RBA’s Bernstein on 70s’ Inflation, Speculative Investing

With inflation once again front of mind for markets over the last week or so as the bank crisis has cooled, investors and advisors may want to check out a recent discussion on Bloomberg’s “Masters in Business” podcast. Hosted by Barry Ritholtz, the podcast featured guest Richard Bernstein from Richard Bernstein Advisors (RBA) discussed lessons from the 70s’ inflation and how RBA avoids speculative investing by relying on its top-down, macro view.

See more: “Q&A With RBA’s Richard Bernstein”

Bernstein and Ritholtz discussed investing in the current market environment with “conflicting crosscurrents” like strong employment met by rising rates and falling margins paired with firms able to pass costs on to consumers. Bernstein pointed to the 70s for context about how a macro firm navigates inflation, especially while keeping to a macro view that emphasizes profits, liquidity, and sentiment.

“I think the first thing that one has to do in the current environment is understand that the central bankers in the 1970s were not stupid,” Bernstein, CEO and CIO of RBA, noted. “I think the thing we all need to remember is that fighting inflation is not easy.”

“I’m not sure it’s an evolution, I’m not sure we’re any smarter than we were in the 70s, that the same pressures and the same conflicts and all that kind of data are still there. So I think that, you know, our story has been that the Fed will be tighter for longer than people think that it’s this, this tightening cycle is not going to end quickly.”

Rather than engage in speculative investing, which Bernstein believes dominated in 2021 and is the dominant trend in the markets right now as crypto has spiked, RBA looks to avoid responding to every headline and instead builds an investment approach that tries to identify the sectors that benefit from accelerating or decelerating profits rather than respond to an increasingly events-driven information ecosystem.

“Everything is a hair-on-fire event these days. And it’s hard to figure out what is true investment information, and what is pure noise,” Bernstein said. “It’s profits, liquidity, sentiment, and valuation, we never deviate from that. So yes, we know what’s going on. We know what the Fed’s doing…But we stick to our process.

Instead of a world in which markets could count on secular disinflation, with prices cooling over time, RBA instead sees a world of secular inflation with 3% long-term inflation, compared to market estimates of less than 2%, returning to a world of easy liquidity, Bernstein said.

Whereas globalization, global competition, deepening logistics networks, and free trade agreements like NAFTA built a world of secular disinflation following the 70s’ inflation, globalization may now be contracting, Bernstein said, weakening that downward price pressure.

Advisors looking for RBA’s investment approach available in an ETF may want to consider the iMGP RBA Responsible Global Allocation ETF (IRBA), which actively invests in other ETFs to reflect RBA’s house view and investment process.

For more news, information, and analysis, visit the Richard Bernstein Advisors Channel.

 

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