Three Longs & Three Shorts

How Would Investors React If We Finally Get Some Inflation?

In last week’s edition of ‘Three Longs & Three Shorts’ we highlighted the views of Russell Napier and Albert Edwards with respect to the potential for inflation to rise going forward (see In this piece, Ben Carlson interviews Jeremy Siegel (he of ‘Stocks for the Long Run’ fame) on the same subject and elicits some interesting views: “With this liquidity in the economy, as we say, I expect moderate inflation, not — I’m not talking about hyperinflation. And so, I’m nowhere near that. I expect inflation to move up in the next year to 2, 3, 4 percent, 5 percent and maybe run again in 2022 the same way.
So, cumulatively, I expect inflation may be to go up — the price level, consumer price level go up 10, 12 percent over the next few years, maybe 15. Now, don’t forget, we had almost 15 percent inflation in one year back in the terrible years, of the late ’70s.
So, again, this is what I call moderate inflation. I expect bond yields to rise from the current half percent to one, one and a half, two, two and a half, three. They’re still great hedge, short-term hedge. Three, three and a half on treasuries, maybe four.
If we have 15 percent inflation, you wipe out $3 trillion.
So, basically, that’s how you paid for it. Inflation is another way to tax people. It’s a tax on the bondholders.”
This point – that inflation will basically be used by Western Governments to tax their people and get them to pay for Covid – is then brought home by Carlson using a series of interesting charts (you will have to read the piece to see the charts). The point he makes is: “Inflation went from under 2% in 1945 and 1946 all the way to nearly 20% by 1947. By 1949, it was back under 2% and heading lower. After another minor bout in the early-1950s, inflation would remain subdued until the late-1960s…. ce 1983 inflation has been 5% or more on a trailing 12-month basis just 4% of the time. It’s only been more than 4% around 15% of the time.
This century, higher than average inflation is basically non-existent. Since 2000, it’s been running at 5% or higher less than 1% of the time. And it’s only been 4% or more 6% of the time.”
Carlson then tees up the big question: If inflation rises to more than 4% (which is what Russell Napier and Jeremy Siegel expect), is that a good thing or bad thing? QE-haters will say that the rise of inflation will signal a resurgence of traditional value investing. Carlson takes a different view: “Isn’t this the best-case scenario for the U.S. economy in the coming years? It would signal a boom in the post-Covid economy. The giant debt load we’ve taken on would be cleared up a bit from an inflationary shock. And getting inflation under control after the initial burst would bring things back to normal (if such a thing exists)….While many investors would likely panic if that were to happen, it would be one of the best-case economic scenarios going forward.”