Markets seem to still believe the Federal Reserve’s narrative of transitory inflation, but that narrative is not reflective of reality, said Adrian Day, president of Adrian Day Asset Management.
“The market simply doesn’t believe the inflation story, and they seem to believe what the Fed is saying about it being transitory. To me, obviously there are reasons to think that some of the recent jumps we’ve had in certain prices are temporary, but if prices in aggregate go up, then that’s a reflection of inflation, and it seems to me we definitely have inflation,” Day told David Lin, anchor for Kitco News.
Day said that the Fed is likely going to taper soon due to asset prices climbing. In fact, they’re not too far away from raising rates as well.
“I think they have to believe [in persistent inflation] because if the inflation numbers continue to move higher, and I’m not talking about runaway inflation at this point, but if we get a 3% and 4% consistent number, and we move up to 5%, the Fed’s going to have to raise interest rates,” he said. “I thin the Fed is extremely reluctant to raise rates at the moment.”
To hedge against inflation, Day recommends hard assets, as well as stocks.
“Equities are an inflation hedge. People’s own businesses can be an inflation hedge. I think gold is a good inflation hedge on a risk-reward basis, because I don’t think there’s a lot of risk in gold. Silver has historically been a better inflation hedge, but right now I think it would be a better inflation hedge,” Day said.
Day added that while real estate is also a good inflation hedge, housing prices have become overvalued in many places.
Importantly, gold is not always the best inflation hedge, but it performs well during deflation, Day said.
“If you look at history, over 800 years, gold is not the best inflation hedge. On a relative basis, compared with other things, gold underperforms. But, it is a very good deflation hedge and that’s because deflation is often associated with monetary upheaval of some type,” he said. “If you’re in a country like Argentina, Zimbabwe, Weimar Republic, where you have runaway inflation, then holding your assets in gold is obviously a very, very good thing to do, but even if you look back at the 1970s, or the second half of the 1970s, gold was not the best performing asset.”
For Day’s views on monetary policy and cryptocurrencies, watch the video above. Follow David Lin on Twitter: @davidlin_TV