Inflation Is Here To Stay

Inflation Is Here To Stay

Inflation isn’t transitory, posit two of the world’s biggest asset managers, and a safe refuge will be hard to find. This from an article in Bloomberg Opinion.

In an interview for Bloomberg Television, Nicolai Tangen, who was a former hedge fund owner and now runs the largest sovereign wealth fund in the world for Norway, said that inflation will stay high for a long time. His $1.3 trillion fund gained 14.5% last year, but he expects the fund to struggle in the coming months.

Meanwhile, the world’s biggest money manager, BlackRock Inc., with $10 trillion of assets, published a research paper purporting that consumers have switched from spending on services to goods due to the pandemic, and that has resulted in supply chain disruptions and bottlenecks. If central banks start tightening, BlackRock said, they may wind up damaging growth in their efforts to reduce inflation.

And indeed, the Fed looks poised to start raising rates in March—the first of possibly five raises in 2022. If they keep up at that pace, the Fed funds rate would finish this year at about 1.3%—more than half a percentage point higher than the average for the past 10 years. And inflation isn’t only happening in the U.S. The Bank of England is expected to raise rates as well.

So far this year, the global value of equity markets is down about 5%, and the S&P 500 has recorded the worst start to the year in more than a decade. And with inflation looming like a dark cloud, bonds won’t provide a refuge. The stalwart 60/40 portfolio has lost more than 4% in January because both asset classes are slipping, Bloomberg reports. The last time the Fed tightened policy, in 2018, stocks suffered, with the S&P 500 posting its worst year since the financial crisis of 2008. Many experts are advising reduced exposure to the stock market and to favor cash instead after its strong gain last year.

BlackRock said in their report that investors will need to rethink how they evaluate asset prices in reaction to the shifting landscape of the economy, writing “Greater macro volatility – in both growth and inflation – implies greater market volatility and higher risk premiums on bonds and equities,” as quoted in the article. Navigating the volatility already seen this year will certainly challenge even the steadiest of traders.