For the last 40 years, it didn’t matter how low investors set the bar for inflation. Rich Bernstein of the eponymous advisory firm told advisors yesterday on a webcast yesterday that, like a limbo dancer, inflation always managed to get under the bar.
When it comes to investing, expectations can be as important as other yardsticks, like an excessive focus on past returns. “Treat investing like an over-under bet,” he said.
Bernstein, a former chief market strategist at Merrill Lynch where he was named to Institutional Investor’s All-America research team 18 times, isn’t predicting a return of 1970s-style inflation. But he does think inflation will surprise the markets on the upside.
Few investors associate tech stocks with 30-year Treasury bonds. However, Bernstein noted both are long-duration assets acutely sensitive to inflation and interest rate expectations. With interest rates as low as they have been for the last decade, relatively small swings in nominal rates get magnified in terms of relative percentage increases.
For example, the yields on long-term Treasury bonds, while still low, have more than doubled off their bottom during the pandemic. When one discounts cash flows out for decades, the impact is significant.
The advisory firm Bernstein founded 11 years ago is underweight in both U.S. equities in general and tech stocks in particular. Bernstein voiced suspicion that many advisors have clients sitting on big capital gains, in love with their various tech shares. Some, or many, are afraid of “ruining a relationship.”
History provides some indication of how this ends. “In the 1990s there were all sorts of stories about how technology would change everyone’s life,” he said. “Most of the stories came true. But tech stocks were the worst performing sector for the next decade.”
During the webcast, Bernstein made a powerful case for why inflation was likely to surprise markets after decades of anemic price increases around the world. A recent survey of small business owners by the National Federation of Independent Businesses found, on average, they planned to raise prices 6% this year, he said.
Then there is the unprecedented money supply growth. Currently, Bernstein said it is increasing at a 27% clip. That compares to 14% or 15% in the 1970s.
He also recalled the 2010-2012 period after the financial crisis when inflation hawks predicted dire consequences from the Bush administration’s TARP bailout and the Obama administration’s stimulus program. Both programs are dwarfed by the size of pandemic-driven fiscal and monetary stimulus efforts. “The people who were so wigged out at 10% or 11% money supply growth from 2010 to 2012 are silent now,” he said.