- Grant Williams — cofounder of Real Vision, author of “Things That Make You Go Hmmm,” and portfolio and strategy advisor to Vulpes Investment Management — thinks the fiscal stimulus being used to fight coronavirus-led economic fallout will have unintended consequences.
- Due to that impending paradigm shift, Williams thinks investors need to focus on the preservation of purchasing power.
- “I think we will make new lows,” he added.
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“It feels like we’re at a point where there’s going to be the kind of paradigm shift that we haven’t really seen in 40 years.”
That’s what Grant Williams — cofounder of Real Vision, author of “Things That Make You Go Hmmm,” and portfolio and strategy advisor to Vulpes Investment Management — said in regards to today’s market environment.
Based on Williams’ track record, his call is worth heeding. He’s been traversing markets for more than three decades and has seen his fair share of financial crises, geopolitical flare-ups, and black swans.
Now, his focus is closely trained on inflation.
“That is the return, at some point, to an inflationary environment,” he said about the paradigm shift. “And it’s likely to be driven by the amount of money that’s going to be printed to counter this deflationary shock.”
Williams is referencing the aggressive stimulus packages that governments around the world are implementing in order to offset some of the economic damage caused by the coronavirus. To him, this “helicopter money” that’s being dropped in the lap of individuals is a one-way ticket to an inflationary environment.
For context, the last time the US experienced a serious bout of inflation was during the 1970s and 1980s. During that time, legendary Federal Reserve Chair Paul Volcker fought tooth and nail to rein in inflationary pressures by raising the Fed funds rate to 20%. Today, the Fed funds rate is 0%.
The chart below depicts the consumer price index (CPI) — a key gauge of inflationary pressures — throughout history. As you can see, it’s been historically low for much of the past decade.
World Bank/fred.stlouisfed.org
In Williams’ mind, the stimulus intended for the labor force differs from typical “stimulus” that has failed to worm it’s way into the “real” economy. For years, central banks around the world undershot inflation expectations as much of their efforts oozed into inflation on Wall Street — in the form of overextended asset prices — instead of on Main Street.
Now, with the CARES Act and other government stimulus packages on the way, Williams thinks that’s all about to change.
“That money will go straight into the economy,” he said. “It’s going to be spent. It’s not going to be used to purchase assets, so it’s hard to see a way in which this doesn’t raise the inflation rate.”
He added: “And if we do have that kind of shift — an entire environment — then literally everything changes,” he said. “People need to think very, very differently about the next 40 years than they have about the last 40.”
To Williams, that differentiated way of thinking centers around a focus on the preservation of purchasing power, something that investors haven’t had to combat with in decades.
A stark warning
Against that backdrop, Williams doesn’t think the pain in markets is close to subsiding anytime soon. In fact, he believes the economic fallout will last much longer than anticipated — and that lack of growth will weigh on sentiment in the markets.
That end result is one firms across Wall Street have already started warning about as a possible headwind for stocks. In recent months, strategists at heavyweight firms such as BlackRock, JPMorgan, and Morgan Stanley have said the risk of higher inflation is being underappreciated by investors at large.
“The chances are that the fallout — from an economic standpoint — that results from this lasts longer rather than shorter,” he said. “People are going to be slower to get back to work, they’re going to be slower to go out to the store and spend money, they’re going to be slower to re-hire people — and the longer this situation goes on, and the closer it gets to next year’s flu-season, the bigger the problem gets.”
“There’s no way that I would sit here and think for one second that this is over,” he continued. “This market is not done shaking itself out.”
Williams concluded: “I think we will make new lows — and it worries me that when we do, it’s going to be post-stimulus; it’s going to be post them saying we’re going to throw the kitchen sink at it, and it’s going to start making new lows, because suddenly the lack of growth is going to matter.”
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