Looking Beyond Inflation - Barron's Interview

Barron's interviews Merrill Lynch's chief investment strategist, Richard Bernstein. Current turmoil will not lead to the end of capitalism as we know it, he says. Still, investors hoping for a V-shaped recovery will likely be disappointed.

Bernstein says more than anything people are concerned about inflation, especially in light of recent developments that have led them to conclude the U.S. is printing money, which will lead to dollar devaluation and rampant inflation.

He's not worried:

I think prices are going to respond to the slower global economy. I believe the global economy will be weaker than people think. You always have to make a bet, stronger or weaker. I've been arguing that you should err on the weaker side. If that's true, then demand for commodities, demand for everything, goes down and some inflation subsides. More than anything else, remember that inflation is a lagging indicator and credit is a leading indicator. There's not a lot of credit being issued these days.

His comfort with inflation helps explain his lone-wolf bullishness on Treasurys. "It is just amazing that we have an asset class that is outperforming and everybody still hates it," he says, again pointing out that money - without credit creation - can not generate inflation. He also likes high-quality corporate bonds and munis, but cautions against the allure of lower-grade issues.

Looking at stocks, Bernstein is dismissive of those who keep looking to yesterday's stars to shine again. Instead, they should look ahead to tomorrow's growth stories - which he thinks are going to be decidedly mundane: Staples (ETF: XLP), health care (ETF: RYH) , developed markets over emerging markets, high-quality debt, and the dollar.

Comments

[papita:]

richard berstein is a perma bear and always has been. his asvice sucks just about as much as anyone else. and his skin looks like it went through a meat grinder. I'm surprised this ugly bastard still has a job.

2008 Sep 28 11:04 AM

[tinman:]

"money - without credit creation - can not generate inflation" ... hmmm, that's something to consider. But why was the July PPI up 9% y/y?

2008 Sep 28 11:07 AM

[The World's...:]

This guy gets paid to give advice? He probably went to the same school as the CEO's of WAMU, Merryll. Lehman, Fannie et al. Disgusting. Anything that Barron's prints out is a piece of junk advice.

Every time I go to the pump I am reminded of inflation. Every time I go to the supermarket I am reminded of inflation. The Government and these money managers must be smoking crack these days.

2008 Sep 28 11:39 AM

[sickofthehype:]

$700B will end up being MUCH more than that figure, and when the printing presses are on full steam inflation will ratchet higher and higher. It's simple economics. Watch the trailing indicator levels next year after this is all over with. Inflating our way out of this is obviously the decision we made, which will be good for commodity prices and the like, but bad in a high unemployment stagnant-wage environment.

2008 Sep 28 11:56 AM

[whidbey:]

Bernstein better hope that credit is created and used and that some inflation does result. If that does not happen (and pretty damned quick) this bailout is going to be worth nothing except to salvage banks and BDs who are short of liquidity. For this strategy to be justified it must stimulate the consumer to spend. Remember consumers are 70% of the economy. Consider the debt levels in households, how that spending increase? Will, wage increases, or tax cuts, or tax cheating. Frankly I think the latter is seriously under estimated.

2008 Sep 28 12:36 PM

[rjbullock:]

My take is that we'll see inflation in food and energy continue, but deflation in housing, autos, etc... Stuff that's already built, in other words. With tight credit and a cash poor American population, people will be forced to sell their assets for less than they'd want to... Which is making me kind of salivate as I'm a saver.

2008 Sep 28 01:13 PM

[Smarty_Pants:]

Hmmm....USTreasury has to auction off more debt to fund current FED bailouts in "small potatoes" batches. Soon to be released details of $700 Billion mega-bailout package will require even more such auctions.

How can Mr. Bernstein claim "There's not a lot of credit being issued these days." and keep a straight face?

Just for perspective: if you had spent $1,000,000 a day, from the birth of Christ until today, you would have spent about 732 billion dollars.

Now THAT'S a lot of credit.

The $64 question is what will the bailout recepients do with all that money? A) bury in the back yard, or B) spend it in the market and bid up prices on stuff with money that didn't exist a month ago?

Don't mistake liquidation of excess inventory with a loss of value in the unit of currency. Inflation is caused by the latter, not the former, and we're going to have the latter is unthinkable amounts.

Anybody notice that foreign holders of US Debt dumped about $280 Billion of the stuff in September? They're still holding a couple Trillion more. How low does the dollar have to go before they start unloading in serious amounts? Any guess what that will do to the value of the dollar?

2008 Sep 28 01:57 PM

[closedbooks:]

The debasement of the dollar would appear much greater except for another sad consequence of inflation: the continual debasement of the product to keep prices low. Whether it be thinner paper or the change from cocoa butter to oil, we have all noticed this phenomenon. Inserted in an old book I found a warranty for a sewing machine made in the 1920s - all parts guaranteed for 10 years! My favorite peeve is the Stanley thermos - When it was made in New Britain, Conn., it seemed to be indestructable - even when I would leave it on my truck tailgate and it would roll off and bounce down the highway after me. The only reason I would need a new one was when I didn't wash it for a couple years and my wife refused to open it any longer. However, my most recent didn't go 6 months before every weld and every piece of plastic was taped together. I was so disgusted I went to a website and was amazed to find the claim "built for life". However, it wasn't the product that was built for life but was built for how I live my life. Sorry, I'm an old man but I'll lay a few more thermos's in the ground before I head there myself.

2008 Sep 28 04:24 PM

[bbowen7:]

For "Closed Book". Nice story. Get one of the old thermoses, put some gold coins in it, and bury it in the back yard.

2008 Sep 29 12:30 PM