Inflation and interest rates are forecast to continue elevated for the foreseeable future, according to Bill Ackman, which will have a negative impact on the outlook for stocks.
During a call with investors in his Pershing Square hedge fund during the third quarter, he stated, “We think inflation is going to be fundamentally higher moving forward than it has been previously.” Historically, inflation has been historically low. We do not feel that it is probable that the Federal Reserve will be able to get inflation back to a level that is somewhat consistent with 2%.
Inflation reached a level that was 9.1% higher than it had been in the previous 40 years in June, but it remained at 7.7% in October. As a response, the Federal Reserve raised interest rates from near zero in March to a range today of 3.75% to 4% and suggested that they could reach beyond 5% for the first time since 2007.
Nevertheless, Ackman said that the markets are overly confident that the fear of inflation will recede and that interest rates will decline. He made the observation that increased interest rates reduce the value of the companies’ projected future cash flows, which may cause stock prices to suffer as a result.
He stated that current long-term interest rates are far lower than where they are expected to be in the future. “From our perspective, this is a clear danger for stock markets.”
The investment tycoon with a net worth of one billion dollars based his inflation projection on the expectation that American businesses, having experienced disruptions in their supply chains as a result of the pandemic, will bring more of their output back onshore. In the event that this occurs, it is likely that businesses will pass on the increased costs of labor, rent, and raw materials to their customers in the form of higher pricing, which will feed inflation.
In reference to the financial advantages that have been gained via outsourcing in the most recent few decades, Ackman stated, “We’re no longer going to have the same sort of subsidy going forward.” He also pointed to rising global wages as a driver of higher costs, as well as the costly cost of shifting from fossil fuels to renewable energy sources. He said this was driving up the cost of everything.
Additionally, the chief of Pershing provided some insight into where he believes rates will eventually settle. According to him, securing a thirty-year fixed-rate contract with an interest rate of less than four percent for any form of a financial asset, including US Treasuries, will be difficult.
During the call, Ackman did not provide an assessment of the likelihood of a recession in the United States; however, several of Ackman’s colleagues brought attention to that risk, joining a growing number of commentators who have sounded the alarm on an imminent economic slowdown.
On the other hand, Ackman did brag about the success of Pershing’s hedging strategies, which had brought in a total of $5.2 billion in profits since the year 2020 began. They have contributed 13% to the fund’s performance this year, which has helped to partially offset the 22% loss that was caused by the drop in the value of the fund’s stock portfolio.
Ackman has also expressed his optimism that his special-purpose acquisition rights company (SPARC) will be granted regulatory approval by the end of this year, and that he will reach an agreement to take a private company public by the beginning of the following year.
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