INFLATION WORRIES ARE ALL THE RAGE | CROUCH CONNECTION | APRIL 2021 "ADV"
INFLATION WORRIES ARE ALL THE RAGE
Again, borrowing a title and a subject from the esteemed columnists at Federated Investors, Linda Duessel recently pointed out that the favorite topic of many market pundits seems to be the concern that the unprecedented stimulus from Washington will reignite inflation.
The massive federal stimulus package that has just been signed by President Biden has many market pundits hyperventilating about the inflation that they believe is right around the corner, predicting that inflation and the resulting interest rate increases will derail our ebullient economy and the stock market rally we have been enjoying for the past year
For 40 years inflation alarmists have been warning that reckless government spending would create shortages in the availability of important commodities (think oil, steel, copper, etc.) and the availability of workers, driving up the cost of labor and materials, eventually causing runaway inflation in the lives of everyday Americans. So far, also for 40 years, economists have been wrong.
Periodically, temporary shortages, particularly in the oil markets and labor force have caused prices to rise and create “headline inflation” in the economic data, what Fed Chairman Powell refers to as “transitory” inflation. Recent stimulus from Washington will almost certainly create some shortages in the supply chain as the world reopens following the Covid-19 shutdowns and we see people emerge from their lockdowns. Should we be concerned by the alarmists?
INFLATION HEAD FAKE?
Federal Reserve Chairman Jay Powell and his colleagues have repeatedly assured us that “persistent inflation” will not be a threat for several years. Boston Fed President Eric Rosengren stated in February:
“What we really want for inflation is kind of the broad based inflation rate to be at a sustained level of 2%. I don’t think we are going to see that this year. I don’t think we are going to see it next year.”
San Francisco Fed President Mary Daly expanded on the topic in a March 2 speech:
“The dynamics of inflation have changed. Inflation is far less responsive to movements in output and in employment than in previous decades…declines in bargaining power for workers, fierce competition in product markets (think Amazon), and a labor force that is far more elastic than most imagined have all played a role.”
And one of the strongest US bond managers, Pimco Chief Investment Officer Dan Ivascyn has warned of an “inflation head fake” where misguided concerns about rising consumer prices causes bond yields to skyrocket. He says:
“Our economic teams laid out the baseline forecast for a strong recovery across the world and inflation that – in spite of all the reflationary talk – we think is likely to remain below central bank targets over the next one to two years, notwithstanding a temporary spike over the next several months (which could cause a “head fake” in markets).”
Another respected market strategist, Scott Minerd, Guggenheim’s Global Chief Investment Officer also dampened any expectation of higher interest rates:
“Whether it’s negative rates or rates which are barely positive, I think that over the course of the next 18 months, we should expect to see a high likelihood that we end up with significantly lower long-term rates than we have today.”
IGNORE THE PESSIMISTS AND INVEST NOW?
“The foregone conclusion today is that long-term rates are on an uninterrupted trajectory higher. History tells us something different. Economic growth in 2021 will likely far exceed potential, which should boost corporate earnings. Since the March plunge we have been going on offense. Even today, we continue to play offense.”
And Max King with MoneyWeek tells us to:
“…ignore the Jeremiahs and use current market uncertainty to buy into quality growth companies and funds. Their end-of-the-world thesis is creating an opportunity for astute investors. Once yields settle, equities should move higher, pushed up by rising corporate earnings and accumulated excess savings.”
Having outlined our optimistic outlook for 2021, I have to remind everyone that the market regularly gets over-exuberant. The rally since last year’s crash has been eyepopping, so it would not be surprising for us to have an “adjustment” (correction) if any data reports or earnings news suggests that the recovery could take longer than expected. We believe that any weakness would be an excellent opportunity to invest any excess cash that you might want to add to your portfolios.
Please call or drop by if there is anything we can do for you. We look forward to seeing you soon.
Branch Operations Manager
Warren Buffett Quote:
"I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."
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