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How to Invest When Consensus Is...We've Passed Peak Inflation

Released on Tuesday, January 24, 2023ECONOMY
While realized inflation is near record highs, future inflation expectations are subdued, and future inflation expectations are benign. A key risk is an increase in inflation expectations could bring back nightmares from 2022 when both bonds and equities declined together hurting all portfolios. Investors should be wary of inflation expectations rising above the Federal Reserve's 2% target. Following the economic devastation that the Financial Crisis wrought, central banks throughout the world engaged in massive and unprecedented programs of quantitative easing. When these quantitative easing (or so-called money printing programs) began, a small but vocal minority of economists and investors predicted that the consequences of such programs would be high levels of inflation, essentially arguing that the cure would be worse than the disease. Up until COVID, most of those envisaging inflation were faced with evidence to the contrary. Post COVID, realized inflation has been surging but consensus remains that inflation has peaked. The US yield curve has inverted, bringing the 2s10s spread to its lowest level in the history of derivative markets, even lower than the 1980s levels. In this session we will discuss what has been learned from the current inflation shock and what we can do differently in the future to have more diversified portfolios.

Nancy Davis
Quadratic Capital Management, LLC, Managing Partner and CIO

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