AIMA Canada presented its 8th annual luncheon debate on May 25 at The National Club in Toronto. The tongue-in-cheek debate looked at which risk investors should be prepared for in the next few years: inflation or deflation.
Hubert Marleau, co-founder of Palos Management in Montreal, argued for inflation and Derek Holt, vice-president of Scotia Capital Economics in Toronto, took the deflationary view.
“There’s no doubt in my mind we have entered into an inflationary era,” said Marleau.
The consumer price index (in the U.S.) is over 3% and is accelerating, and import prices are up 10% and have been accelerating quickly in the last six months, he explained.
We’ve got a situation for the debasement of currency. And a sick and weak currency always brings about inflation, he added, pointing to historical evidence such as the French franc and the British pound after World War II.
And, there’s an inflationary bias in economy, he argued; there’s no way the federal government is going to accept defaulting.
Marleau said there are three ways out of deflation:
- grow out of it and export more;
- default (but the U.S., Marleau maintains, is not going to do this); or
- inflate yourself.
“Don’t believe either of us,” Holt laughed when he took the podium. Arguing in the deflation camp, Holt said of the U.S. monetary policy that he doesn’t see what the federal government is doing right now as inflationary.
Asset bubbles are popping up, he said, pointing to the housing bubble we have in Canada. There are also housing price bubbles in Australia and China. We’ve had “too low for too long” issues in the housing market, Holt said.
Holt added that Canada needs a colossal policy error, which is not impossible—if it’s a policy error on diminishing pricing power across many sectors.
More likely, Holt said, the emerging markets will consume more domestic products, and growth and inter-regional trading will become more important.
Over the next 10 to 20 years, as emerging markets trade more aggressively among themselves, that will take up global product demand, he explained, resulting in a policy problem for the developed world, as it will pay more for gas and food.
Holt also argued that the U.S. needs a “massive tightening” in the job market. Which means, employing everyone to get a run up in wages and more pricing power to absorb the price shock. But that’s not likely.
Once the presenters had their chance for rebuttal, the audience voted by show of hands to see who “won”: inflation.
But Marleau added quickly, “I’m really not on the inflation side; I’m probably more in the middle.”