Last updated on June 20, 2023
With Naomi Fink, Europacifica Consulting
Naomi Fink, founder and CEO at Europacifica Consulting in Los Angeles, joins the podcast to discuss her view that inflation will prove more elevated and persistent than market participants are anticipating — and how and where this impact will be felt.
Content Highlights
- Inflation caught investors by surprise and investors could be forgiven for thinking inflation will drop again. But inflation will more likely normalize around a higher rate (3:15);
- There are multiple reasons for this: reversal of globalization, limits to technological advancements, supply shocks, geopolitical unrest, and labor supply shortages, to name a few (4:09);
- Where does this leave Fed policy? (6:03);
- Retailers have been reporting a consumer pullback on big ticket purchases: business cycle or inflation? (13:52);
- Companies will need to innovate to deal with more persistent inflation and a skills shortage. Those that don’t will be left behind (16:34);
- AI is not a cure-all and may in fact be mostly hype (18:23);
- Background on the guest (24:53);
- Japan and Japan stocks (28:36);
- Social security cost of living adjustments are not keeping up with inflation. The impact (33:59);
- What options do retirees have to maintain their purchasing power on fixed income? (38:17);
- Financial literacy is vital but may be a double-edged sword… (46:28).
More Information About the Guest
- Website: Europacifica.com.
- LinkedIn: @EuroPacifica-Consulting.
Quick Highlights From Our YouTube Channel
Transcript
Moderator 0:02
Welcome to the contrarian investor podcast, we give voice to those who challenge a prevailing sentiment in global financial markets. This podcast is for informational purposes only. Nothing on this podcast should be taken as investment advice. Guests were not compensated for a parent’s, nor do they supply payment in order to appear. Individuals on this podcast may hold positions in the securities that are discussed. This is our urge to educate themselves and make their own decisions. Now, here’s your host, Mr. Nathaniel E. Baker.
Nathaniel E. Baker 0:36
Naomi Fink you are the founder and CEO of Europacifica Consulting out there in Los Angeles, California. Thank you so much for joining me contrarian investor podcast today. And I’m very excited because I’ve known you for a long time. But I’ve not had you on the podcast yet. But you have some rather contrarian views on inflation. And inflation is something we hear the narrative that it is coming down. And that soon the Fed will be able to cut rates will have to cut rates because of a slowing economy. But you don’t quite have that view, at least when it comes to inflation. You view inflation as much more persistent. Tell me about that?
Naomi Fink 1:24
Certainly. Well, I think inflation is something that perhaps caught markets and households and investors by surprise, and perhaps it’s becoming more than norm to see it sticking around. But traditionally, inflation expectations have been very persistent. Recently, in the last few years, we’ve had very low inflation expectations. So I think it’s natural. We’ve had very low inflation, and that gave rise to low inflation expectations. And so I think it’s natural to think that inflation is going to abate, and we’re going to go back into a very low inflation regime. I disagree. I, on the other side, I don’t see any hyperinflation expectation, but I think that’s that we’re going to normalize around, you know, a positive rate of inflation, which has been in question over over the past few years. And I think it’s no longer going to be in question. I think there are several reasons from a macroeconomic perspective, why we’re not going to see a sudden return to an ultra low inflation environment. One has been the reversal of globalization, at least partially, we saw a decline in prices on trend ever since China joined the WTO at the start of the millennium, and there was a lot of downward pressure on prices with with globalization and that at least partially, has has started to reverse in some of it’s not probably not going to come back anytime soon. Another aspect is that, well, we heard about Moore’s Law for such a long time. And now it appears to be something of the past. And I’m not saying that there’s not going to be any new technological innovation. I think there is. But there’s, it’s going to be a challenge to find it. I don’t think that that just ever cheaper, ever larger capacity, semiconductors is going to be a very steady, dependable source of downward price pressure for producers especially. So I think that there are some that there’s also probably a lot of interim, maybe not long term, but geopolitical pressures that are supply shocks, unrest that that are likely to keep prices on, on the rise rather than the decline. And then we’ve seen the other side of some of the demographic pressures that we thought were going to be bring deflation, which is a labor supply shortages. So we learned that, that demographics can also lend itself to inflationary moves, which is a completely different interpretation than we had a few years ago. When when prices were on the downtrend.
Nathaniel E. Baker 4:11
Yeah, that’s a bunch of stuff right there. Now, where does this leave Fed policy and this the Fed and their fight against inflation, which is taking the form of Qt and interest rate hikes? Is that not having an effect at all in your view? Is it having a minimal effect? Do they need to try something new? What is what’s going on there?
