Market Q&A with Blaine:
Recession Chances, Inflation and Reddit’s Influence

Frequently, we receive questions from the readers of our popular market commentary, the Weekly Research Briefing, authored by Blaine Rollins, CFA. So, we thought we would use this week’s blog to share a few of these questions along with Blaine’s responses.

Question: Should we be concerned about inflation this year? What do you expect to see?

Blaine: Inflation is a concern for the markets right now because the economy is accelerating, and with the decline in COVID and potential return to normalcy, there is uncertainty that GDP growth could run into the high single digits. If the economic strength was spread evenly across the economy, then we might not see the many shortages and price spikes that are appearing today. Double-digit percentage accelerations are occurring in housing costs, meat, and grain costs, dining out costs, energy costs, new and used vehicle prices and several other areas of consumer spending.

Now there are some areas of the economy where pricing has fallen to zero because activity has stopped or slowed significantly. Think of movie theaters, cruise ships, theme parks, and other travel and leisure activities. But with consumers having saved over $2 trillion in excess savings since the COVID restrictions started, you can bet that once they get vaccinated, they will be leaving their Netflix and Peloton to dine out, see a concert, fly to a beach or theme park. This rush of activity all at once this summer will likely cause further inflation spikes in many understaffed and capacity-constrained industries. Any guesses as to what front row tickets to the first Rolling Stones concert will cost?

Question: When do you expect central banks to start tightening?

Blaine: The Federal Reserve’s goal is to not raise rates until they see full employment and 2%+ inflation, which could occur in 2021 or in 2022. It all depends on how excited consumers and businesses are to run out and spend, and invest once they feel comfortable getting past the threat of COVID. Given the currently accelerating datapoints and factoring in another $1.5 trillion stimulus, I would think that the first Fed Funds rate hike would occur in the first half of 2022. The ECB will likely be behind the Fed by a couple quarters given the greater vaccine rollout success in the U.S.

Question: What are your thoughts on the recent influence of Reddit’s WallStreetBets on the markets and generally how much do you think social media will influence the markets going forward?

Blaine: Yesterday’s bucket shops are today’s Reddit/WSB. Only the method of communication has changed from pencils to phones to the internet. Speculation and gaming the stock market has been around for a hundred years and will continue to exist in the future. This isn’t the first time that there has been a battle between small and big investors, and it won’t be the last. It’s just that this time some hedge funds needed a lifeline to return to the tables. In the big picture of finance, this was a very small side show.

Question: What are your thoughts on major financial institutions warming up to cryptocurrencies? What’s your outlook on Bitcoin and other cryptocurrencies as part of an investment portfolio?

Blaine: Major financial institutions can warm up to running some cryptocurrencies through their systems to test and try them out. However, until there is less price volatility, more liquidity and more transactability of cryptocurrencies, I think that these will remain a minor asset for speculation. Now if the Fed or some major institutions come up with a cryptocurrency that they would stand behind and guarantee, then that could make the asset much more interesting.

Question: What percentage chance do you think we will have a recession in the next 12 months?

Blaine: I’d put our chances of a second recession in the next twelve months as close to zero as mathematically possible. Not even an alien zombie invasion would be able to keep kids and parents locked up in their homes this summer. We got COVID, learned from it and are recovering from it. The next virus that shows up in a chicken, cow, pig or even another bat had better be scared as hell because we will tackle that one even more quickly than this one.

The financial markets across the board from equities to credit to commodities are telling us that a ginormous wave of economic growth is going to be unleashed over the next 9-12 months. It would take the mother of all black swan surprises to scare everyone back into their houses for the next year. But even if, I think the world just got a lifelong lesson in how to prepare for the worst and I think we could still recover quickly. So I pity any alien zombie that tries to block my kid’s path this summer because it will only be the zombies bones littering the floor.

Ask Blaine Your Questions: Send your market questions into blainerollins@361capital.com and it may be featured in a future blog.

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