46 BARRON’S November 22, 2021
Market View
Wage-Price Spiral Is Coming
Global Investment Strategy
BCA Research
bcaresearch.com
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 real-
location of spending from services to goods.
U.S. inflation should dip over the next six to
nine months as the demand for goods deceler-
ates 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 distri-
bution. 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. infla-
tion will surprise meaningfully on the upside.
—PETERBEREZIN
Troubling Change in China
Cumberland Advisors Market Commentary
Cumberland Advisors
cumber.com
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 orig-
inally 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 con-
tinue to be cautious about investment there.
—DAVIDKOTOK
Why Powell Is the Logical Pick
Washington Policy Weekly Update
BTIG
btig.com
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, renominat-
ing Powell is a logical step for the following
reasons:
- Although Powell and Brainard would
almost surely both secure Senate confirma-
tion, Powell would cruise through the pro-
cess and secure bipartisan support.
- Progressive opposition to Powell has
been relatively modest and disjointed.
- Powell’s renomination could provide a
modicum of political cover to advance the
nominations of more progressive board and
vice chair nominees.
- Even though Powell and Brainard ap-
pear to have similar monetary-policy views,
our sense is that the markets would wel-
come the leadership continuity that comes
with a second term for Powell.
One of the lines you hear most often in
Washington is “personnel is policy.” This
maxim is true across government, but espe-
cially so with the Federal Reserve, given its
centrality in the global economy. In this vein,
we firmly believe that the White House will
use its remaining nomination opportunities
to advance progressive picks who will priori-
tize full employment. In discussing the open
Federal Reserve Board seats, we have heard
the following names mentioned: CEA Chair
Cecilia Rouse, AFL-CIO Chief Economist
William Spriggs, professor Lisa Cook, and
economist Seth Carpenter. In recent days,
Roger Ferguson’s name has resurfaced, as
well.
—ISAACBOLTANSKY
Growth Trumps Value
House Views
Truist Advisory Services
truist.com
Nov. 16:Consistent with our sector strat-
egy, where we upgraded the technology
sector, the largest sector in the growth
style, we are upgrading our view of the
growth style, relative to value, to Neutral
from Less Attractive.
Technology has been much stronger in
our quantitative work, and its price relative
to the broader market recently broke out of
the trading range it has been in since Sep-
tember 2020. The consumer-discretionary
sector, which is the second-largest in the
growth index, is also showing strength in
our work.
While we still have a favorable view of
the cyclical sectors, such as financials and
energy, the S&P 500 Value Index, our
primary value benchmark, has a heavier
weighting to defensive sectors, such as con-
sumer staples and utilities, which are mak-
ing new price lows, relative to the market
and where we are Underweight in our sec-
tor strategy.
As a result, the value index doesn’t fully
reflect the cyclicality that we favor, given
our view that the third-quarter growth
scare is in the rearview mirror and that the
U.S. economy is set up for positive sur-
prises. This is also another reason we pre-
fer U.S. small-caps, which have more expo-
sure to cyclicality and less exposure to the
defensive sectors.
—KEITHLERNER
Favoring Fixed Income
Weekly Market Commentary
Winthrop Capital Management
winthropcm.com
Nov. 15: Interest rates continue to creep
higher, and spreads on riskier assets remain
tight. Interest rates have increased over 60
basis points, measured by the yield on the 10-
year U.S. Treasury, since the beginning of the
year. This has put pressure on performance
across most fixed-income asset classes, as the
total return for the Bloomberg U.S. Aggre-
gate Index is down 1.80% year to date.
In addition, investment-grade credit
spreads are tighter by 10 basis points, year
to date. With credit spreads trading at his-
torically tight levels, the real yields on in-
terest rates adjusted for inflation are nega-
tive. We expect this phenomenon to persist
through next year as the rate of inflation
remains elevated.
Considering these challenges, the fixed-
income asset class still plays a critical role in
a diversified portfolio asset allocation. Over a
30-year cycle, fixed income has consistently
proved to be the best way to diversify a
portfolio and manage performance through
capital-market volatility. Both long-term and
near-term correlations across equity and
fixed-income markets have remained negative.
With equity-market valuations at historically
high levels, our assumption for expected
returns is significantly lower, and portfolio
diversification is extremely important.
We are in the process of reducing the
large-cap growth allocation in portfolios and
adding value-based strategies. In addition, we
are utilizing short-duration fixed-income strat-
egies in our asset allocation in order to fur-
ther protect our portfolios from interest-rate
volatility. While expected returns may be
lower, these fixed-income strategies should
protect principal and provide better protec-
tion against rising inflation than broad market
strategies over the intermediate term.
—GREGORYJ.HAHN,ADAMCOONS
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”Wage growth will broaden over the course of 2022, setting the scene for a price-wage spiral
in 2023....U.S. inflation will surprise meaningfully on the upside.” —PETERBEREZIN,BCA Research
This commentary was issued recently by money managers, research firms,
and market newsletter writers and has been edited by Barron’s.