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  • Chip Barnett

From Transitory to Persistent

October 2021

Through September, stocks are rising this year; bonds are flat. I think that will continue into next year.

Consumer demand is surging and in many sectors has surpassed 2019 peaks, but suppliers can’t keep up.

An anonymous economist I follow on Twitter recently summarized:

“We are short everything: not enough homes, not enough cars, not enough meat, hardly any inventory, not enough workers. We didn’t do anything for a year & then tossed around 20% of GDP for fun money. We have a lot of paper & not a lot of stuff. Gonna be hot for a while.”

“hot,” if you haven’t noticed everywhere you shop, is inflation. Federal Reserve officials agree - they talk a lot about 2021 inflation, and they label it “transitory.” They suggest demand and supply will soon normalize, and with it, prices. I disagree. I think these supply disruptions and labor issues are going to linger long enough that consumer and producer mentalities change to expect a new, higher rate of annual inflation.

If the Fed’s words are debatable, what about their actions? A few weeks ago they announced tapering their support of the bond market. This is the first and only precursor to their raising rates, which they’re expected to start next summer. They are going to make the cost of capital more expensive, so in my opinion, this announcement is what caused the pullback in stocks and bonds at the end of September.

Let’s skip ahead: economic demand strengthens into 2022, but continues to be interrupted by labor and supply issues. The Fed begins tapering and is preparing to raise rates. The talk about inflation will change to its becoming “persistent” and not transitory. What should our portfolios look like? We make sure to own value stocks. Higher interest rates tends to be better for stocks instead of bonds because inflation eats away at a fixed income payment, and because companies can raise prices. Within stocks, value tends to outperform growth. Rising rates make profits today (value) more attractive than hoped-for future earnings (growth). I expect stocks, and value specifically, to follow this historic pattern as rates rise.

One final point of optimism: to the extent our supply chain of foreign goods, say from China, remain delayed and retain shipping surcharges, domestic producers will benefit considerably.

I’m not rooting for inflation; just helping prepare your portfolio for it. I want you to have more purchasing power tomorrow than you do today.


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