Current markets continue to be underscored by inflation fears as well as labor market recoveries across most states as people return to work. However, according to Jay Hatfield, founder, CEO, and portfolio manager at InfraCap, the risk of stagflation in 2022 is the most pressing issue facing markets right now.
“I think [the Taliban takeover of the Afghan government] maybe caused a little bit of weakening, about maybe 10 handles in the S&P,” Hatfield told Yahoo Finance Live. “But the dominant risk right now we see is really stagflation in '22 and that the Fed has lost control of inflation.”
Hatfield noted that it is likely the Fed will need to raise interest rates at least twice in 2022 because of where the brunt of inflation is coming from, which is the housing and consumer durable sectors. Ultimately, it is Fed Chair Jerome Powell who holds the “smoking gun” on inflation, he said.
“So not only did you see the images from Afghanistan, you also had reporting that not just [James] Bullard and [Robert] Kaplan, which tend to be the thought leaders on the Fed, but other members are realizing that inflation is out of control and are likely to accelerate the taper,” Hatfield added.
Hatfield joined Yahoo Finance Live to discuss the current outlook on inflation in the U.S. as well as monetary policy expectations from the Fed. InfraCap is an SEC-registered, New York City-based investment adviser that manages ETFs and a series of hedge funds.
As for whether the current levels of inflation will be sustained over a longer term, as the Fed continues to hammer home its “transitory” theme, Hatfield believes that inflation is indeed accelerating.
“If you mark CPI to market — so in other words, specifically look at housing — and instead of using the BLS methodology of asking homeowners every six months whether they think rents have gone up, you just look at the market. [And] if you just look on the internet, which maybe the BLS should learn how to use, then the CPI would be really running 8% year over year,” he said.
Hyperinflation
Hatfield also cited “hyperinflation” in steel markets as being another reason why inflation could potentially rise to double digits if an aggressive tapering strategy is not pursued by the Fed. He believes that the only way to effectively get inflation under control is to begin raising interest rates prior to the conclusion of the planned tapering efforts mentioned by Kaplan in an interview with CNBC last week.
“The only thing that's going to slow the housing market down is higher rates,” Hatfield said. “Just not buying as much securities is not going to slow [it] down because there is a momentum to these situations as well, as we know from the boom during the 2000s. Once housing prices start going higher, people buy on a speculative basis.”
In regard to Hatfield’s predictions of stagflation and interest rate hikes by the Fed in the coming year, however, Invesco (IVZ) Global Market Strategist Brian Levitt does not hold the same opinion. Levitt pointed to current bond market conditions as being the strongest indicator that inflation levels are expected to eventually quell.
“You've got a one-year breakeven of over 3%, which may sound scary, but I would say [is] supportive for corporate earnings,” Levitt told Yahoo Finance Live. “And you've got two-, three-, five-year inflation breakevens moving back into the 2.5% range — which is largely consistent with the Fed's comfort zone — and suggests that the bond market, which tends to get it right more often than anything else, expects inflation to moderate over time.”
Thomas Hum is a writer at Yahoo Finance. Follow him on Twitter: @thomashumTV
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