Inflation is transient, just like dinosaurs

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This commentary was posted recently by fund managers, research firms and market newsletter writers and was edited by Barron’s.

Inflation: Transient like T. Rex

Discussion points
BMO Capital Markets
October 22: Looks like inflation is transient … in the same way that dinosaurs were transient, that is, they stomped for centuries, terrified all kinds of beasts, and generally dominated debates before they vanished. Persistent strength in energy prices, a rapid rebound in metal prices, worsening supply shortages – pumpkins and costumes now! Admittedly, bond markets are in serious question, with 10-year yields reaching 1.70% Thursday in the United States and Canada, the first time since spring for the former and late 2019 for the latter. Still, stocks were far from disrupted by the looming inflationary threat, with the


S&P 500,

Dow Jones industrial average,
and the Toronto Stock Exchange all hit record highs this week, ruling out September’s mini correction (which totaled 5.2% for the S&P) ….

This commentary was posted recently by fund managers, research firms, and market newsletter writers and was edited by Barron’s.

Even though inflation is raging, real activity has been mostly disappointing lately. This directly ties into our theme that spending remains strong, but it is funneled more into price gains and not volume gains, as supply simply cannot keep pace.

Powerful metals

UBS House View-Daily US
UBS
October 20: The shift to renewable energies and zero-emission technologies is heavily dependent on transition metals. For example, electric vehicles require three to five times more copper than internal combustion cars, as well as lithium, nickel, cobalt and rare earths. Some producers react, with


Rio Tinto

this week, claiming it would double spending on energy transition metals to $ 3 billion per year from 2023. Yet supply is not increasing at an adequate pace and geopolitics presents new challenges for the economy. ‘supply.

We recently raised our three- to six-month copper price target to $ 12,000 per metric tonne, which is approximately 20% above current prices. Supply problems on the energy side threaten the production of refined industrial metals in China and Europe for next year, which has prompted us to revise our copper price forecast upwards. We also remain constructive on other transition metals like nickel, cobalt and lithium, and believe companies interested in them should see increased cash flow leading to higher returns for shareholders.

Why Won’t the Fed Tighten?

Third Quarter Letter
Royce Investment Partners
October 18: The Federal Reserve’s transient description of inflation could be viewed with cynicism as its attempt to “denigrate” inflation expectations, which it so firmly wishes to anchor. There have been over 30 instances of central bank tightening so far this year, almost all in developing or emerging markets. Several have tightened several times. The stage may well be set for increases in developed countries. Certainly, companies doing business in emerging and developing countries will face headwinds. Too much stimulus, whether fiscal or financial, could cause the economy to overheat, further raising inflation and ultimately interest rates.

Basically, the Fed is afraid of making a policy mistake by tightening now because of temporary inflation numbers. They believe that we can still see “substantial further progress” in employment. Essentially, due to the pandemic, closed schools and extended unemployment benefits, the 40-year low in the [labor force] the participation rate will increase. President Jerome Powell thinks there is still a significant margin. It’s a big bet. Although the participation rate may increase for the reasons it suggests, the degree of increase is unknown. It appears that the pandemic has changed attitudes towards work in ways that remain to be discovered. The risk is therefore that we have too few employees to allow us to solve the shortages, and the resulting inflation would continue. Time will tell us. I hope he is right as far as this will solve the shortages and the pressures on inflation, although I have my doubts.

Interestingly, Powell himself said that central banks “have always been faced with the problem of distinguishing transitory inflation spikes from more problematic developments.” It is clear that the Fed has a different test for raising rates than for reducing quantitative easing.

Avoid crypto, but watch it

Strategic revenue outlook
Osterweis capital management
October 18: We have actively avoided anything crypto-related for a long time, including companies whose businesses are heavily dependent on crypto prices or trade flows. Bitcoin and non-fungible tokens, or NFTs, are not scannable as investments. These are complete speculations and appropriate illustrations of the Biggest Fool Theory. Examples are MicroStrategy, which raised a few billion dollars earlier this year through the sale of several convertible bonds, which it then quickly invested in Bitcoin, and


Coinbase
,

a large crypto exchange (which was recently hacked) that issued high yield debt earlier this year. These issuers do not present the type of risk / return profiles that we find attractive.

We recognize that the crypto ecosystem continues to grow and attract more capital, for better or for worse, as everyone searches for the next Bitcoin or Beeple NFT. We still maintain that at some point we will see a significant destruction of capital among those who invest large sums in these so-called assets and businesses. Yet despite not investing in all things crypto, the broader acceptance and expansion of the crypto industry provides us with valuable barometers of investor sentiment and risk appetite. We carefully observe commentary and price action for crypto assets / companies looking for clues regarding changes in speculative fervor, which often run parallel and sometimes portend swings in sentiment in the stock and bond markets. So while we have no direct crypto risk in our portfolio, we find the markets informative and useful as a signaling mechanism to alert us to possible changes in “risk” in investor sentiment.

Zillow’s dilemma

This week in the markets
Capital of Stillwater
October 18: A funny thing happened with Zillow’s takeover of the house rollover market: They lacked the bodies to process the deals and contractors to make the improvements needed to actually topple the houses. Again, the human side of the equation cannot keep up with the algo machines.

Q3 EPS is better than you think

Weekly strategic overview
Waddell & Associates
October 15: The S&P 500 is expected to post year-over-year profit growth of 27.6% for the third quarter, according to FactSet data. Given that most companies are reporting actual profits that are higher than estimated, what is the realistic projection for the quarter? Based on the five-year average improvement in seasonal earnings growth due to companies reporting positive earnings surprises, the index is likely to post earnings growth of nearly 35% for the third quarter. , which would be the third consecutive quarter from one year to the next. one-year profit growth exceeding 30%.

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