Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Montgomery: Take advantage of inflation scares
Inflation isn’t the only thing that investors should be concerned about. According to Roger Montgomery, founder and chief investment officer of Montgomery Investment Management, investors need to consider the income side of the equation and use this as an opportunity rather than a disaster.
While the market is somewhat consumed with rising inflation, Montgomery believes investors should see this as a chance to take advantage of any inflation scare that negatively affects stock prices.
Montgomery notes the comments of RBA Governor Philip Lowe saying to the AFR, “as the RBA governor has constantly reminded his audiences, the pre-condition for the bank to raise the cash rate by next year is inflation “sustainably” within the 2-3 per cent range. We can’t rule that out” Lowe said.
“But it has a very low probability because it would require wages growth to pick up very substantially – probably above 3 per cent. So, the probability of unwinding a decade-long decline in wages growth in just six months seems very low to me. It’s probably not zero but it’s close to zero.”
Rather than yelling warnings like Chicken Little, people need to realise that the sky isn’t falling, and inflation isn’t going to destroy everyone’s life savings. Instead, Montgomery says to consider the following: “inflation is a predictable and constant companion to an economic recovery. While each recession’s causes might be different, the response has mostly been the same – cut rates, pump money into the economy and inflate. And remember, the current debate about inflation is occurring in the middle of the very tempest to which US Federal Reserve chairman Jerome Powell alluded on 28 April, when he said; “During this time of reopening, we are likely to see some upward pressure on prices.”
Montgomery comments, “the reopening of international borders will bring with it skilled and unskilled migrants that will curtail the present pressure on wages in some pockets of the economy. While CPI takes into account commodity prices, it also takes into account services prices. A large component of services is labour, indeed much larger than in commodities. Service prices are indeed a function of inflation but if rising service prices aren’t indexed against productivity increases, then it’s hard to conclude the increase in service prices is ‘bad’ because wage/income increases may also be experienced by those supplying the service.”
Getting back to the income side of the inflation equation, investors need to realise that if “service prices are increasing amid low productivity, the inflation is unpalatable. Of course, commodity price increases, on the other hand, are always inflationary, because wages are such a small component of their supply. But even then, many commodity prices have already peaked,” says Montgomery.
While investors are focused on the recent annual change in US consumer price index (CPI )of 6.2 per cent for the headline number, what isn’t shown is that it is offsetting a recent fall to nearly zero in early 2020. Because the inflation number is coming off a low number last year, it makes this year’s number look unusual. As long as prices don’t keep rising at this rate, next year’s number should be disinflationary because this year was extra high.
Montgomery finishes by saying, “I currently believe investors should take advantage of any inflation scare that adversely impacts equity prices, as an opportunity. This time next year inflation fears could be a distant memory. And that means low rates, continuing QE and disinflation. This is usually a pretty supportive environment for equities, particularly innovative growth companies.”
