What Did We Learn This Week? (09/29)—Supply constraints are secular

According to a survey of large endowment and foundation CIO’s conducted by KKR that was published this week, 57% of the CIO’s put inflation as their number one concern. However, less than a quarter of the CIO’s believe the Ten-year will be over 3.5% in 2023 and more than half of those polled believe that the Ten-year will be below 3% next year. Mind you, the Ten-year traded as high as 4% mid-week. Given everything we see and read about bearish positioning, this survey strikes me as optimistic. These are CIO’s with many billions of dollars of AUM who clearly do not embrace the reality that the days of historically low interest rates are behind us.

So what does it imply about the thinking of these CIO’s that more than half of them believe the Ten-year will be sharply lower next year? My interpretation is that the majority of elite level market participants still believe that the Fed is going to do its job and crush inflation at which point we can all go back to enjoying the good old days of disinflationary growth. In other words, sentiment remains that it isn’t different this time and the playbook of the last four decades is still the hymnal from which to sing. I disagree. I do agree that the Fed will ultimately bring down inflation via an economic recession. But my longer-term view is that as soon as the US economy begins to come out of the recession, the inflationary pressure will again be the main concern weighing on financial markets. While this bout of global inflationary pressures may have begun with fiscal and monetary authorities printing too much money and stoking too much demand, the issue now is supply constraints and those supply constraints are largely secular.

To be clear, our near-term consensus aligned view is that growth is slowing rapidly toward a US and global recession and like every previous recession, measures of inflation will fall and might even fall precipitously. Our more important view though, and one that the survey suggests remains a contrarian call, is that we face a future of structural inflation that will pressure long-term interest rates higher.

I also suspect that while it is necessary and easy for Fed officials to talk bravely talk about holding the line and continuing to raise interest rates amid job losses, they have yet to enter the arena, stand in the glaring sun and stare down the charging bull. By the end of this year, it will be clear to everyone that housing prices are going to be down nationally, layoff announcements will crowd the headlines and we will have seen CPI prints that make it clear the economy is shrinking and inflation is falling. I’m not calling for a near-term “Pivot”, but I do think we will hear Fed speakers warning that monetary policy manifests with long and variable lags and you will see the dots on the dot plot start to come down amid economic weakness. While that will be bullish for the front end of the curve, it will be less bullish for the long-end as there will be the inflation hawks who argue that Powell et al have failed to prove their Volcker-like resolve.

Every day I read about or see a pundit lamenting the risk of a Fed policy mistake. The concern is that the Fed isn’t respecting the lag in the policy actions already taken and they end up crashing the economy unnecessarily. What that suggests to me is that Wall Street’s economists and strategists are still looking at the inflation problem from a cyclical excess demand lens when the real issue is a secular lack of supply.

For more on from Tim, follow his podcast The Weekly Bull and Bear wherever you listen to your podcast or read his weekly blog posts here.

Tim Pierotti is WealthVest’s Chief Investment Strategist. 

Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.

WealthVest makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made in this material, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of Tim as of the date indicated. They do not necessarily reflect the views and opinions of WealthVest and are subject to change at any time without notice. WealthVest does not have any responsibility to update this material to account for such changes. There can be no assurance that any trends discussed during this material will continue.

Statements made in this material are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed in this material, including consulting their tax, legal, accounting or other advisors about such information. WealthVest does not act for you and is not responsible for providing you with the protections afforded to its clients. This material does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by WealthVest.

Certain statements made in this material may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The S&P 500® is a trademark of Standard & Poor’s Financial Services, LLC and its affiliates and for certain fixed index annuity contracts is licensed for use by the insurance company producer, and the related products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC or their affiliates, none of which make any representation regarding the advisability of purchasing such a product. WealthVest is not affiliated with, nor does it have a direct business relationship with Standard & Poors Financial Services, LLC. 

Tim Pierotti, Chief Investment Officer

Tim Pierotti is WealthVest’s Chief Investment Officer  Tim has over 25 years of experience in various aspects of the equities business.  Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management.  Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund.  Tim is a graduate of Boston College and lives in Summit NJ.

Previous
Previous

What Did We Learn This Week? (10/06/2022)—Sell-side Research

Next
Next

WealthVest Coordinates City-Wide Cleanup Project for National CleanUp Day