With the unprecedented policy and fiscal response by our federal government to keep the US economy afloat as we wait out the Covid-19 pandemic, we at Harvest believe discussions around the return of inflation, specifically monetary inflation, deserve the proper attention and vigilance. Coincidentally, this morning The Economist published a piece on the possibility of its eventual return and the fact that over the past month the Federal Reserve has ballooned its balance sheet close to 40% to $2tn and the ECB has done the same to the tune of $600bn or 12%. Net, net there will be ramifications to this historic global stimulus boost.
The monetary inflation threat that has given us some pause over the past few weeks is fundamentally predicated on the fact that during any crisis, central banks print money to alleviate stress to our capital markets and consumer. The US is somewhat fortunate in the fact that we are able to monetize our sovereign debt as it continues to be in demand as the relative global “safe-haven”. At some point in the future, all the money we are printing will contribute to a gradual devaluation of the greenback and we believe inflationary forces will surface. In addition and adding fuel to the inflation debate, will be the fact that certain parts of the supply chain, including pharma and technology, will return to the US strictly as a matter of national security. We are of the opinion as Covid-19 headlines improve as far as new cases and deaths, there will be a groundswell of support for this type of legislation and the end result will be jobs returning to US soil. Higher domestic labor costs will, over time, add to the inflation outlook.
What does this all mean? Investors over the past decade have had the luxury of valuing assets in the goldilocks scenario of low rates, low inflation and low volatility in a steady, quasi-deflationary backdrop. Undoubtedly, this has benefited every asset class including bonds, equities and private equity as most of these assets have been closely correlated and have moved higher over the past decade. The reality is that as inflationary headwinds begin to appear in due time, the products that haven’t “worked” over the past decade including gold, real assets and infrastructure may start to outperform in a meaningful way in the future.
Whether or not we are wrong, the question to ask: is it worth having all of your investments dependent on a continued deflationary environment, or is it time to diversify?
Partner, Portfolio Manager
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