EDITOR NOTE: A classic sign of excess in the markets is when people who know very little speak as if they know a lot. This happened during bitcoin mania toward the end of 2017, and it’s happening again across multiple asset classes, from equities to cryptos. Another sign of excess is when investors know very little or show little awareness of emerging factors of great significance. For instance, inflation. Very few people talk about inflation, and it’s strange. A figurative analogy would be that of a slow-moving tsunami wave, so high that it’s nearly blocking out the sun, and people on the shore are going about their business as they see nothing on the horizon. Media is describing the current inflationary scenario in terms of industries and sectors--some being overvalued, some undervalued. But the underlying current is the money supply. Too much of it, and inflation is virtually guaranteed, despite it being delayed. As a non-CUSIP precious metals investor, you know better than following the herd. For unless you’re invested in gold and silver, in an inflationary scenario, you may “make” money, but you won’t necessarily keep it.
Institutional Investor Hall of Famer Richard Bernstein is finding a lot of denial about inflation risks.
According to Bernstein, the evidence is baked in to how investors are positioned right now.
“Think about what people love. They love long-duration equities right now,” the CEO and CIO of Richard Bernstein Advisors told CNBC’s “Trading Nation” on Monday. “That shows that people are kind of ill-prepared for this higher inflation.”
He worries investors are forgetting that long-duration equities or growth stocks traditionally perform like 30-year Treasury notes. So, they’re typically a smarter investment during bearish economic outlooks — not when growth is abundant.
“When you start to see interest rates go up and you start to get people more optimistic on the economy, then those groups start underperforming,” said Bernstein. “What’s the probability we’re going to get higher inflation than people think? We think the probability of that happening is quite high.”
Yet, the tech-heavy Nasdaq, even with Monday’s softness, is up more than 5% so far this month.
“There’s a kind of bifurcated market. You’ve got a portion of the market that is extraordinarily overvalued [and] really doesn’t have sound fundamentals,” he said.
Bernstein’s issues with tech stocks started before the coronavirus pandemic. Two years ago, he told “Trading Nation” the enthusiasm for tech showed parallels to the dot-com bubble.
He’s sticking by that warning.
“The group as a whole, I think, is ripe for underperformance,” he said. “The reason I say that is they are the safe havens. They proved to be the safe havens during the pandemic. They surprised a lot of people with that, myself probably included.”
Bernstein, noted for his long tenure on Wall Street and running strategy for Merrill Lynch, is encouraging investors with at least a 12-month time period to focus on economically sensitive groups.
“These are all the beneficiaries of kind of a pro-cyclical, pro-nominal growth,” he said. “Fundamentals are demonstrably improving.”
‘Clearly a sign of speculative excess’
What about investors that have shorter-term timelines and are looking to capitalize on speculative and momentum trades, such as cryptocurrencies? Bernstein suggests steering clear.
“What I find kind of ironic is that people who have never traded euros, never traded yen, never traded pounds, never taken a course in international trade and finance are suddenly telling experts why bitcoin and cryptocurrencies are so important,” Bernstein said. “That is clearly a sign of speculative excess.”
Original post from CNBC