Some of the world's largest asset managers such as BlackRock Inc., Fidelity Investments and Carmignac are warning markets are underestimating both inflation and the ultimate peak of U.S. rates, just like a year ago.
The stakes are immense after Wall Street almost unanimously underestimated inflation's trajectory. Global stocks saw $18 trillion wiped out, while the U.S. Treasury market suffered its worst year in history.
And yet, going by inflation swaps, expectations are again that inflation will be relatively tame and drop toward the Federal Reserve's 2% target within a year, while money markets are betting the central bank will start cutting rates.
That's set markets up for another brutal ride, according to Frederic Leroux, a member of the investment committee and head of the cross asset team at €44 billion ($47 billion) French asset manager Carmignac, since worker shortages are likely to fuel higher-than-expected inflation.
"Inflation is here to stay," said Leroux in a phone interview. "After the crisis central bankers thought they could decide the level of interest rates. In the past two years they realized they don't: Inflation does."
He added that one of the biggest mis-pricings in the market today is the expectation that inflation will come down to 2.5% next year, before adding that the world is entering a macroeconomic cycle comparable to between 1966 and 1980. That period saw energy shocks that drove US inflation into double digits twice.
"We have to live in a very different environment than before," Leroux said. Gold, Japanese stocks and trusty, steady companies will make a comeback, in his view, as negative real yields persist and central banks will be unwilling to inflict too much pain.
On Thursday, Fed officials reiterated the central bank's hawkish stance with comments that sought to dispel hopes for an imminent reversal in the policy path. On Friday the European Central Bank's Chief economist Philip Lane echoed that sentiment, saying price pressures will remain elevated even if surging energy costs ease.
