Lazard Insights Are Inflation Concerns Inflated? - Lazard Asset Management
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Lazard Insights Are Inflation Concerns Inflated? Ronald Temple Managing Director Co-Head of Multi-Asset and Head of US Equity June 2021 Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the date of this presentation and are subject to change.
Realized US Inflation Has Been
Stable Durable Good Prices Have Limited CPI for Decades
CPI Services, Durables and Headline
(1982-1984 = 100)
400
350
300
250
200
150
100
50
0
1956 1959 1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019
CPI Durables CPI Services CPI All Items
As of May 2021
Source: Federal Reserve Bank 3The Recent Inflation Spike Has Exceeded Expectations… US Consumer Price Index (% Change YOY) 6 5 4 3 2 1 0 Jan-2019 Apr-2019 Jul-2019 Oct-2019 Jan-2020 Apr-2020 Jul-2020 Oct-2020 Jan-2021 Apr-2021 As of May 2021 Source: Bureau of Labor Statistics 4
… But Much of the Increase Is Attributable to a Few Factors
Consumer Price Index – Key Drivers
(% Change YOY)
12
10
8
6
4
2
0
-2
-4
-6
May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Transporation Services Used Cars and Trucks Food All Items
As of May 2021
Source: Federal Reserve Bank 5Pent Up Demand Is One Driver of Price Increases
Cumulative Implied “Excess Personal Savings”
(USD Billions)
2,500
2,000
1,500
1,000
500
0
Feb-2021
May-2020
Nov-2020
Dec-2020
Jul-2020
Aug-2020
Sep-2020
Oct-2020
Apr-2020
Apr-2021
Mar-2020
Jun-2020
Jan-2021
Mar-2021
As of April 2021
Source: Bureau of Economic Analysis, Federal Reserve St. Louis, Haver Analytics 6US COVID Relief Exceeds 26% of GDP
Size of Recovery Acts
($ Billions)
10.5% of 4.5% of
13% of GDP 9% of GDP 26% of GDP
6,000
GDP GDP
5,000
$1900bn
4,000
$5,683bn
$2,883bn $900bn
3,000
2,000 $1,505bn
1,000
0
GFC Fiscal Response COVID Response (March December COVID-19 American Rescue Plan Total COVID-19 Relief
2009 - 2012 to July) Economic Relief Bill
As of March 2021
Source: IMF, Congressional Budget Office 7Direct Payments to Households Will Extend through 2021
Timeline of Fiscal Stimulus in 2021
Q1 – Q3: Unemployment
Q1: Direct Stimulus Payments Q4: Infrastructure
Insurance
December COVID-19 Relief: Up to $300 per week for Potentially up to $2 trillion
$600 per person unemployed workers over a decade on
infrastructure
Q1 Q2 Q3 Q4
2021 2021 2021 2021
Q1: Direct Stimulus Payments Q3 – Q4: Child Tax Credits
American Rescue Plan: Up to $3,600 per child,
$1,400 per person depending on age, for 2021
As of June 2021
8
Source: American Rescue Plan, Biden Proposal for American Jobs Plan, CNBC, White House May 2021Labor Distortions Are Another Transitory Inflationary Force
Non-Farm Job Openings and Hires
Thousands
10000
9000
8000
7000
6000
5000
4000
3000
2000
1000
0
Dec-07 Nov-08 Oct-09 Sep-10 Aug-11 Jul-12 Jun-13 May-14 Apr-15 Mar-16 Feb-17 Jan-18 Dec-18 Nov-19 Oct-20
Job Openings Hires
As of April 2021
Source: Bureau of Labor Statistics 9Labor Distortions Are Another Transitory Inflationary Force
US Unemployment Rate (U3)
(%)
Unemployment Rate Absentee Worker Adjustment Adjusted Unemployment Rate
30
20
10
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
As of May 2021
Official unemployment rate accounts for people who are out of work and looking for a job. In April and May 2020, BLS classified workers that reported being employed, but
not at work as “employed”. Had they been classified as unemployed; unemployment rate would have been 4.8ppts higher in April and 3ppts higher in May; in recent months
this has decreased toVaccinations Accelerate Safe Reopening and Job Growth
Change in Employment January 2021 to April 2021 and Vaccination Rate of US States
(Percentage Point Change and %)
2
1.5
Change in Employment
1
0.5
0
-0.5
20% 30% 40% 50% 60% 70% 80%
Vaccination Rate
Note: Vaccination data is percentage of all adults over 18 with at least one dose of Pfizer, Moderna or Johnson and Johnson
Size of bubble indicates state population
Y Axis indicates percentage point change in the employment to population ratio of the US from January to April 2021. A 1.5pp change means that employment rose by 1.5pp
over this time period
As of April 2021
Source: Bureau of Labor Statistics, Center for Disease Control 11Global QE Adds Fuel to a Fire that is Already Quite Hot
Central Bank Government Balance Sheets Since 2008
(2021 $, Trillions)
10
9
8
7
6
5
4
3
2
1
0
2008 2010 2012 2014 2016 2018 2020
Federal Reserve Bank ECB Bank of Japan Bank of England
Note: Monthly averages of weekly Federal Reserve, ECB and Bank of England calculated (BoE after 2014)
As of April 2021
Source: ECB, Bank of Japan, Federal Reserve, Bank of England 12Culminating in the Highest Inflation Expectations since 2011
Imputed Five Year Inflation Expectations
(Difference Between Nominal Five Year Treasury Yield and Five Year TIIPS, %)
3
“…we will not
tighten monetary
2.5 policy solely in
response to a strong
labor market…we
2 now explicitly seek
to achieve inflation
that averages 2%
over time.”
