DANIELLE DIMARTINO BOOTH: What in your mind could possibly ignite inflation?
Because it's the one thing that nobody is expecting.
We're all expecting wash, rinse, repeat.
More deflation next time there's a disruption of any kind, and again, every central bank
comes riding into the rescue with more stimulus.
CHRISTOPHER COLE: More stimulus-- so look at looking back at-- there have been other
cycles across history that are like an Ouroboros eating its own tail.
If we take this beyond just short volatility, we can think of it as part of the entire debt
deflation cycle.
So this idea that you start out with something good, you start out with real economic growth,
technology, and demographics, and that leads to growth.
And fantastic-- you're growing.
The economy is growing.
It's fundamental growth.
At a certain point in time, the fundamentals get stretched and we become reliant on fiat
devaluation and debt expansion.
DANIELLE DIMARTINO BOOTH: So think of the baby boomer generation generating genuine
economic growth, and then they're starting to move to spending less.
And how do you fill that gap?
CHRISTOPHER COLE: Exactly.
So to this point, we start out in this framework.
It's in the period of 1984 to 2007-- one of the most incredible periods of asset price
growth and asset appreciation growth in not just American history, in history period.
90% of the returns of a 60-40 stock-bond portfolio came from the 22 years between '84 and 2007.
Just 22 years drove 90% of the gains of that portfolio over 90 years.
DANIELLE DIMARTINO BOOTH: I probably couldn't count on one hand the number of investors
who have been around since before 1984.
CHRISTOPHER COLE: Exactly.
The average investment advisor is 52 years old.
They were a kindergartener during the stagflationary period of the 1970s.
So you have all these baby boomers, 76 million baby boomers-- largest generation in American
history.
They're teenagers right into the devaluation of gold in the 1971.
That is driving a tremendous amount of inflation at that point in time.
Interest rates go up to 19%, and then these baby boomers, 76 million of them, enter the
workforce in the early '80s.
And they start making money.
They start making money, and they start spending.
They start investing.
So you have baby boomers coming on in.
Then you have a trend towards globalization, so we're able to export our inflation overseas.
You have a technology boom as well.
And then, interest rates begin dropping.
DANIELLE DIMARTINO BOOTH: Oh, yes.
CHRISTOPHER COLE: So and-- DANIELLE DIMARTINO BOOTH: May he rest in peace, Paul Volcker.
CHRISTOPHER COLE: Exactly.
And as if that's not enough, taxes start coming down.
So you have this once-in-a-generation, once-in-several-hundred-years economic boom, asset price boom that occurs,
driven as baby boomers come into the workforce, begin savings, enter into their prime earning
years.
But now, those boomers are going to be retiring.
They are going to be drawing $20 trillion dollars out of markets instead of putting
that into markets.
This, obviously presents a tremendous deflationary force.
So I'd like to think about this as a snake.
If we take the snake metaphor and we pull it out, it's not just short volatility.
It is almost like a snake devouring its own tail as part of a business cycle.
The snake is eating prey and naturally compressing inwards through secular growth.
And that's healthy.
But towards the end of the secular growth cycle, that snake relies on financial engineering,
excess leverage, and begins eating its own tail.
And that is where we're at, I would say, in the cycle right now.
And you've written beautifully on this about some of the debt problems out there.
Currently, we're at 48% debt to GDP, highest corporate debt to GDP, highest level in American
history.
DANIELLE DIMARTINO BOOTH: You tack on-- you aggregate non-financial, we're at 74%.
CHRISTOPHER COLE: 74%.
DANIELLE DIMARTINO BOOTH: Unheard of numbers.
CHRISTOPHER COLE: And what are we doing with this?
What are corporations doing with this debt?
They're issuing debt to buy back their own shares at a trillion dollars a year.
And then institutions are funneling that in in order to-- they need to find ways to generate
yield absent any fundamental growth.
So we had a year like last year, where there's no actual earnings growth, but it's all multiple
expansion driven by share buybacks and speculation.
So this is-- we're at this end of the cycle, where the snake is devouring its own tail.