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Could Sustained Inflation Be the Next Black Swan Event?

Housing Market Peak
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EDITOR NOTE: It’s really strange to label an event, or a “potentiality,” that you can see coming months to years in advance a “black swan.” Black swan events are supposed to be unpredictable; partly explainable only in hindsight. But if you’re completely unaware of your surroundings walking across the street, then a car moving 5 mph toward you from a block away might be considered a black swan, at least from your perspective? Billionaire investor Bill Ackman says that an inflationary spike lasting longer than a few months might be the black swan to surprise the markets--that inflation might be as “transitory” as the Fed predicts. Well, if such an outcome materializes, then there it is...the swan...heading toward us rather quickly from far down the horizon. Is it black, or white? We can’t really tell. And it doesn’t really matter if we can begin sheltering our wealth with an asset that’s shiny and yellow.

Bill Ackman said in an interview with Interactive Investor published Thursday that sustained inflation could cause an unexpected tailspin in the stock market.

"I think one of the 'black swan'-type risks for markets is a real spike in inflation that's not just a three-month spike, that's more sustained," Ackman said. "Also, meaningfully higher interest rates, which I think will affect the discount rates that people use to value companies. And I think those could be countervailing stock-market forces."

A "black swan" event is a rare and unpredictable event that could have severe consequences.

The Pershing Square Capital Management founder said that the trillions of dollars in stimulus from COVID-19 relief bills and President Joe Biden's infrastructure proposal, historically low interest rates, and "benign policy" from the Federal Reserve would set the US up for "explosive GDP recovery and probably inflation."

Ackman said he thought that with the pace of vaccinations, the US would be close to full employment and near all-time low unemployment rates at the start of 2022 - factors for the Fed to change policy.

"I think you could see certainly expectations change as soon as the next few months about how accommodative the Federal Reserve will be," Ackman added.

More investors have questioned whether inflationary pressures from the economic recovery will be temporary or have a lasting effect on markets. The Fed has signaled that it will keep its accommodative policy stance, which has long driven gains in stocks. The Fed's chairman, Jerome Powell, has also emphasized that any rise in inflation would be transitory.

But many on Wall Street have predicted that the Fed will need to change its hand sooner than expected and that it will spook markets. The Wharton professor Jeremy Siegel told CNBC on Friday that the Fed would change its policy stance in 2021 and that it would cause a "day of reckoning" in the stock market.

Ackman recommended investors own businesses with pricing power to combat inflation.

"I think inflation is going to be real, and you're going to see wage inflation. I mean, everywhere there are 'help wanted' signs. It's very hard to hire people to fill its jobs, particularly with a stimulus package which includes extra unemployment benefits," the investor said. "So it's a lot of pressure on wages I think, which I think ultimately is a good thing but could have, again, depending on the nature of the business, could have a negative impact."

Original post from MarketsInsider

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