Inflation Threat Looms Large

November 10, 2021

Jeff WeingerJeff Weniger is head of equity strategy at WisdomTree, responsible for formulating the firm’s equity outlook and setting the investment themes. He has been a vocal critic of the Federal Reserve’s commitment to accommodative monetary policy in spite of rising inflation data. Weniger spoke with to discuss what data he is watching and the potential effects on the U.S. economy.

The following transcript has been edited for clarity and brevity. You've been vocal on Twitter about the current threat of high inflation that's facing the U.S. economy. What is some of the data you're seeing?

Weniger: The inflation calculations (headline CPI) by the Bureau of Labor Statistics are seemingly refusing to pick up the housing and shelter data.

One example would be on the Case-Shiller 20-City Home Price Index: The most recent reading was a 19.7% year-over-year increase. That's corroborated by some of the government agencies showing that home prices were up double digits. By most accounts, rent is up double digits as well year-over-year.

These numbers need to show up in the data. I suspect that they will in 2022. One of the reasons is the way that they calculate the home price inflation as opposed to rent inflation. It's by surveying homeowners and asking them what they suspect their home would rent for. It's owners-equivalent rent.

What happens is [when] you ask homeowners these numbers, they harken back to the last time they thought about rent. Maybe [they are] thinking 2018, 2017, 2016. And it isn't until you go to a friend's house and they say, "Did you hear what rents are two blocks over?”

It's at that point you realize there's rental inflation, and that's when the homeowners relay that information to the Bureau of Labor Statistics and it shows up in owners-equivalent rent. We’re going to get a lot of that showing up in the first [and] second quarter of 2022.

These CPI numbers aren’t indicating real life. There are other rigidities in the economy, like the trucker shortage that'll be more persistent than the consensus expects. I suspect the supply chain issues are not going to be going away in a month or two. You're pinning the blame pretty clearly on the Federal Reserve for not acting quickly enough to normalize monetary policy. When do you think it should have begun normalizing policy after COVID rocked the markets in early 2020?

Weniger: The answer to that question is whether they should have gone as extreme as they did. I tend to be of a view that the central banks end up causing more trouble than they're worth. They could have been at least considering tightening policy a year ago. This is so late in the game, because we had improvement in the labor market and the trajectory was toward full employment.

No one knows why the labor force participation rate has declined so much. The No. 1 thing I would pin it to is that a considerable proportion of the cohort of retirement age or near retirement age suddenly woke up to an S&P 500 that was in the 4000s and said, "I think I can retire now. It was not on my radar in 2019 but now suddenly it is."

At this point we're at 4.6% unemployment. Not only are they behind the curve on ending tapering, but they're only just now having the conversation about when to start hiking rates. I think they should have ended quantitative easing completely rather than tapering down.

If you think about it from a historical context, when Greenspan took rates down to 1% with no QE, that was highly stimulative and extremely accommodative. A 0% interest rate policy was pitched to us during the global financial crisis as an extraordinary program to be implemented in a situation of systemic collapse as a last resort. And that situation was one where everybody was insolvent.

Wachovia was insolvent. Merrill had to get absorbed by Bank of America. The entire European banking system … everyone was insolvent. And not only were they insolvent, many homeowners in the hot markets of the era were insolvent, too.

COVID was a different scenario where the worst of our fears economically did not come to pass, as opposed to the mortality side. By the late spring of 2020, it became apparent that the S&P had already bottomed on March 23, 2020. We did not have the issues in credit that were expected to come to pass.

The No. 1 thing that matters to people outside of our industry—and this a recurring issue for both the Fed and Wall Street—is we look at the stock and bond market, and most people look at the housing market. Most people just need to make sure they have a job and [want to know] what their home price is doing.

What we've had in sharp contrast to that other crisis is, not only have home prices not been declining, but they've been roaring higher. It’s a social ill that we continue to have home prices zooming like this.

It's great news for people who own the houses, not so great news for their children and for young adults. In the environment where that is occurring, there's no justification for a stimulative monetary policy, let alone hyperstimulative monetary policy. You’ve seemed to call on others in the asset management industry to speak up about this. Do you think a lot of people are staying silent?

Weniger: People fall victim to short-termism. We're so hyperfocused on whether you can beat your quarterly number by a penny; we should be thinking about what kind of value you’ve created for your equity over the course of 10, 20, 30 years.

We don't need the stock market to go from 2200 to 4700 from March 2020 to November 2021 to have a stable asset management business. We don't need to make a fortune when it's in our best interest and everyone's best interests for stability so that the prospect of a Gen X person getting wealthy is equal to the prospect of that of a Millennial or of the generation that comes after them, the Zoomers.

There are a lot of people on Wall Street who like seeing the stock market go up. But what they're doing is potentially sowing the seeds for all of us to be painted with this broad brush if and when some malaise comes thereafter.

The household income of a lot of the movers and shakers at the Fed and on Wall Street is so much higher than what is typical. If you're just trying to buy some hamburger meat to put on the table and you're driving a 10-year-old car and it's over $3 for gasoline, maybe you were one of the people who lost their job last year—it's a tight situation.

You can see it occurring in the surveys. By all accounts, this is a pretty strong economy. But Middle America is telling us they've lost a lot of their optimism recently.

The [amount] that many people have in their 401(k)s is measured in the thousands or tens of thousands. It's not measured in the millions. If you have an IRA that has $10,000, [and goes to] $13,000, or $14,000, that brings a smile to people's face. But that’s very quickly wiped away when the landlord says your rent is up 15%.

I don't think that hiking rates several times in 2022 breaks the back of this economy. But at least it could slow down some of the speculative excesses that are very clear in pockets of the market.

Contact Jessica Ferringer at [email protected] or follow her on Twitter

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