— “Inflation has peaked.”
— “The rate of growth has peaked at home and abroad, as well.”
— “Investors of all stripes, foreign and domestic, are offsetting their exposure to equities by purchasing high quality Treasuries to provide ballast in their portfolios.”
— “The spread of the Covid delta variant may slow global growth if it continues unchecked among the unvaccinated.”
Ron Insana–CNBC contributor and senior advisor at Schroders
From Talking Head to Hedge Fund Manager and Back Again
This pretty much sums up the 37-year financial service and media career of the individual who provided the bullets for my post today, Ron Insana. If you’ve been a regular financial media consumer his name will be familiar as he spent 22 years with the Financial News Network and its successor CNBC. He left the network in 2006 to start his own hedge fund which he closed in 2008. Subsequently, Mr. Insana authored several books, resumed his role as a financial commentator and now works as a senior advisor at Schroders, an old line British investment management company.
I take issue with the bullets above.
“Inflation has peaked.”
Mr. Insana would have been better off saying that the rate of inflation has peaked temporarily. To me this a pretty simplistic assertion. It only contemplates the inflationary bottlenecks that have occurred as we have reopened our economy, not the more lasting effects of the $5 trillion worth of stimulus injected into the economy over the past year. This is the equivalent of 22.7% of our trailing $22 trillion GDP. Insana’s thought process overlooks the potential impact of huge demands on resources that will come from the burgeoning new middle classes in Asia that we helped create (shipping manufacturing overseas). Another item is that we and the rest of the world have been on a very expansive monetary policy footing (emergency footing) for most of the past decade, a period where, most of the time, there was no real emergency.
I believe that these inflated chickens will come home to roost but please do not sell your stocks in response to this potential. Rates will increase and that will be normal. We will be coming off emergency measures into a more normal environment. Trust me. This will be OK. I know. I survived 1982 and a 15% yield on the 10-year US Treasury note.
“The rate of growth has peaked at home and abroad, as well.”
Again, I think the author should have qualified his statement with the word “temporarily.” Certainly you would expect a spike in growth on the reopening trade. What is important going forward is the rate coming out of the spike. In light of the stimulus will we head back to sub 2% or will we level off at 3.5 or 4% (or maybe even more)? I stress that we are in uncharted water as it pertains to the current level of monetary ease and stimulus. For those of you who think the benefit will be short-term, think again. The “multiplier effect” as a result of the stimulus could be far greater that the actual dollar of stimulus provided.
“The Fiscal Multiplier
The fiscal multiplier is the ratio of a country’s additional national income to the initial boost in spending or reduction in taxes that led to that extra income. For example, say that a national government enacts a $1 billion fiscal stimulus and that its consumers’ marginal propensity to consume (MPC) is 0.75. Consumers who receive the initial $1 billion will save $250 million and spend $750 million, effectively initiating another, smaller round of stimulus. The recipients of that $750 million will spend $562.5 million, and so on.” (Investopedia)
“Investors of all stripes, foreign and domestic, are offsetting their exposure to equities by purchasing high quality Treasuries to provide ballast in their portfolios.”
If my thoughts on bullet one and bullet two are correct, the last thing you might be wanting to do is purchase a 10-year USTs at a 1.25% yield. I think what we saw last week was the mindless flight-to-safety trade. These moves have been a constant feature of this secular bull market. Don’t confuse me with the facts. I just want to hide.
“The spread of the Covid delta variant may slow global growth if it continues unchecked among the unvaccinated.”
This certainly is true. My sense is that the impact on the developed world might be measurable but, again, not the end of the world. We are not dealing with the “black death.” We are lucky to live in a world far removed from the middle ages (I think) where science and technology solve problems in weeks that would have taken months or years even 50 years ago.
Bottom Line
I don’t think the Fed, the bond market or Ron Insana is right about our inflationary blip being temporary. Inflation should be, and normally would be, stronger as the economy heats up. I can give you 5 trillion reasons why it should heat up, all pointing to a robust economy and great corporate earnings growth. My only caveat is rising interest rates will bring multiple compression. The high-flyers, today’s ‘nifty fifty’ would appear most vulnerable markdown while the rest of the market marches forward.
What’s your take?