Some investors are banking that the war against inflation has already been won. At least a few major hedge fund managers think inflation is here to stay.
The latest manager to sound the alarm was Citadel founder Kenneth Griffin. Griffin at a conference on Thursday said that as countries retool their economies to be less reliant on foreign competitors—a phenomenon known as deglobalization—costs will go up, reversing the deflationary pressure that the opposite trend put on the U.S. economy for the last few decades.
“There’s many trends at play right now that are pushing us towards deglobalization and with that is almost certainly a trend towards higher baseline inflation,” said Griffin at the Bloomberg New Economy Forum in Singapore, adding that the higher baseline could last for decades.
Griffin has company in worrying about lasting inflation. Bridgewater founder Ray Dalio and others in recent months have warned of heightened inflation, for various reasons, and the possibility that the U.S. debt load could become harder to bear in light of higher interest rates.
For investors, the implication could be higher rates, Griffin said, both before and after accounting for inflation.
Over the past week, bonds and stocks have rallied as investors bet the Federal Reserve might be at the end of its historically aggressive campaign to stamp out inflation. Exchange-traded funds such as the
iShares 20+ Year Treasury Bond ETF
(TLT) have seen huge inflows, despite poor performance this year, an indication that some investors are prepping for a pivot to falling rates that would send prices higher.
But if Griffin’s right, the Fed might have more work to do if it hews to its long-stated commitment to target 2% inflation. That’s because the Fed before recent years was, in effect, getting an assist as companies tapped into global supply chains and workforces to bring down costs.
With rising geopolitical tremors, two wars, and heightened tensions with China, lately the White House has emphasized bringing supply chains back into the U.S. to decrease the country’s dependence on foreign governments. That decision puts the U.S. on firmer national-security footing but comes with higher costs.
In a worst-case scenario, some hedge-fund managers have said the U.S. debt could spiral out of control if higher rates force federal officials to print money to keep up with the debt.
There are several ways investors can protect against inflation without also taking on the risk that interest rates rise further.
The simplest is cash. After a long spell of negative real rates, options from Treasury bills to money-market accounts are all compensating investors well above the recent annual inflation rate of about 3.4%.
Bridgewater’s Dalio in September at a conference said in the current environment he “prefers cash” over bonds, later explaining his reasoning as the combination of the high yield offered in cash-like investments such as Treasury bills—currently above 5%–and his expectation that rates will have to rise further to entice global investors into Treasuries.
The U.S. Treasury Department also recently upped the real rate offered on I Series Savings Bonds to 1.3%, meaning that for the 30-year life of the bond, investors are guaranteed to beat inflation by that amount.
The savings bonds can’t be redeemed for one year, and if redeemed within five years, investors lose the last three months in interest. The Treasury has annual purchases limits of $10,000 per investor on the bonds, with some limited workarounds.
I bonds are one place where retail investors actually do have an advantage over hedge funds. Why not take it.
Write to Joe Light at joe.light@barrons.com
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