Naomi Fink 4:35
Well, I it may be argued that we would be worse off if had the Fed done nothing and perhaps we would be in a much more inflationary regime. That’s that’s possible. And just keeping in mind that the Fed can only really influence inflation expectations rather than inflation that’s already happened. Well, once the the the news is out once The prices have risen, the only thing the Fed really can do is try to bring bring those inflation expectations back around again. So potentially that’s that’s, that’s been one thing they’ve been at least partially successful at. The one thing that that the Fed isn’t able to do is to eliminate business cycles. And so I think the Fed is going to have to, to, certainly, in the context of business cycles, respond, if we do see higher inflation, if we do see demand holding steady. Yeah, it makes sense that, that they, they raise rates, and if we do see a recession, and and then the inflation starts to abate, I would expect them to cut I think longer term, though, despite the business cycle, we’re probably going to see a normalization to a more positive rate of inflation. Over the next few years, that’s, that’s my view.
Nathaniel E. Baker 5:57
Will they be able to cut if inflation is still stubborn at 5% Plus CPI, or even four.
Naomi Fink 6:04
So I would imagine that inflation is likely to fluctuate, and I wouldn’t expect it staying at one level. So it’s possible that, that if we do see demand soften, then then prices will come lower, I just don’t expect them to stay low. So I think that it’s possible to have to have a business cycle, even if on trends, prices continued to rise. I would think that softer demand would translate into into softer price rises as well. I just don’t think that that’s going to be a permanent phenomenon where the Fed can just step away. And and then I certainly don’t see the Fed getting worried about about deflation anytime soon.
Nathaniel E. Baker 6:52
Yeah, it seems that deflation is one of the A word of a bygone era at this stage for all the reasons you mentioned. Now, what does the Fed do potentially about their, their men? Yeah, their mandate, and also their target of two CPI? Is that out the window? Or do you think they can achieve that? Or do they need to redo it? Well,
Naomi Fink 7:13
I think, once again, we’re thinking of a long the Feds target is a long term target. And it operates monetary policy around that target. And I think historically 2%, on average, hasn’t been a very wild targets, it’s possible that we do see that target need to shift upwards if we see these persistence. price pressures on the upside, I think it might be a little too soon to say that, that we should throw away that target. Because again, we haven’t really seen what prices do during the recession yet. And that’s very important in determining the long term average.
Nathaniel E. Baker 8:00
You anticipate a recession this year or soon for the US?
Naomi Fink 8:05
I am hesitant to say I anticipate an imminent recession. But I’m pretty convinced that we will see a recession sometime I think that we have not eradicated recessions, just like we didn’t eradicate inflation. And whether it’s this year or whether it’s next year, I think that that that there is going to be a recession, there is going to be the other side of the business cycle at some point. And and then it looks like since we have seen quite a healthy expansion up until now. And there are some, you know, there have been some late cycle signals. Whether it’s, it’s this year or next year, it’s it’s probably inevitable.
Nathaniel E. Baker 8:50
Yeah. Okay. Where does this leave investors, and you have a lot of people retiring the baby boomers, of course, so you have more people who are going to be on fixed income. Some of them may be and are postponing their retirement. That’s another story for another day. But what does an investor do with this higher inflation, secular higher inflation?
Naomi Fink 9:11
Well, this is one thing I have been looking at relatively closely the impact of inflation on real incomes, especially on real incomes, over the lifecycle in retirement and how that might impact retirement decision making, including on timing of retirements, and it can have a real influence and it’s probably an influence that we haven’t counted on. For example, if we see persistent inflation, persistent, higher inflation, then the higher the inflation, the more we can expect it to eat into real income and therefore into consumption of households. We can actually even though short term, perhaps less intuitively, we tend to see sort of savings and consumption act In opposite ways, over the long term inflation can eat into asset building as well, just by virtue of having less in terms of real, real income, therefore, not having less in terms of means to save. So inflation can act as a deterrent to savings longer term, which is also obviously in retirement not going to help much to maintain purchasing power, if you have the combination of of the the inflation eroding purchasing power already and reduced savings. So, that’s, that’s, that’s not so good. Interestingly, though, when you do have greater price fluctuations, and those price fluctuations translate into expectations of of greater volatility in real incomes, people do tend to engage in precautionary savings. And, and then that that can be seen from empirical data. And then also, when we translate it to a theoretical model, it also it makes theoretical sense, you expect more volatile real income over your lifetime, you save more and you save earlier. So, so then it is possible that there could be some impact to savings behaviors. I would emphasize those savings behaviors in a theoretical model don’t necessarily translate to greater financial literacy in the real world. So I would think that financial literacy is is one important tool, particularly when we look at at understanding of of inflation, it’s an important tool to help households cope with with fluctuations in real
Nathaniel E. Baker 11:52
So, there’s an option for you: invest in in financial literacy, like, you know, podcasts and such. Just for example, I’m wondering if you’ve seen here going back to inflation and purchasing consumer purchasing power that the big retailers, they reported earnings over the last couple of weeks, Walmart, Home Depot, Target, Lowe’s, they all pretty much said the same thing, which is that consumers are, are pulling back on big discretionary item purchases. I’m not sure if you saw that. And if you think that maybe this is the some of this inflation stuff coming home to roost? Because as you mentioned at the outset, this would this would affect consumers purchasing. So you think that could be your is that just the business cycle?
