Inflation Will Cool, But Only Briefly

On Nov 20, 2021

This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

Global Investment Strategy
BCA Research
Nov. 19: In past reports, we have contended that inflation in the U.S. and, to a lesser extent, in other major economies would follow a “two steps up, one step down” trajectory of higher highs and higher lows.

We are currently near the top of those two steps. The pandemic ushered in a major reallocation of spending from services to goods. U.S. inflation should dip over the next six to nine months as the demand for goods decelerates and supply-chain disruptions abate.

The respite from inflation will not last long, however. The labor market is heating up. So far, most of the wage growth has been at the bottom end of the income distribution. Wage growth will broaden over the course of 2022, setting the scene for a price-wage spiral in 2023.

We doubt that either fiscal or monetary policy will tighten fast enough to prevent such a spiral from emerging. As a result, U.S. inflation will surprise meaningfully on the upside.

—Peter Berezin

Troubling Change in China

Cumberland Advisors Market Commentary
Cumberland Advisors
Nov. 19: In the new China finance regime, a required personal contribution to resolve a debt problem is now a standard. That new standard is there, whether it was originally agreed to or not. Here’s the proof [from caixinglobal.com]: “Evergrande Chief Borrows $105 Million Against Hong Kong Properties.”

Where this leads, no one knows. But it is regime change, now applied in the world’s second-largest economy. And it is applied retroactively to the major players, who will comply because they fear for their safety (maybe their lives?). In the world of finance, a retroactively enforced personal guarantee is a new thing to contend with. It is like playing checkers with its “have to jump” rule and finding the rule changed in the middle of the game.

That means the terms of borrowing and use of debt and leverage are profoundly changed, as well. So is the credit analysis of debt. Maybe China will be better in the long run for initiating such discipline, but right now, it is administering a shock. We expect more difficulty within the Chinese capital markets and with those firms that used the U.S. financial markets as their sources of capital. We’re underweight China in our International Equity ETF portfolio. We continue to be cautious about investment there.

—David Kotok

Why Powell Is the Logical Pick

Washington Policy Weekly Update
BTIG
Nov. 19: We still believe the odds slightly favor Federal Reserve Chairman Jerome Powell being renominated for another term, although we fully admit that Fed Governor Lael Brainard’s prospects appear to have improved, both among our contacts and in prediction markets. In our view, renominating Powell is a logical step for the following reasons:

Although Powell and Brainard would almost surely both secure Senate…