“Inflation is currently above 10 per cent,” said Bill Ackman, founder and CEO of Pershing Square Capital Management. The billionaire investor fears that if inflation remains at this level, “there will be major consequences for most of us.”
With non-financial media writing about the increasing devaluation of money, inflation awareness is starting to permeate all parts of society. But according to Bill Ackman, the reality is much grimmer than it seems.
According to the billionaire, inflation will last much longer than the Federal Reserve suggests and investors would like. He also questions the communicated inflation figures. “The inflation that households are actually experiencing is fierce and much higher than reported government statistics”, Ackman tweeted this week.
Inflation at 10.1 percent
The consumer price index officially rose 6.8 per cent year-on-year in November, but Ackman argued that the government is using “extremely inaccurate” metrics that underestimate housing costs. A more accurate figure would be 10.1 per cent, he claimed, based on his own calculations.
The consequences for society should not be underestimated, according to Ackman. “If inflation remains at this level,” he said, “it will have major consequences for most of us. On the one hand, consumer spending will continue to rise at a rapid pace. On the other hand, inflation can significantly damage the performance of your investment portfolio. When you combine the two, you get rising expenses and falling assets, both of which lead to a lower standard of living.”
The CEO of Pershing Square Capital Management said he believes that most investments in the current market are priced as they would be in a market environment of low inflation or deflation. Bonds are yielding negatively and equities are at exceptionally high valuations, “which can only be justified if we remain in a low-inflation world”. When the stock market is priced twice its historical average, these valuations are only sustainable if inflation is not transitory, said Ackman.
The solutions
Investors should look for companies with pricing power, or market power, he said in an interview with investment platform ThinkInvest earlier this year. “The best inflation hedge is exposure to companies where the value of the organisation does not change significantly when interest rates rise.”
Although the billionaire is reluctant to give his views on the short-term future, he said he assumes that markets will diverge more in 2022. Companies that cannot pass on rising wages and prices to the end customer will perform significantly worse than those that can. “We are keeping very stable companies in our portfolio such as Universal, simply because we have no idea what the world will be like in 12 months’ time.”
The biggest risk as interest rates rise is in exposure to the big tech companies, according to Ackman.
Billionaires worried about inflation
The founder of Pershing Square Capital Management is not the only billionaire concerned about inflation. “If you had not already experienced inflation at the pump, or seen it in food prices and the housing market, you would certainly have heard about it in the talking points of well-known billionaire investors.”
For example, hedge fund manager Paul Tudor Jones ($7.3 billion) told US financial news site CNBC that inflation could be worse than feared, both for the markets and for society. “I think inflation is the most important problem for investors on Main Street, and it is clear to me that it is not transitory,” Jones said. “It’s probably the biggest threat to financial markets and to society in general.”
The era of the 60/40 portfolio is over, he argued. “It is time to invest in inflation hedges, such as commodities and inflation-protected securities.” Fixed-income securities should be avoided above all when inflation is high and interest rates are low, he added.
David Tepper, founder of hedge fund Appaloosa Management and also a billionaire ($12 billion), said equities do not look like a great investment at the moment, when everything depends on interest rates.”’I just don’t know how interest rates will behave next year. I don’t think there are any good asset classes at the moment. I don’t like stocks, I don’t like bonds, I don’t like junk bonds,” Tepper told CNBC.
Still, the time to “short” equities has not yet arrived, according to Tepper. Stocks, he said, are still a great long-term investment “that everyone should have in their portfolio”.