Naomi Fink 12:39
So I would say that might be indicative more of the business cycle simply because if we’re looking at the pure influence of inflation, you should be bringing forward a lot of those purchases, because you think it’s going to cost more in the future, if you’re looking at trend inflation. So I would say that those are more business cycle indicators, rather than a real fear of deeply entrenched inflation.
Nathaniel E. Baker 13:09
Okay, yeah, that makes sense. So where else? What other concerns you have, as for this, as far as the longer term prospects of inflation are concerned? What can consumers do? What can investors do?
Naomi Fink 13:24
Well, investors are probably going to have their work cut out for them. And I say this because the firm is also going to be influenced by by inflation. And it’s probably going to be the the firm’s job really to, to adapt to, to the new normal in terms of inflation. So we’ve already seen some spikes in purchasing in the purchasing price index. And some companies have done their best to absorb that and ultimately pass on the price rises to consumers whilst attempting to maintain their own market power. They’ve, they’ve seemed to do that relatively well, so far. But again, I would like to see that over an entire business cycle. And it’s a certainly a different phenomenon altogether to deal with a temporary spike in inflation and, and a return to low inflation versus more volatile inflation or higher inflation over the long term. I think that companies are going to have to innovate in order to to deal with higher trend inflation and less predictable inflation. That means they can’t just rely on the same downward trends, whether it’s globalization, or Moore’s law, or, or all of these very reliable, predictable trends that we’ve had characterizing the last decade if not more. I think they’re going to have to get inventive and creative and think of new ways they can harness technology. And I mean technology in the broader sense, I don’t just mean development of, of new tools, new technological tools or, or consumer facing technology, I’m also thinking of creative ways to allocate labor and capital. And one thing I have to, to bring up here is that companies are probably going to be, they’re going to be dealing with a skills shortage for quite some time. We, alongside the decline in prices over the last couple of decades, we’ve seen this decline in labor share of capital. And sure that’s possible. If if just by mobilizing capital, then you can continue to maintain your productivity. But there are some signals that that’s not going to be possible, there has not been that much attention paid on allocation of labor, or just being able to cultivate human capital compared to physical capital. So I think that’s the new frontier, the firm’s that are better able to cultivate the human capital and to retain the human capital to allocate the human capital are probably going to be those who are going to be strongest in a higher inflation environment.
Nathaniel E. Baker 16:19
Interesting. One thing you didn’t mention here was AI, artificial intelligence, major buzzword, of course, nowadays. And one of the ways that people are talking about using it, of course, is to potentially displace certain workers, maybe the way that the factories did and other advances in productivity in years past. Do you think that can be one that one way that can help? Or is that just all high?
Naomi Fink 16:44
So I will have to be the contrarian here and probably no better place to do. Yeah, um, I believe that AI is an extremely useful tool, but I believe that’s what it is, it’s a tool. It’s the it can help us complete tasks, it but tasks rather than jobs, I believe that the jobs are still a very much human phenomenon. And, and certainly those who are less capable of using the new technology, including AI, a are probably going to start AI are going to be at a disadvantage. That said, humans are very adaptable creatures, I think that that, that we have the capability to, to learn an enormous amount of things. And and on top of that, we’re able to we modes, we’re able to to have empathy, we’re able to, to, to think of new things that haven’t been invented before, something that that AI has difficulty doing, given that most of AI uses pattern detection. And, you know, granted over over large, large sets of of data, and then there’s a great, I think the scariest thing about AI to me is not the propensity to usurp human labor, but just to get it wrong. I think I was at a, I was at a one year and, and then there was, there was a presentation given on AI. And one of the points that that was brought up was that AI is supremely good at detecting patterns. So for example, if you want to distinguish cats from dogs, tools are getting AI tools are getting better and better at distinguishing cats from dogs, like a picture of a cat versus a picture of a dog. But that’s dependent on the information that you give it. So if there is a disproportionate number of pictures of cats, on pianos, then the AI is going to think that black and white oblong rectangles are characteristics of a cat. Whereas, you know, common sense humans we know it’s not. So I think that, that there, there are definitely uses for AI and and it’s possible, I guess, especially given are given human history, that, that if we fail to incorporate it and fail to adapt, then there are going to be losses in in human jobs. But I think it’s it’s probably our duty as both as, as part of of the economy individually and then also our, our policymakers to to really try and figure out how best the the economy might adapt to, to incorporate these new tools and also to keep them in check, especially when they get it badly wrong.
