There’s growing speculation the Federal Reserve will become more aggressive on rate hikes as inflation rages on. Kim Parlee speaks with Phil Davis, founder of Philstockworld.com, on whether inflation is here to stay, and if rate hikes alone will be effective in getting inflation under control.
I think to some extent, especially in the energy sector, the risk has been priced in by the market. So nobody's ignoring it per se. What kind of conflict you have, if you have a conflict, I don't think you can get too far ahead of something like that until you let it play out.
So we'll have to watch that one play out. The other one we're watching play out is inflation. And I know it keeps ticking up in the states, it's ticking up in Canada. We had a new number today as well, too. So what do you think with the Fed minutes come out as well today, too? Is this a persistent long term risk or do you think this is something that's going to go away in a few months?
No, absolutely. I've been criticizing the Fed all like the last year and a half about when they kept saying it was transitory. It's not transitory, it builds on a cyclical basis. You have price inflation, wage inflation, wage inflation, price inflation. So unless you step in to stop it, it can get out of control very quickly and pretending it's going to go away, is the worst way to look at inflation.
I guess, and that's I think what everyone was so nervous about in terms of what was going to happen with the central banks. We did get some minutes that came out today. And I think there was maybe a little bit of a sigh of relief. It feels like the market is more concerned, not just by how much rates will go up, but how quickly rates could come up. Could we see a 50 basis point increase? Could we see an irregular Fed meeting with an announcement? Did you take any comfort in terms of what you heard today?
Well, I don't think I take comfort in what I heard from Bullard two days ago, when he said he thinks we need a 50 point hike in March. Because frankly, you're not going to get this under control unless you get on top of it now. And this attitude that maybe it'll get better on its own, that's not going to happen. You're seeing really significant wage increases, especially the minimum wage is going up to $15. It's going to keep a constant upward pressure on inflation, and the companies are thrilled to jump in and raise their prices. Robert Reich has been very critical of what's going on. And so is Elizabeth Warren and some other people are saying these companies are really taking advantage because they're raising prices 15, 20% when the inflation rate is 7%. It's for profit. It's not for a necessity on a lot of these things.
What's your interpretation in terms of market pricing and inflation? How much dislocation have you seen, or how should investors think about this?
Well, that's the inflationary danger from a market perspective. In other words, inflation is great for stocks. Stocks inflate just like everything else. So if you have stocks and they inflate, God bless. Earnings inflate too, but the only problem you have is an operating company is the dislocation. In other words, if your suppliers are raising prices or your commodities are going up faster than you can raise prices to the customers, then there's going to be some dislocation and margin squeeze. But over time it tends to work out. So when you see a company being hit by inflation problems, it's usually a good time to invest. They will probably be able to get over it and fix it in the end.
And how is this all going to play out for you in terms of the year on the markets? I've spoken to lots of people and they say we may end up back where we started this year, but it's going to be an uncomfortable ride.
We were we were projecting this year to be flat to 10% down, and we're currently about 10% down. And we're sort of looking like this is the range we think we'll stay in in the market. But you have to realize that down the road, if you were selling your sweater for $40 and it costs $30 of materials and labour to make the sweater. Now, if you have 20% inflation across the board, you are selling the sweater for $50 and it's costing you $36 to make the sweater. Now you're making $14 instead of $10. So you're actually making 40% more money selling the same sweater. You didn't build any factories you. Didn't make any investments. You didn't do anything differently. So if you ride out the inflation, it's actually good for business. It's not really good for them because it's inflationary dollars, it's all meaningless. But it's going to increase your portfolio, which is what matters. If you're investing, that's what counts in the end.
I guess unless you see central banks get nervous by that, raise rates, and then they can't quite get the soft landing and you get a recession. Any concerns about that?
Yeah, I mean, obviously somewhat. But again, you've got to protect yourself from the market inflation. Right now, inflation is our big concern. Recession is a much lower concern than inflation. And you can have both at the same time, because the people who are in the bottom 80% of society are not keeping up with inflation, they're suffering and they are drifting into recession as we speak. So it's not out of the question, but this growing market recession isn't there yet. There's no particular close signal for that.