'Realized inflation is high and is going to stay high for a bit': Investment Strategist

Ahmed Riesgo Insigneo Chief Investment Strategist joins Yahoo Finance to discuss the latest with the markets headed into Thanksgiving.

Video transcript

- Let's keep talking about what's happening in these markets, and we are joined in the stream to do that with Ahmed Riesgo. He is Insigneo's Chief Investment Strategist. Thank you for joining us. And I want to jump to something. I don't want to go to inflation yet.

I want to get to what you're telling your clients about US growth possibly slowing below 3% next year, because we've had analysts coming on saying, look, there's going to be an inventory build that's going to drive not only GDP higher than people are predicting, but also equities higher. What is that analyst perhaps missing that we need to pay attention to?

AHMED RIESGO: Yeah, hi, and thank you for having me. I think that analysts perhaps is just focusing on the demand side of the equation. The supply side of the equation, however, is showing us that we still have lingering problems from the pandemic that are not going to be resolved any time soon. So it's not so much a matter of demand faltering. It's that supply is just not going to be able to keep up.

And so that's likely, at least in our view and our modeling, pointing to sub 3%. But you talk as if sub 3% is something to sort of write off. And it's not. Remember, trend level of growth in the United States is around 2%. So the economy is still going to be growing above the long term trend level growth.

- Ahmed met Adam mentioned inflation there at the top. Obviously, that has been a huge challenge here for some consumers, I should say, over the last couple of months. Do you think we've already hit the highest level. I mean, we've seen the highest level in just over 30 years. Is that here to stay, or do you think we'll start to see at least some relief when it comes to inflation?

AHMED RIESGO: Yeah, look, my sense is that we're sort of at near sort of peak inflation right now. If you look at where this sort of started, ground zero for this was really the automobiles and the chips. And that happened a year ago.

And we've already started to get word from the automobile companies that manufacturing is coming back online. A lot of plants in Asia are opening up again. So that was the sort of first phase. And that seems to be coming to an end. I anticipate some of these bottlenecks to be alleviating here in the coming months.

- And I want to bring your attention to some of the eco data that we got today. And I want to ask you, what do you think the Fed makes of the PCE data and then weigh that with the jobless information that we got as well? The best analogy I've heard is that you're trying to put the brakes on thin ice. You're worried that if you don't do it right, you create a train wreck. But you've got to do it. How carefully, how much of a tightrope is the Fed walking here?

AHMED RIESGO: Yeah, the Fed is definitely in a tough spot, because it's sort of hard to draw analogies with history. I will tell you, the Fed is squarely focused on long term inflation expectations, not so much realized inflation. We all realized inflation is high, and it's going to stay high for a bit. The Fed is more worried about those long term-- I'm talking about the five year forward rates, which are basically looking at 10 year inflation expectations.

As long as those remain anchored-- and those so far they have. They're actually still below the highest levels from the previous cycle. As long as those remain anchored, the Fed is likely not to get too worried about this. If those become unmoored, that's a different story.

- Where do you fall on the pontificators? And I'm not calling you that, but the different people who say stock markets in a bubble, because plenty of people say absolutely not. Where do you fall? What are you telling your clients?

AHMED RIESGO: Look, the stock market is definitely expensive on an absolute level. And when you look at absolute valuations, that's true. But when you look at it on a relative basis, and by relative specifically to the bond market, it's really not that expensive. So that's sort of that narrative of there is no alternative I think still has some time to run.

When you look at what's called the equity risk premium, which is basically what you're getting paid for owning stocks instead of bonds, it's still not outside the norms of what we've seen in history. So I still think that the stock market still has a bit to go.

In fact, if you look at also history here, we probably have not reached the final sort of mania phase or the melt up phase of the stock market. We're likely to see that sometime here in the next year or two. But yeah, like I said, on an absolute level, sure, it's expensive. On a relative basis, not so much.

- So Ahmed, it sounds like there's still some money to be made here. So where would you suggest investors put money to work right now?

AHMED RIESGO: Yeah, we are basically positioning ourself for higher and higher bond yields. Again, I don't think this is going to be a sort of straightforward process. You can think of it as a two steps up, one step down sort of a graduated equilibrium.

So I think you will see rates making higher highs and higher lows successively. So you want to be positioned or position your portfolio to be able to absorb those. And one of the best ways to do that is first of all, owning real assets, real estate. You want to own commodities. You want to own the value cyclical names in the stock market, basically companies that aren't going to be hurt as much by a rise in real yields.

- We appreciate your insight. Ahmed Riesgo is the Insigneo Chief Investment Strategist. Good things to you and your family this Thanksgiving.