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Inflation is in “structural change” and these markets will benefit

By on June 11, 2021 0

A mining truck transports ore from the pit to a crusher at the MP Materials rare earth mine in Mountain Pass, Calif., Jan. 30, 2020.

Steve Marcus | Reuters

European equities should outperform the United States as inflation persists and commodities begin a new “supercycle,” according to Livermore Partners chief investment officer David Neuhauser.

The US consumer price index on Thursday showed a 5% jump in headline inflation in May from a year earlier, its biggest increase since 2008. Core inflation, which excludes prices volatiles of food and energy, also reached a 28-year high at 3.8%.

While markets have largely dismissed current inflation figures as transitory and fueled by short-term anomalous factors, Neuhauser argued that a more fundamental “structural shift” was underway.

Livermore Partners noted that wages are not increasing as much as expected, alongside GDP growth rates above 6%. Average real hourly earnings in the United States, which explains inflation, fell 2.8% in May from a year earlier, according to the Bureau of Labor Statistics.

“As you see auto prices, house prices, food and energy prices go up, even though it looks like economies are starting to explode, the real problem is you don’t see wages go up. just as quickly, ”Neuhauser told CNBC’s“ Squawk Box Europe ”Friday.

“Ultimately this is going to start to pinch the consumer and as you know the consumer makes up over 70% of the economy.”

If inflation is indeed here to stay, as Livermore Partners anticipates, Neuhauser suggested it would cause problems down the line and force the Federal Reserve to curb its accommodative monetary policy.

Sluggish wage growth

Neuhauser cited McDonald’s and Chipotle as examples of companies that have started incurring substantial and rising input costs while struggling to attract workers in the wake of the pandemic, leading them to offer bonuses and focus on wage growth.

“This will ultimately increase the price of their goods and services, which of course will increase the prices for consumers,” he added.

This could cause problems if these trends combine with the potential reduction of the Fed’s unprecedented bond buying program, Neuhauser suggested.

“It will at least have the potential to start reassessing the markets, which look extremely foamy. Ultimately, that’s what you need to focus on as an investor,” he said.

“You have to look at the numbers and you can put them aside, but you can’t do that if you start to see more consistent, hotter numbers coming forward.”

“Supercycle” of raw materials

Neuhauser’s fund is now largely focused on commodities, banking, and industrials, as it believes commodities are at the start of a new “supercycle” – a decades-long period in which commodity prices. commodities remain above long term trends.

“We’ve seen (less) mines under construction, we’ve seen oil and gas see capital spending (capital spending) cut because banks don’t lend anymore, you see ESG initiatives taking center stage when it comes to board meetings. ,” he said.

“I think there was this structural change where you haven’t seen capital, capital has been starved in the complex and ultimately you have a dollar potentially looking to collapse.”

The shift means commodities are the place to be for investors over the next three to five years, he argued.

“We’re playing this in terms of some of the free cash flow or smaller cap cash flow businesses,” he said.

“A lot of it is in Europe and a lot of it is international, so I think Europe is going to outperform the US as we go forward and that’s where most of our capital is actually in Livermore, in a lot of these European stocks linked to mining.

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