Nathaniel E. Baker 19:53
Yeah, yeah, you touched on I mean, there you still need to program these things, right. And there’s a lot that can go wrong. And it’s not just something where you To flip a switch and you go away and that’s the end of it. So yeah, there is that. Very cool. I want to take a short break now. Give a chance for our sponsors to make themselves heard. And we’ll come back then and ask you some more questions. If you are a premium subscriber, do not touch the dial. You will not get the break. We’ll be right back. In fact, we already are.
Welcome back everybody. Naomi Fink of Europacifica Consulting. Now we this is the segment of the show where we have the guests tell us a little bit more about herself and her station in life and how she came to arrive at it. professional background and such I know you were pretty long history on Wall Street before you restarted Euro Pacific consulting last year, if I’m not mistaken. So talk talk to us about that.
Naomi Fink 20:50
Yeah, so I did found Europe Pacifica about 10 years ago. And, and it was a pretty much a macro shop. We’re doing consulting on on macro with a big Asia focus, given my own experience in Asia, especially Japan, as you might be able to tell with the logo here.
Nathaniel E. Baker 21:13
Look of Mount Fuji for those who aren’t watching. Yes.
Naomi Fink 21:16
And I, I recently have have restarted Euro Pacific to encompass not only the macro side of things, but also the households micro retirements. Since I’ve spent the last six years focusing on retirements and, and household consumer choice myself, and I’m still the chairperson of a breeze Retirement Security Research Center. So yeah, there’s there’s probably a lot of of macro and micro coming together right now in the world. So I’m, I’m excited to, to marry the two and, and delve into it’s more
Nathaniel E. Baker 22:04
and you have a pretty long history on Wall Street as well. Some of your jobs were macro focused, right?
Naomi Fink 22:11
That’s correct. I started my my search career as a Forex strategist a an experience I certainly welcome and celebrate today, it’s, it’s just kind of a nice way to see the world and in financial terms, you’re always looking at at relative economies. So you’re never looking at just one. Even if, if your concern is the US dollar, it’s always the US dollar against the rest of the world. Its trade partners, you know, the end, investment inward and outward. I thought it was a wonderful foundation on which to explore other asset classes. I spent a bit of time in in pure macro as well, looking at at Japan, which is at once probably one of the world’s most fascinating and frustrating economies, given the failures for exit deflation for decades. And, and I’ve also looked at at the equity market, that Japan equity market, which is now now on the rebound. It looks like the reflation is is doing it some good not to mention the yen, yen weakness. And yeah, of late I’ve, as I’ve mentioned, I’ve been focusing on multi asset worlds, and looking at asset allocations for especially for households, thinking of retirement saving for retirement and of course in retirement. And this is, this has been certainly a new focus and, and to a new set of decisions that that have haven’t been have merited understanding some of the macro factors through a new lens, the lens of, of choices that are often influenced by not necessarily rational decision making.
Nathaniel E. Baker 24:15
Indeed, indeed, and this is one of the reasons for being contrarian or at least having a contrarian view in mind. Speaking of which, Japan equities have gotten a lot of press recently, Warren Buffett, investing in them. And a little bit of hype reemerging now, as it tends to do periodically every couple of years, but this time, it seems like there’s a little more behind it. And from a contrarian perspective, that would not be when one wants to invest in this market, but for Japan, Japanese stocks, do you think this is still a good time or is it? Not so much?
Naomi Fink 24:51
Well, I think that there has been a chronic undervaluation problem with Japanese equities as their does tend to be every time If we see a situation where we’re, we’re probably growth in the rest of the world eclipses Japan. But we have this we have now this the situation where not only do we have undervaluation in Japanese equities, but we also have a very cheap yen, which is not only good for for trade, because we know as we know, there was a lot of globalization of Japan’s trade too. But it’s a good environment for investment for foreign investors. So I think that’s that’s one of the big reasons why a lot of the capital was going into Japan. Now, structural factors. I would say that there’s a good chance I’m not going to say that, that it’s a foregone conclusion. But I think there’s a good chance that Japan now has the means whereby to incorporate some necessary structural reforms. With inflation coming back into the question, it’s not just a foregone conclusion that you can leave cash at the bank at near 0% interest and, and still be able to buy more tomorrow, thanks to deflation. So now there’s an incentive to have to work to allocate the capital a little bit more possibly, that’s going to lend itself to to more investment friendly governance practices among Japanese companies. And so there have been some hopeful signals. I mean, even over the last years, when people didn’t like Japan at all, you know, there’s been a governance code and a stewardship code introduced, there have been there’s been a lot more focus on by large investors, even within Japan, on the governance of affirms, there’s a lot more ESG focus, for instance, in Japan, and probably the rest of the world, whereas it’s very, as you know, controversial in the United States, but I mean, the g of ESG is governance, and insofar as governance is related to return on assets, and improvement in governance is probably an improvement in return on equity for Japan.
Nathaniel E. Baker 26:59
Yeah, any particular sectors within the Japanese economy that you think might be particularly compelling?
