Latest / Bloomberg Intelligence / Joe McAlinden Sees the US Entering a Stagflation Period (Audio)

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Joe McAlinden Sees the US Entering a Stagflation Period (Audio) · Bloomberg Intelligence

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  Speaker 1: You're listening to Taking Stock with Kathleen Hayes and Pimp
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  Speaker 1: Box on Bloomberg Radio. Stagflation What is it? Many people
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  Speaker 1: have never really heard the term, Joe McLendon has. He's
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  Speaker 1: the founder and the chairman of Macallindon Research Partners and
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  Speaker 1: also Catalpa Capital Advisers. Joe Mcalindon, thank you very much
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  Speaker 1: for joining me. Tell people what is stagflation? And it's
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  Speaker 1: going to have to involve you explaining how many years
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  Speaker 1: you've been in the investment business. I'm sorry, Well, you know,
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  Speaker 1: there aren't a whole lot of folks in the business
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  Speaker 1: today who actually lived through the stagflation period, but back
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  Speaker 1: in the sixty and they say, if you remember the sixties,
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  Speaker 1: you weren't really there, but I was there. We started
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  Speaker 1: a process beginning with with unpopular wars coupled with expansive
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  Speaker 1: social spending that led to deficits and the central bank
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  Speaker 1: monetized a lot of that selling the seats for a
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  Speaker 1: big surge in inflation and subpar growth during the nineteen seventies,
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  Speaker 1: which became really bad towards the end of that decade
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  Speaker 1: of the seventies. So the stag inflation idea is that
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  Speaker 1: the economy is is UH stag stagnating basically with subpar growth,
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  Speaker 1: and inflation is beginning to rear its head and perhaps
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  Speaker 1: on its way too much higher numbers than what the
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  Speaker 1: FED would like, And that PIM is what I think
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  Speaker 1: we're on the cusp of here. UM a period we've
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  Speaker 1: had subpar growth, but we've had also very low inflation.
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  Speaker 1: But as I passed through the data that that has
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  Speaker 1: been coming out over the last six nine months, what
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  Speaker 1: I see is is a big surgeon inflation bubbling onto
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  Speaker 1: the surface, which is going to reach the headline level
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  Speaker 1: in the second half of the year, in this coming winter.
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  Speaker 1: So I think we're gonna be UH in a stagflation
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  Speaker 1: period for sure, with one caveat that the very short
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  Speaker 1: term GDP data, I think, like the second quarter a
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  Speaker 1: third quarter UM are going to be on the stronger
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  Speaker 1: side UM, but then I think the growth rates will
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  Speaker 1: recede back to that stubborn. Two. It's been stuck at
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  Speaker 1: for for for several years now. Now the GDP report
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  Speaker 1: that will be out a week from today, of course
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  Speaker 1: we'll be bringing that to you live on Bloomberg. So
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  Speaker 1: a little bit more on inflation. What leads you to
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  Speaker 1: these to the conclusion that we're going to see this
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  Speaker 1: move higher, an acceleration in the inflation rate. Well, when
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  Speaker 1: you look at the actual published numbers UH, UM the
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  Speaker 1: UH and you and you UH get granular and dive
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  Speaker 1: into two the weeds, you find that the for example, UM,
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  Speaker 1: the core rate which takes out food and energy, is
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  Speaker 1: already above UH. And of course the sets target is
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  Speaker 1: two percent inflation. The only reason the total inflation rate
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  Speaker 1: has been held down has been the weakness in oil
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  Speaker 1: prices and other commodity prices. What we know is they
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  Speaker 1: have already turned around. I mean, oil, although it's off
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  Speaker 1: from its highs, is up from twenty eight dollars a barrel.
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  Speaker 1: So if you simply assume that oil goes sideways from
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  Speaker 1: here the year on, your comparisons for oil and other
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  Speaker 1: commodities are gonna be a huge double digit numbers, which
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  Speaker 1: will push up the the existing pressures. We're seeing in
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  Speaker 1: services inflation, and at the core level. When you look
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  Speaker 1: at the core level and you drill into the services
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  Speaker 1: part of that, which is three quarters of what people
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  Speaker 1: spend their money on, UNTI already got a three handle.
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  Speaker 1: In other words, it's above three percent and has been
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  Speaker 1: there for several months. So all I'm saying is that
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  Speaker 1: if oil simply stays where it is in dollar terms, um,
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  Speaker 1: you're going to see prints on inflation this coming winter
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  Speaker 1: that are just gonna shock everyone, um and and and
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  Speaker 1: and raise fears of of of of the stagflation environment
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  Speaker 1: truly coming back. Now, when you think about inflation or
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  Speaker 1: an acceleration of the inflation rate, is it important to
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  Speaker 1: recognize that things don't necessarily have to move in a
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  Speaker 1: gradual way. They can lurch from one percentage point increase
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  Speaker 1: to another one. In other words, it doesn't have to
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  Speaker 1: be a gradual increase. You can wake up and get
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  Speaker 1: a print on inflation that sends you scurrying for cover.
