Keith McCullough has seen the future ”“ or, at least, an economic future designed by Federal Reserve Chairman Jerome Powell, and he is warning of an upcoming period of stagflation.
McCullough, founder and CEO of Hedgeye Research, the Stamford-based investment research company, stated that Powell”™s prognostications of the economy ”“ specifically, the increasing unlikelihood of a recession ”“ are not to be embraced.
“The Fed forecast of the probability of recession should be trusted as much as their ”˜transitory”™ inflation forecast, or a parlor game,” he said in a recent MarketWatch interview. “People should not have confidence in the Fed”™s forecast. The ”˜no-landing”™ or ”˜soft-landing”™ thesis is looking backwards. The Fed is grossly underestimating the future, doing what they always do, in looking at the recent past. Their policy is wedded to what they say. They claim they”™re not going to cut interest rates until they get to their target. But any hint of the Fed arresting the tightening gives you more inflation. So there”™s this perverse relationship where the Fed is the catalyst to bring back the inflation they”™ve spent so much time fighting.”
McCullough was skeptical about Powell”™s insistence that the Fed must meet a 2% inflation goal ”“ the rate is currently 3.2%, but McCullough stated that “a lot of people are peacocking and declaring victory over inflation when we”™re about to have reflation that sticks. We have inflation heading back toward 3.5% and staying there.”
McCullough predicted the Fed will enact another rate hike in September and possibly in November if inflation fails to drop to 2%. In an environment where inflation accelerates and economic growth remains lethargic, McCullough warned that the U.S. economy will slide into a state of stagflation.
“Stagflation pays the rich and punishes the poor,” he said. “You want to be the landlord. The prices of things people own are going to go up, and the prices of things you need to live are also going to go up.”
From an investor standpoint, McCullough observed that one positive aspect of stagflation was a premium on growth sectors, if only because much of the economy is stagnating.
“We are long energy and uranium as stagflation plays out ”“ ETFs we”™re using for that include Energy Select Sector and Global X Uranium,” he said, adding that investors should “U.S. consumer, retailers, industrials and financials, which are all decelerating. Healthcare is our favorite sector, which we own through the ETFs Simplify Health Care and SPDR S&P Health Care Equipment.”