Naomi Fink 27:07
Well, I think to begin with the sectors that have traditionally been very competitive in Japan have been those who, who are the traditional exporters. So whether it’s, it’s in the electronics, or heavy industry or or IT related, then, then I think those are probably the the clear near term performers, the harder ones are going to be the surface, the sector firms. And that’s also though, where we see the test of governance, if we’re actually seeing real change, then the services sector, which has tended to be kind of a buffer, I mean, it’s very, it’s a lot more domestic than, than some of these these other sectors. It’s been traditionally where jobs have been, there’s been a cushion to, to the deflation and and years of stagnant growth. Not a lot of jobs have been shed in Japan, compare it to, for instance, US economic cycles in the US, when during economic cycles, then there’s a lot more job destruction or job elimination. In Japan, traditionally, there’s been a lot more pay cuts. And and then that itself is is deflationary. If I’m not saying that, that Japan is going to suddenly move to an American model of job elimination in cycles, but But it’s possible that with the demographics, there’s an aging demographic, there is a supply shortage in Japan, there’s pot, there’s possibility to really try and and get the balance right of investment in labor and capital and allocation in labor and capital. And perhaps what we were discussing earlier, the, the, the investment in AI and how, how we, we use AI matters, well, this might be a key point for, for aging Japan, if if we get the the ability of of the the labor in the market already to leverage the benefits of the the existing technology, we might get a good boost to productivity and productivity, as in at least as macro economists have have modeled is sighs the long term driver of growth.
Nathaniel E. Baker 29:42
Very interesting. Cool. All right. Let’s get back to inflation really quick. And there’s been cost of living adjustments and social security. But you’ve looked into this a little bit, I think and apparently these are not keeping up with the actual prices. Is that right? And tell me about that
Naomi Fink 30:01
by construction. Yes, the Social Security cost of living adjustments are based on past months of price rises. So you are, by definition, always lagging, I guess, if you have volatile inflation, then you’ll get a buffer after a period of high prices. And then that will still last when prices come back down. Again. I think the the issue here though, is if we have trend inflation, that’s not necessarily going to be the best for for retirees who aren’t, aren’t earning wage income. And beyond that, Social Security, the cost of living adjustments, as as backward looking as they are, still are sort of appear to be at least the state of the art in terms of cost of living adjustments in pensions. So there are many pensions, public pensions that have a far lower or a, a much more partial adjustment for cost of living than Social Security. And that might be a worry, it’s been probably pretty easy to to cut down on on some of the liabilities of public pensions by reducing cost of living adjustments without people really feeling too much pain and in periods of low inflation. But as we head into a period of higher inflation and more volatile inflation, people might feel the effect a lot more of not having that cost of living adjustments. They’re going to have to do other things to protect their purchasing power, whether it’s work longer, or whether it’s, it’s it’s work part time, or whether they can, they can come up with an investment strategy that offers them a greater inflation buffer from their own savings. It’s there are new considerations when we look at volatility and inflation and potential higher are reduced real income due to inflation.
Nathaniel E. Baker 32:14
Yeah, and it sounds like this would all be bad for the consumer. And, yeah,
Naomi Fink 32:21
there’s a there’s a cost of living, or there’s a apart from the cost of living index. For Social Security. There’s, there’s an experimental price index for, for older Americans, the CPI II. And, and I think that that’s probably going to be something that we should keep a very close eye on, I think one of the things in a low inflation periods that that, that maybe unduly punished older Americans was the cost of medical care, even in low inflation environments, then the cost of medical care remain very, very high and rising at rates not seen in other sectors. So, so then that that was a worry, but that was a worry in a particular sector. I don’t know if we can compartmentalize that anymore. For older Americans, it might be a, it might be a greater challenge now to maintain across the board purchasing power in retirement, not limited to, to medical,
Nathaniel E. Baker 33:28
wow, what is the CPI? What goes into it other than what would normally be in the regular CPI?
Naomi Fink 33:35
Yeah, so I mean, it’s it’s very similar to the the regular CPI, it’s just weighted such that it represents the consumption basket of older Americans. So for example, you’ll have a higher weighting on medical costs, you’ll have probably a lower waiting on, on discretionary items that you associate with working individuals. So yeah, it’s probably mostly in the waiting set. You’ll see the difference.
Nathaniel E. Baker 34:03
Interesting. Wow. Yeah. Okay. So what does one do there? I mean, one thing that I was thinking about when you’re talking about Japan, and with his demographic problem is is retiring in Japan. But there’s a whole bunch of hurdles there that but there, but there’s Mexico, there is Central America, there’s a number of places for Americans, at least that are closer, and there has been a lot of talk about that. But what put that aside, what kind of options does one have as a retiree to cut down cut down on costs and to be able to keep the income?