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  Speaker 1: That's what I think exactly is going to happen between
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  Speaker 1: the fall and and spring, uh follow two thousand and sixteen,
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  Speaker 1: the spring of two thousand seventeen, Because we we as
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  Speaker 1: I said, we've already had this move, this recovery move
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  Speaker 1: in oil, and not just oil. If you look at
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  Speaker 1: the Journal of Commerce Index, it's a very strongly a
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  Speaker 1: broad range of hard commodities have been have been rising
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  Speaker 1: in price, and they'll probably continue to rise. But if
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  Speaker 1: they don't, if they just go sideways from here and
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  Speaker 1: service inflation at the core level continues to run in
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  Speaker 1: excess of three percent year on year when you reach
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  Speaker 1: those as they would say, when you're talking about earnings,
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  Speaker 1: you would talk about easy comparisons, right, and and in
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  Speaker 1: a sense, the CPI is going to have easy comparisons,
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  Speaker 1: uh when you get into November, December and January, because
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  Speaker 1: that's when oil and other commodities made this huge bottom. Uh.
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  Speaker 1: And so I think you're gonna be looking at three
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  Speaker 1: to four percent prints on on the c p I
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  Speaker 1: UH by the winter of next year. All right, if
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  Speaker 1: that does indeed come to pass, what would you recommend
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  Speaker 1: to clients For people that have money, what should they
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  Speaker 1: do with that money in either to benefit or to
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  Speaker 1: forestall any catastrophe that might might hit them. Yeah. Well,
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  Speaker 1: one of the broader implications of what I've said and
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  Speaker 1: what I believe is that the broad market is probably
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  Speaker 1: going through a rolling over topping process. It's truly down.
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  Speaker 1: The SMP, as as you guys have been reporting, have
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  Speaker 1: made do highs, but the Stock Exchange Index in the
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  Speaker 1: rustle and the rest of the world have have not,
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  Speaker 1: uh and I don't think they will. And and so
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  Speaker 1: the first level of breaking down the market into where
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  Speaker 1: you put your money is you can divide the SMP
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  Speaker 1: into value and growth, and there are some index of
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  Speaker 1: for that, and there's et s people can play. And
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  Speaker 1: I think that after seven or eight years of growth
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  Speaker 1: outperforming value, which has been the case within the SMP,
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  Speaker 1: what you're going to see in the next several years
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  Speaker 1: is value outperforming growth. And that transition is a ready
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  Speaker 1: underway if you look at the relative strength between those
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  Speaker 1: two things, and in terms of sectors, I mean I
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  Speaker 1: would I would think within value UM, I like energy
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  Speaker 1: and basic materials UM and the industrial side of the
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  Speaker 1: economy in general, and I'd be less attractive to healthcare
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  Speaker 1: and and technology. We just spoke earlier today with Karen
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  Speaker 1: Eubile Heart of Bloomberg Intelligence about the results from General
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  Speaker 1: Electric and Honeywell. Industrial companies are challenged by not being
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  Speaker 1: able to increase their sales around the world. Do you
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  Speaker 1: feel that those are the kinds of companies that deserve
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  Speaker 1: attention now, well, the global companies will will and and
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  Speaker 1: the global global companies and companies American base that export
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  Speaker 1: a lot I think will benefit actually from a continue
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  Speaker 1: rolling over of the dollar. Everyone keeps talking about how
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  Speaker 1: strong the dollar is, but the fact the matter is
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  Speaker 1: the dollar has hit a peak towards the end of
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  Speaker 1: last year or depending on what index or measurement you use,
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  Speaker 1: early this year UM, and it hasn't made much progress
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  Speaker 1: since now. It's perked up a little bit on the
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  Speaker 1: after the Brexit vote, but I think it's in the
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  Speaker 1: process of UH of going sideways to down and that
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  Speaker 1: will actually even with soft unit sales around the world, UM,
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  Speaker 1: that will boost the currency translation effect for these multinational
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  Speaker 1: companies UM, which includes growth companies as well as as
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  Speaker 1: a more value type industrials. But I think within the
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  Speaker 1: industrials you're you're also going to get up UM an
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  Speaker 1: improvement in pricing power and to pick up an export
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  Speaker 1: UH sales. Thank you. Joe McLendon, founder, Chairman Maclendon Research
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  Speaker 1: Partners and Katapa Capital Advisers. He's favoring energy, basic materials
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  Speaker 1: and value stocks. This is taking stock. I'm pim Fox,
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  Speaker 1: coming up the clothes on Wall Street. And this is Bloomberg.