasoline are inching upward.
Thiel makes just a hint of a point about the need for America to start innovating again. I’ve started thinking very hard about what it would take to bring about an economic and industrial renaissance in America. But it has to be driven from a direction that will put people back to work. We really can’t do that with people who have limited education and skills, unless we’re willing to sharply deflate overall living standards, or (equivalently) to restrict trade. (Look for the Democrats next year, driven by labor unions, to start pushing that incredibly destructive idea.)
This means we need to find new ways of working, and new things to work on (the job of healthy entrepreneurship), but we also need to solve the education problem. The teachers’ unions, for all the public and political support they enjoy, are preventing the needed change. It’s not too much to blame them in large part for lowering the living standards of a generation of young Americans.
A final interesting point raised by Peter Thiel at the end of his short interview relates to China: he mentions a growing consensus by western business people (including Jeff Immelt of GE!) that you just can’t make money in China, unless you’re the home team. Western companies are welcome to help develop Chinese markets and transfer their technology to Chinese firms, but they’re not welcome to enjoy long term success. A good friend of mine, who runs a very successful hedge fund, has been saying exactly this for more than 10 years now.
