At what point does inflation overcome the strength of the consumer?
It’s a question we’re fielding lately as investment professionals balance positive predictions about the US economy against rising inflation, which yesterday was reported at a new 40-year high of 7.9%.
While conceding that “inflation will be higher for longer,” Co-CIO and Head of Long/Short Strategies Michael Grant disagrees with those who expect higher prices to lead to extreme tightening or even a recession.
“Inflation can have windows of time when it settles back to the 3%-5% range, which I think is acceptable to the Fed. I do not see the Fed overreacting to bring inflation down because there is not the political capital for this kind of negative, Fed-induced shock to the economy.”
In fact, Grant, also Senior Co-Portfolio Manager of Calamos Phineus Long/Short Fund (CPLIX), goes so far to suggest, “I think the surprise may be that the developed world avoids recession and remains unusually strong.
“How much higher oil prices can go before they are a genuine squeeze is anyone’s guess, but we are not there yet.”
“We came into the Ukraine crisis with enormous economic momentum due to the end of Covid,” Grant continued. “That kind of momentum is not easily stalled with headlines.”
Grant is calling for a strong economy through 2023, with the risk of a recession no sooner than late 2024 or 2025. “I suspect the 10-year Treasury yield is heading to 2.5% plus by year-end, and assuming short-term rates move to 2%, the yield curve will still not be negative—in other words, no late cycle signal.”
He commented further on what he called “the Putin shock.” The real takeaway, he said, is that “the world will increasingly fragment into regional zones of profitability, corporate governance and political ideology.”
“Corporate managements are finally waking up—the Russian sanctions are the wake-up call—to the fact that they must choose sides. This implies a very robust capital spending cycle as the world’s manufacturing base is reconfigured. Just one example: it will take five years, start to finish, to build an LNG [Liquefied Natural Gas] facility in southern Spain to reduce Europe’s reliance upon Russia. This will add to the inflationary impulse, but equally to the resiliency of economic growth,” he said.
“The key transmission mechanism of the Putin shock is the price of oil. If it stays around these levels, I think the consumer is just fine,” according to Grant. “The Dec 22 crude future is still only $87/barrel so the market is not believing there will be a material problem with oil supplies. How much higher oil prices can go before they are a genuine squeeze is anyone’s guess, but we are not there yet.”
If anything, Grant said, “the silver lining for equities is that the Putin shock will give the Fed the alibi to overlook the immediate inflationary pressures and progress with more cautionary language.”
Investment professionals, for more information about Grant's perspective and/or CPLIX, please contact your Calamos Investment Consultant. You can reach him or her at 888-571-2567 or firstname.lastname@example.org.
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The principal risks of investing in the Calamos Phineus Long/Short Fund include: equity securities risk consisting of market prices declining in general, short sale risk consisting of potential for unlimited losses, foreign securities risk, currency risk, geographic concentration risk, other investment companies (including ETFs) risk, derivatives risk, options risk, and leverage risk. As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.