Real Wealth Concepts

Sticky Inflation, Canadian Recession and Energy: Heard on the Street

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Long Term Inflation Rate Not Going Back to 2%

Bill Ackman, founder and chief executive officer of Pershing Square Capital

The world is a structurally different place than it was. The peace dividend is no more. The long-term deflationary effects of outsourcing production to China are no more. Workers and unions’ bargaining power continues to rise. Strikes abound, with more likely to come as successful walkouts achieve substantial wage gains.

Energy prices are rising rapidly. Not refilling the SPR was a misguided and dangerous mistake. Our strategic assets should never be used to achieve short-term political objectives. Now we must refill the SPR while OPEC and Russia cut production.

The green energy transition is and will remain incalculably expensive. And higher gas prices will raise inflationary expectations. Just ask your average American. They see the prices at the pump and in the grocery store and don’t believe inflation is moderating.

Our national debt is $33 trillion and rising rapidly. There is no sign of fiscal discipline by either party or by the presumptive presidential nominees. And each debt ceiling is an opportunity for our divided government and its most extreme actors to get media attention, and for our nation to threaten default. This is not a good way to recruit the many new buyers we need for our bonds.

The government is selling hundreds of billions of bills, notes and bonds weekly. China and other foreign nations, historically major buyers of our debt, are now selling. And the QT unwind experiment has barely begun. Imagine trying to do a massive IPO where the underwriter, insiders and short sellers are all selling at once, competing to hit every bid on the way down while the analysts downgrade their ratings to ‘Sell.’

Our economy is outperforming expectations. Major infrastructure spending is beginning to contribute to economic growth and the supply of additional debt. Recession predictions have been pushed out beyond 2024.

The long-term inflation rate is not going back to 2% no matter how many times Chairman Powell reiterates it as his target.

Canadian Economy Has Hit an Iceberg

Frances Donald, the global chief economist and strategist at Manulife Investment Management

Even if there are technical factors that avert two quarters of negative GDP, this economy will feel like a recession to most Canadians, for the next year. We are in the moment between when the Titanic hit the iceberg, but the ship has not sunk. When it seems as though we’ve experienced a shock, but not a problematic one. The good news is that, unlike the Titanic, we can heal the economy if we need to by lowering interest rates. But for a lot of Canadians, there’s … a lot of pain to get through.

Robert Kavcic, senior economist at BMO

Discretionary consumer spending is getting held back by inflation and surging borrowing costs. Another sign of sluggish growth for the Canadian economy while the Bank of Canada, at the same time, grapples with above-target inflation

Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank

Inflation’s cooling, they say. It’s only gasoline and mortgage interest costs that are driving it, they say. The government’s (rather unclear) ‘plan’ is working, they say. The Bank of Canada is obviously done raising rates, they say. All of which is complete, utter, rubbish

Bank of Canada deputy governor Sharon Kozicki

We know that if we don’t do enough now, we will likely have to do even more later. And that if we tighten too much, we risk unnecessarily hurting the economy. We are a long way from rate cuts.

Energy: The Macro Issue of the Moment

Sébastien Page, Head of Global Multi-Asset and Chief Investment Officer at T. Rowe Price

  • The macro topic of the week may not be the Fed…but rather oil supply.
  • U.S. Department of Energy data shows the significant draw on total petroleum inventories since late 2020, reaching lows not seen since the mid-1980s (as shown in the chart below).
  • Commercial inventories and the Strategic Petroleum Reserve (SPR) have seen significant downshifts, as firms continue to draw on inventories while the federal government releases reserves to alleviate upward pressure on prices.
  • Meanwhile, Saudi Arabia and Russia are extending oil production cuts.
  • Continued pressure on inventories may drive further upside in oil prices and a resurgence of energy inflation.
  • The demand side also matters, as post-pandemic spending on travel continues, and U.S. growth surprises on the upside (remember when every economist predicted a imminent hard landing?).
  • WTI crude oil front-month futures are up ~35% from June lows, sending prices north of $90.
  • Tactical asset allocation implications: We remain overweight Real Assets equities as a hedge to potential inflationary shocks in energy and broader commodity prices. We maintain our total portfolio interest rate duration close to neutral.