When markets and data look this contradictory, it may be easier to start by counting on your fingers.
“Give me a one-handed economist,” President Harry Truman once pleaded. “All my economists say, ‘on the one hand…,’ then, ‘but on the other.’” He would have been just as frustrated as the rest of us with the mixed signals coming from this summer’s financial markets. Bondholders apparently fret about a monetary policy mistake (or inflation anxiety) that will choke off the current recovery. Equity investors, meanwhile, see a world running hot with earnings delivering consistently enough to warrant a premium to historical valuations.
As a public service, we have devised a simple test to help choose which hand is more convincing. Start each of these sentences with the words “I believe” and hold up a finger on your right or left hand, depending on which statement rings true.
SUPPLY OF THINGS
… the sharp shutdown and recovery of world demand has interrupted supply lines, but this is mostly temporary and we won’t be talking about it much by the end of the year. (Hold up a left-hand finger)
… the benefits of globalization have largely passed, and that politics and pandemics will force companies to build-out more expensive supply chains closer to home, triggering persistent pressures for higher prices. (Hold up a right-hand finger)
SUPPLY OF COMMODITIES
… commodity prices will cool as OPEC sorts out its politics and supply responds to demand. Some corporate profits may suffer, but not for long. (Left)
… the green agenda makes it effectively impossible to build a new steel mill or copper mine even as demand soars for infrastructure and electric vehicles, which require five times the copper of vehicles with internal combustion engines. Higher input costs will hurt profits even as the Fed is forced to tighten aggressively to end the party. (Right)
SUPPLY OF PEOPLE
… government paychecks and lingering COVID concerns have created a temporary shortage of waiters and cooks, but that will sort itself out by fall. Meanwhile, an ample global labor supply and technology that continues to take on the tasks of humans at work will keep wages in check. (Left)
… the pandemic has permanently changed the workforce, sending baby-boomers into retirement and others to reconsider their career priorities. A lasting U.S. labor shortage and U.S.-China trade friction will trigger a new paradigm of rising wages and inflationary expectations. (Right)
… the reopening is only beginning and much “revenge consumption” still lies ahead, especially given ample household savings. Meanwhile, generous fiscal and monetary policy looks like it is encouraging a new corporate capex cycle while banks have just started to lend again. (Left)
… new COVID variants and possible disappointments in the scope of infrastructure spending in America or Europe will end the cycle sooner than you think. (Right)
… populist politics, possibly boosted by the agony of COVID, have now enshrined new and more generous models for both monetary and fiscal policy. Governments that can’t say “no” will usher in a world of vastly greater spending, debt, and inflation. (Left)
… the same forces that have delivered four decades of falling inflation and slower growth remain unaffected by the pandemic. Globalization and technology will continue to undercut wages and demand, while aging populations and developing countries will keep picking saving over spending. (Right)
We won’t score for technical factors or sentiment, because they tend to be transient—and we have run out of fingers.
If you see more right-handed fingers than left, then you are comfortable with the recent move in bonds and likely believe stocks are long-since overdue for a major correction. You will also be somewhat depressing company at cocktail parties should they return this fall, but you have probably come to terms with that.
I am mainly with those of you showing more left-hand fingers, even if the recent fall in rates has forced a fresh reconsideration of the data. Growth is slowing but should remain very strong over the next 12–18 months. Inflation is mostly short term, and the world’s central banks have every interest in overshooting their price targets. We still have a wave of consumer spending, corporate capex, and bank re-leveraging ahead. This should favor equities, Emerging Markets, and private assets.
My one “right-hand” finger is for the last question around the world beyond next year. The deflationary forces of the last decades remain very powerful and undisturbed by the pandemic shock, unless of course cheap money and government largesse somehow trigger a new wave of inflationary expectations that become self-fulfilling.
For now, I am firmly a southpaw, but my other hand is standing by if the data and politics start to shift.