Naomi Fink 34:40
Well, as you mentioned, there is the choice of moving I’m not even thinking of moving outside of the United States. That’s always an option, but there’s a big dispersion in cost of living within the United States. Recently, I worked on a project with with Alameda County and That’s, that’s one of the higher cost areas in the United States. If you want to retire in Alameda County, you’d want a pretty competitive income replacement rates. Of course, if you are going to retire, I’m thinking of somewhere ultra low cost, it may be a rural area in, in, in Oklahoma, then you’re not going to need the same resources that that you’re going to need to, to maintain your standard of living in Alameda County. That’s, that’s one, but there are many other there are many other things that that households can can use to, to maintain their purchasing power, what is investment and of course, I mean, we know that investment presupposes that you have sufficient savings to allocate. And if you are in that position of of allocating savings, then you you would want to be allocating them to, to more to assets that are more inflation resistant. And as I mentioned earlier, that ties in with the firm’s problem if you’re able to select firms and the assets of firms that are particularly resilient to inflation, so pioneering new technology, ability to pass along price rises ability to change the substitute and change the mix of of inputs in order to, to to maintain production at lower costs. That’s that’s the type of firm that you’d want in your portfolio. I am aware though that that not that sometimes there are problems that have nothing to do with investment, for instance, saving enough in the first place, that’s a big challenge for the average American household, especially given the cuts to to things like the fact that their DB pensions are few and far between even those with, you know, not not to mention those with cost of of living adjustments. We we also have have some some recent changes and in in defined contribution regulation that have just taken effect. So we don’t know whether that’s going to be enough to to really help people overcome this hurdle of insufficiency of private retirement savings. There’s also financial literacy, which which might contribute to saving too little to begin with. So, you know, how do we actually get people to save from early enough and enjoy all those years of compounding when they have day to day challenges to deal with, such as allocating their, you know, allocating their household income to living expenses for one. That’s, that’s something that I don’t think we have a magic solution for also, longevity, longevity, I think that’s one of the reasons why Social Security is is, is having a lot of challenges with the Social Security Trust Funds, is, is likely to run out soon. So. So, you know, we’re either going to have to boost the payments in or cut the benefits one or the other,
Nathaniel E. Baker 38:21
or retirement age. I mean, it’s that would seem something I need to do anyway. And then when Social Security was enacted, the average life expectancy was a lot lower than Yeah.
Naomi Fink 38:31
But by default, that’s, that’s what cut to benefits too, because you got fewer years of benefit. And if we do raise the the Social Security eligibility age, then that also implies working longer. So if if we’re to accommodate working longer than employers have to have to, they have to make some adjustments to their policies, they’re probably going to have to think of ways in which they can accommodate Medicare eligible workers, for example, is Medicare eligibility aged 65 and full Social Security. The full retirement ages is 67 and maximum is 70. So so it’s very feasible that you’ll have a lot greater proportion of your workforce being Medicare eligible. So yeah, there are some adjustments that needs employers
Nathaniel E. Baker 39:27
would like that I would make because it would be less insurance costs for them if they’re already covered by Medicare.
Naomi Fink 39:33
Well, I mean, there are probably some, certainly some some advantages. And, and it it probably is, but it’s still up to employers to kind of change the mix of, of their benefits and and also the mix of, of employment arrangements. It’s possible. I mean, what we’ve seen is, is that people tend to, they tend to retire, and then and some of them tend to retire sooner than they originally expected. And some of those people stay retired, but some of them on retire. So do we have the, the the all of the logistics and, and the structure in place for people to unretire and potentially work part time or or go back into a different full time arrangement with the Medicare? It’s like that I think there’s a lot that still has the infrastructure that hasn’t been set up yet. I mean, we’re also working on on trying to prevent leakage from retirement plans, which tends to happen when people leave employment for whatever reason. And, and I think it was, it was David Lipson, at several eight days ago that that demonstrated how you can have a really high contribution rate while you’re working, but you have enough enough periods of unemployment and and then that can all just disappear by retirement age. And so we haven’t really conquered that yet, in the United States, we’re working on things like portability, but it’s not perfect, we haven’t really addressed the whole longevity problem, maybe some of it will be supplying labor for longer, but then also people tend to be more they, they’re more susceptible to medical conditions as they get older. So so it’s possible that there will be a substantial cohort that would like to work longer, but is unable to work longer. And usually if you’re if you’re elderly, and you have a medical condition that requires caregiving to. So there, and I think one of the recent, the recent Ebro conferences has focused on caregiving. And that’s that’s another area that we haven’t quite figured out yet. How do we support the an aging economy, a caregiving economy, and try to, to supply the right choices all throughout the lifecycle, including into traditional retirement age?
