Higher inflation expectations are expected to continue for the next 12-18 months after February saw bond yields reach the highest level in a year.
US Treasury bond yields rose steadily in February to reach the highest level in a year, prompting concerns of rising inflation.
Nucleus forecasted inflation would “bounce hard” over the next six months, especially in the US, over factors such as the low US dollar, rebuild of the inventory cycle, structural changes in supply chains and consumption following COVID and the increased US minimum wage. However, it would avoid any major hyperinflation.
Damien Klassen, Nucleus Wealth’s head of investments, said policymakers were enacting a policy of ‘zombification’ to limit bankruptcies, increase debt and keep interest rates low. This would limit short-term pain, but hinder a healthy economy.
“Someone who can’t pay their rent is not evicted but allowed to accrue debt. Don’t foreclose on those who can’t pay their interest. Instead, build up their interest payments into a larger debt burden,” Klassen said.
“The end game of this practice will be a cohort of zombie consumers and businesses, weighed down by debt burdens too massive to ever pay off but supported by interest rates low enough to keep them from defaulting.
“This zombification is inflationary in the recovery phase but deflationary soon afterwards as oversupply swamps demand.”
Klassen said the firm was positioning its portfolios for a run to value that would last for 6-12 months and had been moving out of consumer staples and growth stocks and into value stocks like travel, banks and energy.
“We believe the important investment factor for 2021 will be managing the inflation scare, followed by its likely disappointment,” Klassen said.
“There are a number of factors that could extend the duration of the elevated inflation, the chief being government stimulus.
“We are expecting it to be six months or more before it is time to switch back into the stocks that are resistant to deflationary pressures.”