by William J. Adams – Chief Investment Officer, Global Fixed Income
Inflation remains higher than expected and appears longer lasting than anticipated. Whether this is a transitory or more permanent phenomenon remains to be seen. We advocate investors not be distracted by headlines and focus instead on investing with a longer time horizon.
I recently had the pleasure of co-hosting a virtual MFS Halloween event with a colleague. As we had both acquired work-from-home facial hair, we decided to attend as the mustachioed Ted Lasso and the bearded Coach Beard from the TV show Ted Lasso. I drew the short straw and had to shave down to a cheesy mustache like Ted’s, dyed to mask my grey whiskers. Our hosting activities entailed slapstick comedy and celebratory toasts borrowing themes and quotes from the Emmy Award winning show.
My favorite routine was a piece about what Ted calls the happiest animal — the goldfish, due to its 10-second memory. In one show, Coach Lasso encourages a player to be like a goldfish: When something is bothering you, forget about it in ten seconds. The advice points to a simple path to happiness. While the goldfish tale was a fun part of the Halloween party, I was struck by the relevance of Coach Lasso’s wisdom in the more serious context of investment management.
As you know, the late October and early November economic calendar was rife with hurdles and potholes — among them disquieting headlines, a necessary evil for eyeballs and attention. Market data and information rained on us: updated data on inflation and supply shortages, labor statistics, GDP reports and global central bank commentary and analysis. If your inbox is anything like mine, I’m certain every other email touched on one of these topics.
It’s understandable.
New world
The post-COVID market environment remains unprecedented. Markets and economies appear less certain. The fundamentals and monetary policy rendering grow further apart while fiscal policymakers are in constant disagreement. The commentary and the trading engender excitement; it’s easy to get swept up in enticing market narratives.
During this period of late October and early November, we had a vibrant email dialogue among colleagues across the investment platform on the topics described above. Debate raged, with thought-provoking views expressed on central bankers, sell-side analysts and research and commentary spanning the continuum of outcomes. Central banker press conferences dominated the conversation. The discussions included previews and post views of the recent US Federal Reserve and Bank of England meetings.
You get the idea. An interesting conversation, but speculative at best. The marketplace is full of opinions: economists’ views about central bankers’ thinking about economic statistics proven to be nearly incalculable in the post-COVID environment. Yet more headlines and sensationalism designed to drive eyeballs. I was reminded of Coach Lasso’s goldfish story; I hope to forget about it in 10 seconds.
One of our research directors channeled his inner goldfish and refocused the conversation by reminding us to forget. Forget the central bankers’ press conferences. Forget the ever-changing headlines, doublespeak and backtracking. Simply ask yourself how it feels, how you experience the current environment. The question is a good reminder for all of us.
Inflation experience
In other words, are you spending more to fill up your car? A lot more? Does it cost more to do the grocery shopping or grab dinner? Can you even get a seat at a reasonable time if you decide to eat at a restaurant? Is it a good time to purchase a car, and will you even find one you like? Don’t even mention buying a home in the United States or trying to repair your existing home, with contractors and building materials in very short supply.
You get the idea. Inflation is higher. You can feel it, experience it. It’s something we have to live with. Some worry holiday shopping is at risk. Even the ability to acquire necessities is in question in some areas, such as Europe, where there are worries over gas (petrol). The price of heating oil could also crowd out other spending. These market dynamics can act like a tax on consumers and are growth-depleting when real wages don’t keep up with inflation. Inflation hurts purchasing power, particularly in lower-wage cohorts.
We have supply problems creating pricing challenges; inflation remains higher than expected and appears longer lasting than anticipated. This is how the economy feels in the real world, devoid of central bank and market commentary. It is a fundamental opinion rooted in economic reality but confirmed by bottom-up research. Companies face these challenges just like consumers do. Our research and analyses validate these themes, and that analysis drives investment positioning.
Long-term investing
Debates and commentary about the transitory nature of inflation belong in the goldfish bowl. Central bankers can continue to redefine transitory and closely watch supply chain issues and transportation shortages. These headlines, however, are entirely too short term in nature, subject to noise, and should be abandoned like a goldfish’s memory. Macro analysis coupled with micro insight and a long-term fundamental opinion is a markedly more powerful tool and a better way to drive investment decision making.
The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed.
