Since the beginning of May, there has been a lot of talk about "higher inflation" at the earnings conference of the first-quarter earnings season, compared with the same period last year. The frequency of inflation talk among corporate executives has soared by as much as 800%. No wonder Bank of America Corporation's chief stock strategist Savita Subramanian could not help sighing at that time: "from an absolute point of view, the frequency of inflation mentioned by enterprises at the earnings meeting is close to the record level in 2011, and the 'temporary' hyperinflation is not far ahead.

The fact that a big Wall Street bank should seriously warn about hyperinflation, even with a "temporary" prefix, is enough to make people shudder-is the Fed losing control over prices? Earlier this month, Deutsche Bank, another big institution, issued a clear warning that the Fed had failed to deal with inflation, leaving the global economy sitting on a "time bomb".

Of course, BofA leaves a little leeway for its own judgment, which is exactly the same as the Fed-in the final analysis, they are all emphasizing "temporary", and the so-called temporary definition is simply an elastic band. after all, it can be as short as a few weeks, which means that the intense cycle of pain in the future is somewhat manageable.

But is it really that simple?

Although markets have been highly sceptical about the Fed's so-called "temporary", it has been used by the Fed as a basis for monetary policy-judging from the current lattice signals, they will not raise interest rates until 2023, and by that time, inflation is likely to be in double digits.

However, there is no shortage of followers in the relaxed tone of the Federal Reserve. For example, the latest consumer sentiment survey report released by the University of Michigan on Friday predicted that soaring inflation would not last long. Richard Curtin, an economist in the university's consumer sentiment survey, wrote: "expectations for inflation in the coming year have fallen to 4.2% from 4.6% in May, the highest in nearly a decade." This is mainly because consumers believe that the surge in prices will be mostly temporary. "

However, on the same day, Bank of America Corporation stood up and poured cold water on all these optimistic arguments. Michael Hartnett, the bank's chief investment strategist and respected by the industry, wrote in a research note that the surge in US prices is likely to be not temporary but will last for at least four years.

Harnett pointed out that although the average inflation rate in the United States has been 3% in the past 100 years, 2% in the second decade of the new century, and only 1% in 2020, "the annualized figure so far in 2021 has reached 8%." "it is baffling that so many people believe that inflation will be temporary at a time when stimulus, economic growth and asset / commodity / housing inflation are essentially permanent," he quipped. "

As a result of the above-mentioned factors, Bank of America Corporation's judgment is that "in the next two to four years, the US inflation rate will be at least 2 to 4 per cent", and its main source is "asset, commodity and housing inflation". The Fed has made a big bet on investing its reputation and credit to keep the ultra-loose interest rate regime until 2023, but Harnett predicted that "global central banks will begin to tighten in the next six months." only a big crash can prevent them from doing so.

Harnett went on to list some specific grounds for his super hawkish position. The first is the fiscal policy bubble, such as Biden's latest infrastructure plan, which "brings the global monetary and financial stimulus to $30.5 trillion over the past 15 months, equivalent to the gross domestic product of China and Europe combined." If anyone wondered before why millions of people are now out of work and consumer spending is much higher than before the outbreak, the answer is here.

Subsequently, the BofA chief investment officer analyzed asset inflation, and on this issue, even the conservative Goldman Sachs Group could not help but admit that compared with moderate economic expansion, asset inflation is already excessive-although economic expansion is actually starting to rise now.

Harnett also pointed out that central banks have bought an average of $900 million worth of financial assets per hour over the past 15 months, making "extremely amazing increases in stocks and commodities over the past 15 months." enough to eclipse the overall returns of the previous century, "and the total market capitalization of global stock markets has also risen to a dizzying $54 trillion during this period.

And although commodity inflation has soared over the past six months, it has not abated recently, so much so that although the Fed has begun to blow hawkish winds, Harnett still expects crude oil prices to rise to $100 by 2022.

Then there was housing inflation, or "vicious housing inflation", in the words of real estate tycoon Zelman. Harnett pointed out that the surge in house prices has swept through the United States, Britain, Scandinavia, Canada, Australia and New Zealand, with a year-on-year increase of nearly 30%, the fourth super boom in nearly 50 years.

In this situation, the central banks of Norway, Denmark, New Zealand, Australia and Canada have all turned to "macroprudential" policies, such as using soaring house prices as an important reference for monetary policy-not the Fed as we all know.

Needless to say, asset bubbles created by the Fed and other central banks are exacerbating wealth inequality. Although it is impossible for central banks to admit it, Harnett made it clear that markets are almost always ahead of the macro economy-in other words, they can be seen as a leading indicator of the economy, and the Fed knows their own capabilities. they can only influence the behavior of companies and consumers through credit spreads and stock prices, so their policies are all aimed at Wall Street.

The problem, however, is that since the "Fed response" rescue of long-term capital management companies from the Greenspan era, the continued prosperity of Wall Street is becoming increasingly distant from the real economy and the well-being of ordinary people. As the chart below shows, the plate of US financial assets is now equal to 6.3 times GDP.

Or, you can make some of the simplest and most intuitive comparisons. The total market capitalization of u.s. stocks is now $27 trillion higher than it was before the outbreak, while the number of non-farm payrolls in the United states is fully 8 million lower than in February 2020.

Harnett concluded that "to solve the problem of inequality between the rich and the poor through quantitative easing is simply asking for fish." In fact, people at the Fed really don't understand this?

To sum up, Harnett pointed out that although US stocks are hitting record highs almost every day, the super party is now coming to an end, including high inflation and a shift to hawkish central banks. weak economic growth and so on. The so-called 3R of raising interest rates, regulation and redistribution will rise, and the so-called 3P of positions, policies and profits will lead to lower or even negative returns for stocks / credit in the second half of the year. this makes the so-called barbell trading long inflationary assets and defensive stock assets the best option.

Harnett's judgment is based on the fact that, in his view, the current buying frenzy in the US stock market is similar to that in the late 1960s, when "inflation was decoupled from interest rates due to excess fiscal policy and the Fed's submission. As a result, so-called beautiful 50 stocks and small-value stocks form barbells and perform significantly better than bonds."

After analyzing the situation in the 1960s, Harnett pointed out that the beautiful 50 stocks at that time were actually equivalent to today's large technology stocks: "from 1966 to 1970, when the first wave of inflation was high, beautiful 50 stocks performed extremely well, while in the early 1970s, when the second wave of inflation was high, the beautiful 50 reached a long-term top, and then the performance was below average for a decade. In other words, the days when FAAMG surpassed the market are almost over. "