Can’t You Hear Me Knocking: A Contrarian Look at Inflation

Key Points

  • Inflation has been low for a generation of investors, with recency bias helping keep expectations subdued.

  • Some shorter-term forces could change the inflation outlook, including fiscal stimulus, tight labor conditions and tariffs/trade policies.

  • But there are also longer-term forces which are changing, including most importantly globalization.

“The trend is your friend.”

An oft-used phrase—coined by the late-great Marty Zweig, with whom I worked for my first 13 years in this business (1986-1999)—was generally tied to the notion that directional stock market momentum should not be ignored. Momentum for any number of factors can be a friend; but also a foe if it unexpectedly turns in the opposite direction.

Marty taught me a lot about contrarian analysis and thought; although he would have been the first to admonish anyone who was a contrarian just for the sake of being one. However, he ingrained in me a thought process that sticks with me today. It’s best described by an oft-expressed mantra of mine: Be at least as intrigued by the story no one is telling than by the story everyone is telling.

The story no one is telling?

This brings me to today’s topic: inflation. I often gauge investor interest in a topic by the Q&A sessions following investor events at which I speak every week. In the two-to-three year period following the Federal Reserve’s global financial crisis (GFC) foray into zero interest rate policy (ZIRP) and start to three rounds of quantitative easing (QE), the topic of inflation abounded. Easily, at least half of the questions I’d get were about a perceived “inflation accident waiting to happen” courtesy of the Fed having opened its money “printing press.” I’ll get to why we were not in the inflation camp then in a bit.

But perhaps it’s time to at least wonder whether inflation’s demise was really more of a long slumber, from which it’s about to stir? I can’t remember the last time I got a single question about inflation risk from an investor (other than sidebar conversations about whether the traditional government-produced measures accurately reflect the kind of inflation we generally experience every day).