What Did We Learn This Week? (07/14)—Tim Pierotti, Chief Investment Strategist

Tim Pierotti, Chief Investment Strategist

It’s over. That’s the message from Blackrock’s 2022 Midyear Outlook. The economists and strategists at the world’s largest asset manager with a tidy $8.5 Trillion of AUM wrote,

“The Great Moderation, a period of steady growth and inflation, is over, in our view. Instead, we are braving a new world of heightened macro volatility – and higher risk premia for both bonds and equities…We ultimately expect central banks to live with inflation, but only after stalling growth. The result? Persistent inflation amid sharp and short swings in economic activity.”

“First, production constraints – stemming from a massive shift in spending and labor shortages – are hampering the economy and driving inflation. Second, record debt levels mean small changes in interest rates have an outsized impact – on governments, households and companies. Third, we find the hyper-politicization of everything amplifies simplistic arguments, making for poorer policy solutions.”

“The transition to reach net zero carbon emissions by 2050 is likely to create a sectoral shakeout similar to the pandemic. The transition is essentially a handoff from carbon-emitting production methods to zero-carbon ones. This handoff can be rough. Carbon intensive production can fall faster than lower-carbon alternatives are phased in. The result: periods of supply shortages and high prices for the carbon-intensive outputs the economy still needs. We see these imbalances helping drive macro volatility and persistent inflation in years to come.”

We agree with all the above and believe these views will become increasingly consensus and increasingly priced into equity and fixed income markets. Labor has been losing out to increasing corporate profitability for forty years, but undeniable demographic challenges, slowing immigration, and a stubbornly low participation rate among some age groups are reversing that trend and will continue to do so.

The rise of populism and political polarization seems unlikely to reverse course and will continue to beget poor economic policy that inhibits investment and productivity. Functional capital markets require functional democracies and that clearly should no longer be taken for granted.

The transition to net zero carbon emissions is already showing the painful unintended consequence of shrinking global oil and natural gas upstream and downstream capacity. As we have discussed extensively, global integrated oil companies have slashed capital spending by over 50% over the last ten years and that trend is set to only accelerate as investors understandably demand that free cash flow is returned given the long-term inevitability of peaking demand for hydrocarbons.

The list of factors that will inhibit growth and generate inflation is long and growing: Deglobalization, rising energy costs and the tangible pricing of carbon emissions, populations that are already in decline like Europe and China and those that are set to decline like the US, falling productivity as a result of falling return on innovation and falling capital investment, the rise of populism and of course last but not least the massive accumulation of global sovereign debt. We have no crystal ball and there is always the hope that human ingenuity finds innovations that massively accelerate productivity, but the onus is on the long-term bulls to prove that. The fact is the playbook of the relatively halcyon last forty years is highly unlikely to be the right playbook for the next decade.

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.

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