Transcript: Rising commodity prices could prove to be a ‘growth tax’
Portfolio manager Jack McIntyre says prolonged and general fiscal stimulus was needed to fight Covid, but inadvertently created stubborn inflation.
- March 15, 2022 March 12, 2022
Welcome to Soundbites – weekly insights on market trends, and investment strategies, brought to you by Investment Executive, and powered by Canada Life. For today’s Soundbites, we speak with Jack McIntyre a portfolio manager with Brandywine Global Investment Management about the U.S. Fed’s efforts to spur the economy and curb inflation. We talked about the Fed’s balance sheet, volatility and liquidity in the markets, and we started by asking how the Fed views inflation.
Jack McIntyre (JM): The Fed has done a sort of 180 in a fairly short period of time, kind of thinking that inflation is transitory to, ‘Hey it’s got legs. It’s going to stay a little longer and be a little bit more resilient.’ And obviously the Fed has shifted their tune accordingly, going from sort of tapering at a slow pace to accelerating the pace of tapering, to raising rates, to eventually shrinking the size of the balance sheet. So, my take on inflation is it’s going to be a little bit of a battle. I think goods inflation is ultimately going to come down, but services inflation should be more sticky, and that’s more labour intensive. So, this is where I think the rate hikes might have a more meaningful impact, quelling inflation in the service sector.
Why inflation is so harmful.
JM: One of the things that you’ve seen is a big surge in commodity prices — oil being one of those. And that’s a growth tax. You know, it means that I can’t spend as much on goods and services, going out for dinner, entertainment, for buying things, because I’ve got to allocate more of my disposable income for energy and food. And that’s the growth. That hurts economic growth. You know, you’re hearing the word ‘stagflation’ a little bit more frequently right now. And that’s probably warranted.
The origins of the current inflation.
JM: Yeah, I think the seeds of inflation were planted by policy makers in response to the pandemic. We’ve always viewed the pandemic through the lens of a global natural disaster, meaning that, natural disasters, they’re painful but you snap back out of them quickly. But meanwhile, and this is globally, is that policy makers, central banks, governments, I think their view that there was not enough stimulus and response to the GFC and they didn’t want to repeat that mistake, particularly on the fiscal side of things. Because post GFC it was all about monetary stimulus. There was all this talk about even austerity, particularly in Europe. Well, that’s not the case. Now we’re firing both barrels. We’re doing fiscal and monetary, and we have for the last couple of years. Now we’re starting to wean ourselves off of that. So, in some ways the policy makers are responsible for the inflation we’re experiencing today.
Liquidity in the market.
JM: There has been a great amount of liquidity but you can think of the liquidity tide receding. And this is where it gets a little interesting, because hey, the markets will be fine. We are expecting to see economic growth continue to be robust, away from Russia and Ukraine. I think as long as there is what I call organic growth, economic activity, then that’s fine because that’s ultimately what drives a lot of equity markets, profit cycles, etc. But if you get a combination of the economy slowing down and the Fed still tightening, and overtightening, that’s where markets tend to get a little upset. So, the risk isn’t necessarily coming from the Fed. It’s obviously coming from geopolitical developments right now.
Volatility in the market.
JM: Because the Fed is reducing monetary stimulus doesn’t necessarily mean we’re going to see more volatility. What the markets are trying to digest now is that tide of liquidity being withdrawn. And it needs to be replaced by organic economic activity. If the economy continues to do well, then I don’t think necessarily there has to be volatility. But we can’t have a conversation about volatility without talking about the geopolitical environment right now. The volatility is more a function of the Russia-Ukraine war. It creates uncertainty.
And, finally, what’s the key take away on the Fed’s fight against inflation.
JM: So, I’ve been a disinflationist for a long time because I look at debt levels, demographics, technology — things like that have had a tendency to lower inflation. But now I have to actually be a little bit more open to the idea that inflation is going to be longer lasting. And there are some similarities between today and where we were in the 1960s and 70s. The amount of money we spent on social programs and defence because of the Vietnam War. Well, we’re in a war right now, that we’re going to be spending more on defence globally. So, I don’t want to say inflation is getting out of hand but the days of disinflation are certainly behind us for now.
Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Jack McIntyre of Brandywine Global Investment Management. Join us every Wednesday at InvestmentExecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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