Market treated inflation like a puppy and now faces setbacks: Bill Smead

Traders on the floor of the NYSE, January 24, 2022.

Source: NYSE

According to Bill Smead, chief investment officer at Smead Capital Management, the market has denied the “wolverine of inflation” and could now face multiple bear markets and “wild” price action in the years to come.

The U.S. Federal Reserve adopted a hawkish tone on Wednesday as it assessed how to tackle inflation at its highest level in 40 years. The central bank has indicated that a first interest rate hike could come in March.

The market has been mired in volatility so far this year as investors try to gauge the pace and extent of monetary policy tightening.

Speaking to CNBC’s “Squawk Box Europe” on Thursday, Smead argued that the Fed’s inaction over the past year, based on its belief that the surge in inflation was “transient,” had led the market to convenience.

“The market has denied what we call ‘the wolverine of inflation.’ is not dog friendly and you have a confluence of dynamics, certainly in the United States,” he said.

In particular, Smead noted that since the start of the pandemic, a disproportionate number of people between the ages of 30 and 45 in the United States had grown up coveting ownership of homes and cars and living outside of major coastal cities and towns. shopping centers. He argued that this paradigm shift will not be stopped by this “late attack” from the Fed.

“In other words, they’ve let this go on for too long, and the market is coming to terms with that. They’re all in denial and they’re just starting to come to terms with the beginning of their denial clearing up,” did he declare.

Smead drew parallels between the current sequence of macroeconomic events and the aftermath of the Vietnam War in the early 1970s, President Lyndon B. Johnson’s “Great Society” – a series of ambitious national programs aimed at eradicating poverty and inequalities and to improve the environment – and the Arab world. 1973 oil embargo.

“We had the pandemic war, we had Biden’s Great Society, then the Saudi Spring cut the legs off the US oil industry by driving the price to zero in April 2020,” Smead said.

“And then you pile this high number of people forming households right behind that, and a shortage of houses and a shortage of cars, and that’s the classic definition: too many people with too much money for too few goods. “

Although his firm does not attempt to time the market in the short term, he suggested that high price-to-earnings ratios, extremely high growth stock valuations and other forms of “financial euphoria” mean the market could heading into an “extremely difficult time.”

“As a company, we’re postulating that it’s going to be like the 1970s, which was a bad bear market in 73/74, and then it peaked with another bear market in 81/82, and there were only certain ways to make money, and they were all pretty keen on making money from inflation,” he said.

“In other words, turn what’s negative into positive, and you can see it in oil prices, you can see it in house prices.”

Smead argued that as pent-up savings are funneled to Main Street rather than Wall Street, continuing to put upward pressure on consumer prices, it will be stocks that benefit from inflation that will take the brunt. fronts.

“The problem is there are so few of them, and they’ve been so overlooked by all this ESG feather dust that it’s going to be a bit wild,” he said.

“We could see some real wild price action, for example, in the oil companies that are actually trying to make money in this area.”

However, Smead’s dark outlook is not shared by all. Luigi Speranza, head of global economy at BNP Paribas, said that while Fed Chairman Jerome Powell’s hawkish policies have now resulted in the pricing of French banks in no less than six rate hikes this year, it was still not enough to derail its bullish outlook for US equities if earnings growth remains strong.

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