Inflation – The Real Deal

A lot of stress happened to hit the markets all at once in September, but wait, didn’t we predict that? Not that we have any inside information, but we pay attention to the signs, and over the summer there were many signs. As mentioned in previous commentaries, one of the things we’ve been keeping a close eye on is the supply shortages, the shift in consumer demand, COVID measures, and the inflationary pressures as a result. Over the past year economist’s and central bankers have assured the public that inflation is simply a transitory issue, that would correct as the economy recovers from the global shutdown. We believe that inflation is not transitory.  The switch to green energy from lower cost oil, natural gas and coal,  wage pressure and supply shortages will all mean higher inflation for longer.
 
In August, we picked up on a noticeable shift in tone amongst these figure heads, including the ongoing measures around COVID and the potential impact it was having down the line. September has indeed helped paint an even clearer picture of where things are headed, which could be the perfect storm for inflation, marking the first real inflation scare in over 40 years.  How’s that for a headline? The overall impact on the markets in September was not too dramatic. The TSX was down on the month -2.55% and the S& P500 -2.03%, while at the same time we raised our year end price targets for both indices. To be clear, it is good for the markets to pull back; we never like it when it just keeps moving higher.
 
To put things very simply, the upbeat consensus view that was held earlier this year by economists on real growth is fading. This doesn’t mean that companies won’t experience continued earnings growth, but the outlook for the overall economy is being revised downward, and at the same time inflation estimates have jumped. The fact that inflation forecasts are rising faster than growth forecasts helps explain why bond yields are grinding higher; as real yields are being driven by prospects of a more hawkish Fed. For these reasons, we believe active management is more important now than ever before. Good stock picking and active bond management will be crucial going forward under the current conditions and for us the proof is in the pudding, as they say, and we make good pudding.

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