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Bernstein: Investors Likely Mispricing US Inflation Threat

Wednesday, 27 April 2011 09:25 AM

U.S. Federal Reserve Chairman Ben Bernanke’s “bet” on U.S. inflation might be working out after all. That means investors who see an equities setback once the Fed halts its latest bond-buying campaign could be in for a rude surprise.

That’s the conclusion of money manager Richard Bernstein, chief executive of Richard Bernstein Advisors, in a recent Financial Times Op-Ed.

U.S. investors are pricing in Armageddon-style inflation, chasing gold and silver to new heights and pressuring oil prices higher, as well as bidding up stocks. The Fed chief has long maintained that such “headline” inflation is likely to be volatile but ultimately contained, thus there is no reason to hike interest rates soon.

Fed Chair Ben Bernanke
(Getty photo)
The Fed has kept up its $600 billion operation of buying Treasury bonds since August, thus forcing interest rates artificially lower. The bank has targeted a June deadline to cease bond buys, although it might reinvest proceeds of the program for some time afterward.

Bernstein’s view is that energy and food inflation instead has forced developing economies to tighten sooner. That will have the knock-on effect of preventing sustained U.S. inflation and, in fact, extend the still-nascent U.S. recovery, he believes.

“Whether they realize it or not, U.S. investors’ current inflation fears are more closely related to emerging markets’ loose monetary policies and resulting strong local-market credit growth than to the Fed’s policies and U.S. domestic credit growth,” Bernstein writes.

Monetary growth in the biggest of the emerging market nations, the so-called “BRIC” bloc of Brazil, Russia, India, and China, has been in the range of 15 percent and 30 percent for the past 12 months, Bernstein notes. Easy credit led to demand, and that has caused inflation to roar abroad, pushing up commodity prices.

“Emerging market central banks have been tightening monetary policy to curtail credit growth and slow aggregate demand. If they are successful, the recent uptrend in commodity prices might end,” Bernstein says.

Bernanke made a similar statement, if in Fed-speak, noting not long ago that the emerging countries had the tools they needed to curtail inflation and implied that they would, leading to a quick decline in food and energy costs for Americans.

Meanwhile, the emerging countries are likely at the end of their growth cycles while the United States is exhibiting signs of being relatively early in a business cycle, Bernstein contends.

“It appears that the U.S. economic recovery is slowly turning into a broad-based expansion, but instead of welcoming this improvement, investors are growing wary that the Fed will soon embark on a policy of monetary tightening,” he says.

Bernanke reiterated his view on the temporary nature of high prices for oil and other commodities in early April in a speech in Atlanta, Ga.

"That being said, we have to monitor inflation very closely, because if my assumption is not correct, we have to respond to that," Bernanke said.

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U.S. Federal Reserve Chairman Ben Bernanke s bet on U.S. inflation might be working out after all. That means investors who see an equities setback once the Fed halts its latest bond-buying campaign could be in for a rude surprise. That s the conclusion of money manager...
Wednesday, 27 April 2011 09:25 AM
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