Last week, Dallas Fed President (and former Goldman Sachs partner) Robert Kaplan struck fear in the hearts of bulls when he suggested that rates should start rising.
“We have real excesses in the housing market,” Kaplan explained, adding insult to injury.
Then, a few days ago, Treasury Secretary Janet Yellen mentioned rates again. Her remarks caused stocks to plunge in response. By that afternoon, though, equities recovered after Yellen eventually recanted her statement.
And today, Kaplan sparked another rapid sell-off when he doubled down on his original comments.
“The Fed should start the taper debate sooner rather than later,” he said. Kaplan believes the Fed will see strong enough economic activity to reduce bond-buying ahead of schedule.
To ramp up the anxiety even further, Kaplan finished by saying that he “[hasn’t] decided if inflation is persistent or transitory.”
Yellen’s insisted that inflation is transitory. So too have virtually all other Fed officials, including Fed Chairman Jerome Powell.
But elsewhere, analysts are predicting a more permanent rise in inflation. JPMorgan’s head quant strategist, Marko Kolanovic, has been famously bullish over the last two years. Regardless of what happened, he told clients to continue buying.
And, outside of the weeks leading up to Covid, he’s been right. The market has marched endlessly higher.
But now, Kolanovic is issuing a dire warning to investors due to the “risk of more persistent inflation.”
He cited a bulging Fed balance sheet (which has quadrupled since 2010 to $7.8 trillion) as well as $6 trillion in new stimulus measures proposed by the Biden administration in 2021. Kolanovic also mentioned the lunacy going on overseas, where central banks have instituted negative interest rates.
We’ve discussed these recent trends (and more) at length over the last few months. Certain commodities erupted in value as inflationary pressure mounted. Kolanovic believes it might only get worse moving forward as portfolios fail to adjust.
Many of today’s “investment managers have never experienced a rise in yields, commodities, value stocks, or inflation in any meaningful way,” Kolanovic said.
“Most portfolios are now vulnerable to a potential inflation shock.”
He continued, adding:
“The interplay of low market liquidity, systematic and macro/fundamental flows, the sheer size of financial assets that need to be rotated or hedges for inflation put on may cause outsized impact on inflationary and reflationary themes over the next year.”
That’s right, not just the next few weeks or months, but the next year. If Kolanovic’s prediction comes true, it could mean major pain for most passive “buy and hold” investors.
Active traders, on the other hand, are likely to emerge somewhat unscathed provided that they step out of the way in time.
Today, stocks teeter on the edge of a sell-off once more. Better-than-expected jobs data is lifting the market slightly, but it won’t be enough to kick-start a rally all on its own. After all, the Fed may view it as a reason to begin tapering in the near future.
“Today’s read is another proof point that we’re one step closer to full economic recovery, sooner than some may have expected,” explained Mike Loewengart, managing director of investment strategy at E-Trade Financial.
“As we see some serious momentum building on the jobs front, all eyes will be on how this plays into action taken by the Fed, if any.”
And so, good news could be bad news once again as nearly every economic metric rises.
Including inflation.
