Kevin Smith: Inflation is Here to Stay
Tom welcomes back the founder and CIO of Crescat Capital, Kevin Smith.
Kevin shows us his recent presentation and how the commodities to equities ratio are near all-time lows. We have record valuations for stocks at large. During periods of high-inflation equity markets can go quite flat or even negative.
We’re seeing concentration in just a few tech stocks and the top five market cap companies are now 54% higher than during the Dot Com bubble. We’ve seen some disappointing earnings results in recent weeks that have seriously impacted Amazon and Facebook as examples. It all just feels like a new Tech Bubble.
Few investors today remember a high-inflationary environment. We call what is coming ‘the great rotation’ which envisions investors leaving growth stocks and moving to undervalued inflation hedged assets.
The typical US Business cycle lasts ten years but during periods of inflation, the period tends to contract. We usually end up with more recessions and were now in the biggest asset bubble in US history. We could be heading into a downturn sooner rather than later.
He notes that rising high yield credit spreads are indicative of a recession. Credit spreads are beginning to head higher. Powell can’t pivot because inflation is real and they need to maintain some sort of credibility.
The Fed is trapped and has never been more cornered than it is today. The Fed can do little or nothing to stop the rise in energy and agriculture prices. Structural supply problems aren’t going away soon. This is an opportunity for investors to get properly positioned.
Lastly, Kevin discusses the lack of capital investment into commodites and exploration for new deposits. This lack of investment will certainly be key to bring about the next commodities boom.
Time Stamp References:
0:00 – Introduction
0:36 – Commodities & Equities
3:02 – Stocks & Inflation
6:35 – Tech. Volatility
10:31 – Wage-Price Spiral
13:30 – Fed & Rates
17:32 – Commodities Outlook
20:25 – US Business Cycles
23:02 – Credit Spreads
27:04 – Fed Speculation
29:45 – CPI & Rents
32:25 – CAPEX & Commodities
36:35 – Exploration
38:00 – Gold Discoveries
43:57 – Wrap Up
Talking Points From This Week’s Episode
- Equity valuations and the Tech Bubble 2.0
- High inflation and what we can’t expect from the Fed.
- The US business cycle, credit spreads and why there signaling recession.
- The lack of CAPEX investment in commodities will surely drive the resource market.
Kevin Smith is the founder and CIO of Crescat Capital. He has been managing investment portfolios since 1992, a career spanning multiple business cycles. Kevin has been the lead portfolio manager of Crescat’s four investment strategies since their respective inceptions. He is the creator of Crescat’s firmwide global macro investment process and systematic equity valuation model. Before founding Crescat, Kevin worked as a wealth advisor with Kidder Peabody. He earned an MBA from the University of Chicago Booth School of Business with a finance specialization and a concentration in statistics. Kevin received a bachelor’s degree in economics and German studies from Stanford University. He holds the Chartered Financial Analyst designation.