Page 43 - Investment Advisor July/August 2022

tant indicator, and the quits rate? A year things get tough, he added. “I wouldn’t tion,” he said, adding that the Fed could
and a half ago hardly anybody looked at give up on a heavy U.S. allocation as yet. have started acting a year ago when
this. Hardly anybody looked at the com- The time will come, but I don’t think the U.S. economy was seeing strong
position of inflation,” he said. we’ve fully priced in the global growth growth. “Now, because they’re so late,
It’s also important to pay attention to concerns that are ahead of us and if we they’re going to be hiking (rates) into a
whether the corporate sector is giving a do price them in, once again, it’s going to weakening U.S. economy and a weaken-
common narrative, because that infor- hit the rest of the world much more than ing global economy, which means that
mation comes much sooner than macro it hits U.S. assets.” at the minimum, there’s a high prob-
data, he added. More than a year ago ability of stagflation and there’s a risk
companies pointed to costs, supply and 6. Look at consumer demand. of recession.”
labor shortages, supply chain problems, For society, inflation is “yet another
“and how they needed to rewire more great unequalizer,” El-Erian said, noting 9. A September pause, though
resilience into the system. At the macro the higher food and gas prices are eating unlikely, would be risky.
level economists didn’t pay enough up “an enormous amount of the budget” The Fed is “very, very likely” to raise
attention to that.” for more vulnerable households. That interest rates by 50 basis points in
leads to problems for companies and their next two meetings, according to
4. Client communication investors, he noted. Inflation is “com- El-Erian, who doesn’t expect policy-
is important. ing after” consumer demand, and that’s makers to stop until they reach what
The most important thing now is how a supply-driven inflation problem they consider the neutral rate, which is
“explaining to clients what’s going on, becomes a demand problem, “and that’s more than 2%.
high-level, high-frequency communica- what we need to minimize.” While Fed policymakers have sig-
tions,” and telling them that the way naled they’ll approve rate hikes in June
they think about safe assets should be 7. The Fed has some explaining to do. and July to help tame inflation, Atlanta
different, El-Erian said. “It should be Observing the Federal Reserve’s infla- Fed President Raphael Bostic reported-
more in terms of ‘What characteristics tion decisions over the past year has ly suggested that a pause in September
am I looking for,’ because that’s where been “a little bit like seeing a car crash in could make sense, as he assumes
the safe havens are,” he said. “In a world slow motion,” El-Erian said. “I’m seeing inflation will have started to retreat
like this, if you’re worrying about infla- a policy mistake gather momentum and by then. “I doubt they will pause in
tion, the best characteristics are price hopefully that’s going to stop.” The Fed September. If they pause in September
setters, not price takers, that also have needs to explain its delays in addressing we risk having the inflation problems
relatively inelastic demand.” inflation, he said. last even longer … so I think we should
“A lot of the volatility we’ve had, anticipate a number of hikes until they
5. Stick with a heavy U.S. unsettling volatility I want to stress, has get to about 2%,” El-Erian said. “And the
portfolio allocation. come from this notion that inflation is risk is that they may break something
U.S. assets have outperformed the rest a problem and the Federal Reserve is along the way but that’s unfortunate-
of the world for four or five years and it behind,” he said. ly what happens when you are so far
makes sense for investors to stick with The Fed grossly mischaracterized behind the curve.”
domestic securities for now, El-Erian said. inflation last year by describing it as
“Lots of people have advocated investors “transitory,” a term that Fed Chairman 10. Beware of steep drops in inflation.
should fade the U.S. and they should put Jerome Powell retired in late November, El-Erian warned that inflation, now over
more money outside the U.S. And my El-Erian said. “Unless the marketplace 8%, won’t decline sharply by year end
reaction has been consistently ‘not yet, believes in the ability of the Fed to without some economic damage. “Are
not yet, not yet,’ and those who have faded understand the inflation dynamics it will we likely to get to 3 to 4%? We could,
the U.S. have underperformed,” he said. worry about yet another policy mistake.” but let’s understand what that means. If
“The U.S. is by far the more resil- we do get to 3% to 4% it’s because we’ve
ient economy,” with very strong balance 8. Fed delays increased stagflation damaged demand in a major way. We
sheets, he said. “We’re much more entre- and recession risks. won’t get down that quickly unless we
preneurial than the rest of the world” The delay in addressing inflation has damage demand, and that’s not a softish
and are viewed as a safe haven, attract- raised economic risk, El-Erian explained. landing. That’s a hard landing,” El-Erian
ing money from around the world when “When you’re late, you risk stagfla- said, responding to a question.

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