Rising inflation expectations may be even more important for investors than rising inflation. These expectations are forcing individual investors and money managers to include a new factor in their models and strategies that has been absent for the better part of two generations. Notably, expectations are essentially aspects of human behavior — and since behavior is quite difficult to model, rapidly shifting behaviors tend to challenge investment strategies built on models.
This adjustment to a landscape that’s new for many investors is calling established verities into question — even down to the near-ubiquitous 60/40 allocation to stocks and bonds. We are fortunate at Guild to have an institutional memory of investment environments characterized by rising inflation and rising interest rates. Other managers may not be so fortunate. This recalibration will affect investors deeply — from their asset allocation strategies, to the analytical lens which they bring to their expectations for individual stock performance.
At the same time, the need to adjust to the expectation of a world where inflation and rising rates are on the table is occurring in the context of other highly disruptive trends. We’re not just talking about technological disruption — that kind of “future shock” is well-known and well-accounted for in many investors’ minds. But over the past few years, and especially in the last year, the advent of macro-relevant digital assets and decentralized finance platforms, and the implementation of unprecedented monetary and fiscal policy, have occurred in tandem. That has created a fiscal and monetary landscape changing fast enough to make heads spin even for investors who weathered the 2008 financial crisis. Investors are going to have to forget many things they thought they knew.
As noted above, we still like U.S. cyclicals, and as a “warrant on global recovery,” we still like Japan. We believe that we are in a sideways consolidation that is already unfolding. Growth stocks may correct for a few weeks, and then rally again.
Gold and silver are beginning to see some positive movement; we like gold, silver, copper, bitcoin, and grains as ways to benefit in an inflationary environment. If the rate at which the real, experienced cost of living is rising exceeds long-term interest rates — and particularly if it is accelerating its upward divergence from interest rates — our desire for inflation beneficiaries will rise correspondingly.
Thanks for listening; we welcome your calls and questions.