Nathaniel E. Baker 42:14
Yeah, those are all big questions. And, again, it just doesn’t look good for the consumer from all of this, especially if you’re talking about financial literacy, saying, but a lot of financial literacy involves not spending money frivolously and not spending money you don’t have, and not buying things you don’t need, which, let’s face it is a kind of a big part of the global economy. And Americans doing these things, including on credit, has kind of been the lifeblood of the global economy for some time now, hasn’t it?
Naomi Fink 42:49
Well, when you say that it reminds me of a debate that I I used to have an ongoing debate with a Japanese economist when I was in Tokyo, the Japanese economist told me Well, you Americans always tell us to consume more in Japan, and that’s why we’re mired in deflation, and we have no growth, but look at you, you’re consuming a whole bunch of stuff you don’t need on credit. And I can’t say that’s not true. And, and then as as we’ve seen, credit and debt tends to be corrosive to to some individual, some individual consumers savers, livelihoods and lives. However, there’s probably a happy medium in between having, you know, years of deflation and, and poor growth and having this profligate spending that, that we Americans are confused and engaging, are accused of engaging in, I think that there’s probably a happy medium where you do have a decent amount of financial literacy. And it’s not about taking no risk, right. I mean, if we took no risk, we wouldn’t have mortgages, we wouldn’t have the ability to, to prefer taking a trip to Italy when we’re young to to enrich ourselves rather than dedicating all of that amount to retirement savings. So it’s, it’s all probably about making, understanding the choices that you’re making and the ramifications, rather than just shutting down and, and doing nothing but but saving. I think that the the way that that we build a well balanced households within the economy is to is to try to figure out what risks are worth taking and what the trade offs actually are. And not to to never engage in the trade offs but really understands what that’s that’s going to do for us and and to try to adapt as well with with some of the the situations that We’re faced with including higher higher inflation. And so yeah, I think that’s that’s a task for the government, that’s a task for households, that’s a task for the firms. And, and then we’re probably going to see it play out in markets, there are going to be those who, who are, especially amongst the firms who adapt successfully, much more publicly, and those who adapt less successfully. Unfortunately, we don’t have as clear a read on the households until after it’s happened. So probably engaging in things like preventive measures, you know, the the education, financial education campaigns, especially trying to reach underrepresented households. Trying to, to help them help give them the tools to better their own lot. That’s part that’s, that’s, of course, part of the problem. I’m not saying though, financial literacy is going to cure the world’s ills. Because there’s still a role. Other players in Congress. Yeah,
Nathaniel E. Baker 45:59
yeah. And to your point, America is just 330 million people or so in a world of what 7 billion now. So if you have other consumers come online, in emerging markets, and pick up their purchasing power, you figure that we’ll be able to pick up the slack for the US, although it kind of hasn’t happened yet. But it’s a slow process, obviously. And, you know, maybe it has started to happen in China, you know, started to Yeah,
Naomi Fink 46:25
certainly, you’d expect emerging economies to grow more quickly add on trends. And, and I think it’s probably a benefit if we do see a lot of those economies show an ability to, to, to use resources such that, that they are able to bring consumers to a more satisfactory standard of living, but then also probably do it in a way that maybe the US hasn’t been the best at, which is trying to use resources in a smart way over time for posterity. Um, there’s probably a lot of room to to develop on that front.
Nathaniel E. Baker 47:12
Yes, indeed. There is. Yes, there is. All right. Very cool. Naomi FInk of EuroPacifica Consulting. So I get the Pacific reference. Where’s the Euro come from? Is that? Yeah, on EuroPacifica?
Naomi Fink 47:25
Yeah, so I must say that, that that’s, that comes from my own personal history. I’ve spent a lot of time both in work and education in Europe, looking at Europe. I speak a few, a couple of European languages. And, and I’ve, I’ve tended to, to favor a lot of the, the connections between Europe and in Asia. Since there’s, there’s a lot there’s a lot of European investment in Asia Pacific. There’s a lot of a lot of influence. There’s no trades. And I’ve, I’ve I’ve tended to, to look at some of those cross border relationships, and
Nathaniel E. Baker 48:17
what countries did you live in out of curiosity?
Naomi Fink 48:21
So I, I spent some time in the UK, I did my university years there and Scotland. I spent a year of that in Spain in Bilbao. I also did my graduate school at Barcelona Graduate School of Economics. And there’s certainly a lot of a very healthy macro economic community there and in Barcelona, so definitely worthwhile picking the brains of some of the researchers there. I spent some time in France, both as a young person in high school and and then also while working for BNP Paribas. And, yeah, I think that, that there is a lot, probably there’s a lot of exchange between Japan and Europe, simply because of the similar demographic challenges that they’ve had to face and, and also some of the I, I think that Europe wasn’t expecting this, but some of the downside price pressures, even in Germany for many years, inflation tended to be the, the issue and then suddenly the a lot of the world they, Europe, Japan, the United States was was faced by potential deflation and everyone started talking about Japan suffocation, and a lot of European economies were were especially interested given it and that those European economies who are interested tended to be those who, who experienced ageing of the of the population, and a lot of them that had current account surpluses like like Germany. So I think there’s, there’s probably a lot of ways in which Europe and and some of the Asian economies can learn from each other because now we’ve, we’ve seen that even China is still relatively young relative to to Japan, but also aging. So we all have to deal with, with this, this problem of sustainability. And, you know, while it’s a beautiful thing that, that we’re able to, to, to live longer and, and healthier a lot of times, it’s, we’re still looking at the the optimal way to support a large population, a lot, a lot of the world’s population doing that.
