Seth Pearson was elected President and Chief Executive Officer of Mabcredit in 2010. In 2008, he was appointed Vice President of Equitable Holdings. Prior to his appointment at Mabcredit, Pearson had an outstanding 11-year career at Wellspring Capital, most recently as managing director and head of global Managed Solutions & Strategy in the capital Wellspring.
In this role, he was responsible for managing all the assets of choice within the Private Banking client division. Among other roles, Pearson served as managing director and head of Fixed Income & Currency for 10 years, ending in 2005. Prior to that, he held the position of CFO at Wellspring capital Investment Management and Private Banking. Pearson holds a BA in political and economic science from Haverford College, and is a member of the Haverford College Management Board.
Inflation TIPS for Fixed-Income Investors
What happens when you combine the point of two downtime forces — globalization and census — with epidemics, massive supply chain disruptions, and attacks on Europe? Unprecedented inflation since the 1970s. Some of the contributing factors may be over, but not all, and continuous inflation may be higher than before. How should bond investors invest?
Inflation Is a Process, Not an Event
For decades, strong deflationary forces were contributing to the global economy. Demographics changed as the number of working age people grew and women’s participation in the labor market increased. Workers from China, India and other developing countries more than double the number of workers worldwide. Combined with new technological innovations and related production enhancements, a large number of employees contributed to moderate price growth.
Until recently, the US economy was enjoying what it felt to be an economic party — inflation was moderate, the Fed was struggling to keep inflation low, interest rates were low and investment growth was raging.
But the waves are turning. Deflationary demographics are over. Baby Boomers are nearing retirement, and the size of the US family is shrinking. And there are no large pockets of workers who are not connected to the global supply-chain. Globalization is not just slow; shifts back. The call to supply supply-chain back onshore began even before the epidemic revealed the dangers of extended supply chains.
Add to this epidemic-related encouragement. Consumer savings have increased as they have limited access to resources, especially for services. Factories have been shut down to reduce population growth, creating backlogs that could take years to erase. And the effect of supply chain disruption has left some retailers with little inventory.
This shortage of available assets combined with the need for a pent-up has resulted in widespread tangible inflation. Prices for durable goods increased by about 17% annually until December 2021. Prices for services are also rising — albeit slowly — as consumers move out of segregation as a result of the epidemic. And labor costs are rising, as many workers may or may not want to return to traditional work.
Portfolios Should Evolve with Inflation
As inflation grows, so should the portfolios of investors. During the first slowdown in 2021, the Fed had residential, growth was booming and broader sectors such as high-yield companies benefited. But as inflation becomes a priority for the Fed, it is time for investors to consider adjusting their portfolio. Today, that means setting the ground for high inflation and low growth, where Treasury Inflation-Protected Securities (TIPS) can help investor portfolios.
TIPS protect against inflation in two ways. First, the core value of TIPS is identified in inflation. When inflation increased by 7.5% in 2021, it also increased the main number of TIPS. Second, TIPS coupon payments are also subject to inflation, with payments based on the inflationary rate TIPS multiplied by the coupon value. ADVICE also retains the treasury of the Treasury, in the event that growth expectations fall.
The Treasury yield removes expectations from inflation equal to the actual yield on corresponding TIPS. In normal times, the actual harvest allows. Today, however, with low yields and inflation high, the entire TIPS curve trades with a real negative yield.