1.5 – Federal Reserve Chair Jay
Powell, February 10, 2021,
“Getting Back to a Strong
Labor Market”
1
0.5
0
Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21
As of 14 June 2021
Source: FRED 13The US Yield Curve Has Steepened in Response
US Yield Curve
(%)
2.5
2
1.5
1
0.5
0
1M 2M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y
Aug 4 2020 June 18 2021
As of 18 June 2021
Source: Bloomberg 14US Growth Outperformed Value by 10,200 BPs since 2016
Russell 1000 Growth and Value
1 Jan 2016 = 100
300
+183%
250
200
+81%
150
100
50
0
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
Russell 1000 Growth Russell 1000 Value
As of 18 June 2021
Source: Bloomberg 15The Growth/Value Dynamic Reversed Late in 2020
Russell 1000 Growth and Value
1 Sept 2020 = 100
140
135
130 +29%
125
120
+16%
115
110
105
100
95
90
Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21 May-21
Russell 1000 Growth Russell 1000 Value
As of 18 June 2021
Source: Bloomberg 16The Global Growth/Value Spread Has Been Similar
MSCI ACWI Growth and Value
1 Jan 2016 = 100
250
+137%
200
+63%
150
100
50
0
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-21
MSCI ACWI Growth MSCI ACWI Value
As of 18 June 2021
Source: Bloomberg 17Asset Allocation – Fixed Income
Fixed Income:
▪ Steeper yield curve = base case scenario
▪ Duration management critical challenge
▪ Developed market sovereign debt remains unattractive
▪ Spread product less unattractive, despite tight spreads
− Securitized credit, IG corporate, EM debt
Opinions as of June 2021 and are subject to change.
18Asset Allocation – Equities
Equities
▪ Faster GDP and productivity growth = broader revenue growth…
▪ … with higher discount rates
▪ Equity rotation likely from long-dated to near-term cash flow
▪ Quality structurally advantaged, but nuance is important
▪ Sustainable equity investing increasingly attractive
Opinions as of June 2021 and are subject to change.
19Asset Allocation – Alternative Investments
Alternative Investments
▪ Income producing real assets attractive for inflation hedge
▪ Higher inflation expectations could raise the cost and limit the scope for
leverage
▪ Consider wider range of alternatives, e.g. PIPE opportunities related to SPACs
20
Opinions as of June 2021 and are subject to change.Biography
Ronald Temple
Managing Director
Co-Head of Multi-Asset and Head of US Equity
Ronald Temple is a Managing Director and Co-Head of Multi-Asset and Head of US
Equity. In this role, Ron is responsible for overseeing the firm's multi-asset and US
equity strategies as well as several global equity strategies. He is also a Portfolio
Manager/Analyst on various US and global equity teams. He joined Lazard in 2001
with ten years of global experience including fixed-income derivative trading, risk
management, corporate finance and corporate strategy in roles at Deutsche Bank AG,
Bank of America NT & SA and Fleet Financial Group in London, New York,
Singapore, San Francisco, and Boston. Ron has an MPP from Harvard University and
graduated magna cum laude with a BA in Economics & Public Policy from Duke
University. He is a member of the Council on Foreign Relations, the Economic Club of
New York, the CFA Society New York, is the chair of Duke University’s Graduate
School Board of Visitors and is Co-Chair of the Duke University Talent Identification
Program Advisory Board. He also served as a trustee of the Link Community School
in Newark, New Jersey, from 2006-2014, as a member of the Trinity Board of Visitors
at Duke University from 2006-2012 and a member of the Financial Accounting
Standards Advisory Council from 2013 to 2015.
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