Nathaniel E. Baker 50:59
Yeah, one thing that Japan has, and that is the last question that we’ll wrap up that is, in terms of immigration, and this is something that Germany has recently over the last quarter century or so, really well, I guess, it goes back further, but the demographics in Germany, and there’s been some articles on this recently has really changed dramatically, just over the last 20 years. And as they they’ve also adjusted their citizenship requirements as a result. But Japan, I think, is still doesn’t have all that much in terms of immigration, historically, and still, right.
Naomi Fink 51:29
So I think whenever we think of the pace of change in Japan, typically, it tends to be more glacial than change elsewhere. Even slower in the store than Europe in some cases. I mean, unless there’s like, there’s an immediate impetus to change. And I think that, that because Japan has, has kind of been able to rely on, on on the current account surplus and being able to, to stomach years and years of deflation without without anything going seriously arrive, then there hasn’t really been a need as such to, to encourage large amounts of of immigration that said, there are changes as slow as, as they’ve been incoming, there’s, there’s been some changes to to visa requirements, especially in industries where there are skill shortages. And I can only imagine that as we go forward, and skill shortages get more acute that that process is going to progress. If we take a look at a lot of a lot of the urban jobs, especially in, in casual workplaces, there are a lot more young people from Asia Pacific, working in Japan, and you know, if I’m not sure how comprehensively they get considered into the labor statistics, because if you’re a student, for example, you’re you’re a student, you’re not officially part of the labor force. But um, I mean, there’s there are changes afoot, perhaps not radical changes, not changes that, that that that are happening at a very fast pace, but perhaps more changes than immediately readily apparent.
Nathaniel E. Baker 53:29
Hmm, interesting. Very interesting. Wouldn’t you need to know Japanese though, to do a consumer facing job in Japan,
Naomi Fink 53:35
you still do generally need to know Japanese. And I think one of the famous high hurdles for for foreign born nurses is that you have to pass the highest level of, of of Japanese language test, which I personally have done. And and I’m I’m proud of it because it wasn’t that easy. And so if you’re expecting somebody with with no prior ties to Japan, who’s already engaged in a career in the medical services to to pass that exam, it’s it can be done, but it’s like it requires it requires more doing than than just getting another job in another location where you don’t have to learn a major obstacle.
Nathaniel E. Baker 54:29
Jeez, but there you go. If you’re Japanese, if you learn language, Japanese as a young person, then maybe you are an advantage there.
Naomi Fink 54:39
All right. Also, I did want to emphasize though, that a lot of Japanese universities are trying to attract foreign talent they are trying to to increase their offerings in English for instance. And they’re trying to to make their their student body a little bit more international. So I mean, again, I don’t think that it’s like it’s it’s the type of of shift that you see in some economies have radically changed their immigration policy. But things are changing. I’ll be it slowly.
Nathaniel E. Baker 55:12
Cool. All right now we thank thank you so much for joining me contrarian investor, podcast today. In closing, maybe you can tell our listeners how they can find out more about you. You’re not active on social media? I don’t think your company website is EuroPacifica.com. I know that. How else can I find out about you? And maybe about your research?
Naomi Fink 55:31
Yeah, so EuroPacifica.com is a good way. I am on LinkedIn. Although not, not, not on most other social media, so you can certainly find me on on LinkedIn. And those interested can also fill in a contact form on on our website. So
Nathaniel E. Baker 55:56
I will link to those and you do regular appearances still on CNBC and Bloomberg and such?
Naomi Fink 56:02
Well, I haven’t been done regular appearances for some time. But so this is one of the Yeah, this is this is this is one of the first I’m just getting things restarted there. But yeah, I am keen on on reengaging. And I, I thank all of the the kind media professionals who’ve been very patient with me having to turn down a lot of these, these opportunities. So I’m anticipating that that’s going to change shortly.
Nathaniel E. Baker 56:41
But you don’t produce research or any kind of thought leadership or anything like that?
Naomi Fink 56:44
It’s coming.
Nathaniel E. Baker 56:45
Oh, it is very cool. All right. Watch that space. Ladies and gentlemen, Naomi Fink thank you again for for speaking to us today. long conversation here. Very interesting stuff, a whole bunch of stuff. And with that, we’ll shut up. Thank you for listening. Look forward to speaking to you all. Next week. See you then. Bye.