Inflation is a major focus of discussion this week, with stubborn numbers from today's Producer Price Index (PPI) reading fueling the trend. Guest Henry McVey, a partner at KKR and head of Global Macro, expects a higher resting heart rate for inflation, which has implications for asset allocation. McVey suggests that services inflation will remain stickier for longer due to the direct correlation between wages and inflation.
KKR has shifted its own capital, moving from about 18% real assets to 25%. This includes real estate credit, infrastructure, and climate sectors, which benefit from contractive revenues where inflation moves up. This is a significant change from the last ten years, moving away from long growth, long duration, and fixed income.
McVey argues that bonds will not offer the same kind of diversification benefit to stocks because stock and bond prices are linked due to inflation. Despite inflation peaking and coming down, the relationship between stocks and bonds is staying the same. McVey suggests that banks in the U.S. and the Federal Reserve have unrealized losses in their bond portfolios. Every time there's a rally in bonds, they're going to sell to offset the overhang.
McVey predicts that the Fed and ECB will likely pause but maintain higher inflation for longer. He also suggests that going into the '24 election, neither political party will want to see the U.S. go into a recession. McVey believes that real rates will hit the economy more than this year, even though they've been raising rates. He suggests that the U.S. will experience a little less boom, less bust in '23, and maybe less boom in '24 as real rates take hold. McVey does not think we should fear 3% inflation.
1. The focus this week is on inflation, with stubborn numbers from today's PPI reading.
2. The next guest sees the inflation trend continuing, expecting a higher resting heart rate for inflation.
3. The guest also discusses the implications of inflation for asset allocation.
4. The guest, Henry McVey, is a partner at KKR and head of Global Macro.
5. The bond market will decide if the current inflation is okay or not.
6. The focus on every basis point in the Treasury market is about what it means for equities.
7. The guest mentions that service inflation will stay sticky for longer.
8. The guest believes that the higher resting heart rate for inflation has been a thesis for quite some time.
9. The guest's firm, KKR, has shifted its capital, moving from about 18% real assets to 25%.
10. The guest explains that this shift means more focus on real estate credit, infrastructure, and climate, which benefit from contractive revenues as inflation moves up.
11. The guest states that bonds will not offer the same kind of diversification benefit to stocks because stock and bond prices are linked due to inflation.
12. The guest mentions that banks in the U.S. have $700 billion in unrealized losses and the Fed has $1.1 trillion of unrealized losses in their bond portfolio.
13. The guest suggests that every time there is a rally in bonds, they will be overhang and will sell.
14. The guest believes that Japan, the biggest owner of U.S. bonds, is exiting deflation.
15. The guest discusses the potential impact of the Fed and ECB pausing but having a higher inflation for longer.
16. The guest believes that the short end being the price, the long end is mispriced.
17. The guest states that the threshold for whether inflation is a big problem for stocks is more like 4%, not 2%.