By J. Keith Buchanan, Portfolio Manager – GLOBALT Investments.
“Pay no attention to that man behind the curtain! The Great Oz has spoken!”
– The Wizard of Oz
We all know the scene. When the Tin Man, Scarecrow, Cowardly Lion, and Dorothy finally made their way to the Wizard of Oz, they all feared an all-powerful, omnipotent figure, granting wishes and issuing justice from a gilded throne. Come to find out, it was just a humbug working some controls behind the curtain.
This moment in that great story is reminiscent of the commentary from market prognosticators these days on the oft-misunderstood macroeconomic phenomenon of inflation. Hyperinflation, disinflation, deflation, stagflation, and any other play on pricing instability for goods and services has become the topic du jour over the past several weeks.
In large part, the market has been divided into two general camps. The hyperinflation crowd is seeing basic industrial goods like copper, lumber, and others undergo unprecedented rallies off the bottom in 2020 as historic fiscal stimulus, accommodative monetary policy, and a reopening economy provides fuel to undoubtedly drive prices higher. In this case, runaway inflation poses a destabilizing risk to asset prices.
The other side of this debate centers around a revamped view of the Phillips curve. The traditional Phillips curve theorizes that there is an inverse relationship between unemployment and inflation. In other words, the tighter the labor market becomes, the more likely it is for the economy to afford higher prices, which sets the stage for widespread and sustainable inflation. However, historically low labor participation has artificially depressed unemployment and stood in the way of true labor market tightness which manifests itself as wage gains. Therefore, any pockets of inflation are transitory in nature as the main ingredient for real and unhealthy inflation, sustained labor tightness, is just not here yet. FOMC Chairman Jerome Powell has time and time again positioned himself in this camp. In this case, the potential for disinflation, deflation, or stagflation also poses destabilizing risks to asset prices.
However, we would caution against becoming too entrenched in either of these camps. The boogeyman in front of you is rarely the one you should fear. It is the unanticipated turn of which it pays to be cautious. We all understand that the stable pricing of goods and services is critical to our everyday lives. We see that at the gasoline pump every day. However, the front-and-center risk being heavily anticipated, priced into markets every minute of every day, and consuming the majority of business talk airwaves can very easily disappoint and prove investors’ worst fears and anxieties to be largely unfounded.
In other words, inflation becomes just that powerless humbug behind the curtain.
GLOBALT is an SEC Registered Investment Adviser since 1991 and, effective July 10, 2013, remains a Registered Investment Adviser through a separately identifiable division of Synovus Trust N.A., a nationally chartered trust company. This information has been prepared for educational purposes only, as general information and should not be considered a solicitation for the purchase or sale of any security. This does not constitute legal or professional advice, and is not tailored to the investment needs of any specific investor. Registration of an investment adviser does not imply any certain level of skill or training. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information may be required to make informed investment decisions, based on your individual investment objectives and suitability specifications. Investors should seek tailored advice and should understand that statements regarding future prospects of the financial market may not be realized, as past performance does not guarantee and/or is not indicative of future results. Content may not be reproduced, distributed, or transmitted in whole or in part by any means without written permission from GLOBALT. Regarding permission, as well as to receive a copy of GLOBALT’s Form ADV Part 2 and Part 3, contact GLOBALT’s Chief Compliance Officer, 3400 Overton Park Drive, Suite 500, Atlanta GA 30339. You can obtain more information about GLOBALT Investments and its advisers by accessing the Investment Advisor Public Disclosure website.
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