Personal Wealth Management / Economics

Ken Fisher Explains Inflation and Rising Wages

Inflation is a hot topic and Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher doesn’t believe recent price gains are likely detrimental to the economy or stocks. Ken says temporary dislocations, including supply chain problems and shortages, have largely contributed to recently elevated inflation readings and should resolve and help ease inflationary pressures.

Many investors believe rising wages right now are causing inflation (or vice versa). Ken says neither is true and wage increases alone don’t cause inflation any more than energy supply issues do. Both represent shortages, which drive prices up in the short term until supply rises to meet demand. Further, Ken says inflation consternation in the media and elsewhere saps its surprise power to move stocks. While shortages and other pandemic related issues may take a bit to fully correct, markets have discounted that long ago.

Transcript

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Ken Fisher: Unless you've been in the upper Amazon basin rapidly fleeing humanity. You know that there's been quite a lot of media attention from all kinds of angles on inflation lately. Some about this, some about that but inflation has gotten a lot of headlines.

Ken Fisher: The one that is a perennial is inflation versus wages. And you can see why this would be a popular thing for people to get all excited about because on the one hand if inflation rate is exceeding increase in wages that's tougher on people on average. If the other way around people are gaining, people never like to see inflation gain on them. And so, there's this chicken and the egg kind of a question which is do wage increases cause inflation? Does inflation cause wage increases? And the reality is neither is true.

Ken Fisher: The reality is that inflation is really all about the degree to which we have total prices which include wages of course rising from the degradation of the value of our money. Now, the reality of that topic is a lot more convoluted than almost anyone wants to give it credit for. And in fact more convoluted than I would have said it was if you'd asked me this question 5, 10, 15, 20 years ago.

Ken Fisher: Because in fact, as I've said in commentary that I've made over the course of the last 18months we increasingly don't really think of money the way we used to think of money. The way we used to think of money was it wasn't when I'm a young man, cash checking accounts, savings accounts, that was money. Then increasingly people were using credit cards. Now we have so many different forms of near money that are counted in the money aggregates that the Federal Reserve releases and in fact it is not actually clear which of those are real monies versus near monies because what real money is is what we use to engage in transactions.

Ken Fisher: But what we know is that normally, whatever the actual level of real money is, if one price gets pushed up by any form of obstruction from things like a lot of the irregularities in supply chain that we've seen recently, or governmental interruption associated with the pandemic or any other form of dislocation. If that price goes up, some other price goes down to offset it. You actually only get sustained inflation if that actual real quantity of money is increased faster than the production of goods and services increases.

Ken Fisher: What I would say at this point in time is that we've actually got a world where some prices are going up, some prices are going down. Overall prices are clearly up because the dislocations have been associated with the Pandemic and its aftermath. Most particularly, that which has been very well publicized the supply chain problems, temporary energy problems in Europe, China, even in America that have had no connection to each other but have caused the price of energy to rise. And in fact, almost all other forms of commodities had rising prices as we came out of the depths of the pandemic.

Ken Fisher: But all of these things will be worked through. They will average out and wage increases alone, contrary to what people want to think, don't cause inflation. They can be a result of inflation, but they don't cause inflation any more than the price of energy. Rising causes inflation. In America, for example, total energy consumption as a percent of GDP is a single digit percentage. So, if you increase it quite a lot, it still has very little impact on total pricing. Wages are much bigger, but wages are a result. They're not really a cause.

Ken Fisher: So, what should you think about that as it relates to GDP, as it relates to the stock market, as it relates to interest rates and bond prices? You should largely not get too excited about it. And in the months ahead, because media right now has a big focus and infatuation on gyrations around inflation, you're going to see a lot of attention focused on all of this.

Ken Fisher: I want to point out that as it relates to capital markets, capital markets are particularly good at prepricing all widely known information and all those things that media talks about a lot. The fact of the matter is that this one has been talked about so much, focused on so heavily, that it's virtually impossible for that which has been talked about not to already be in security prices. And today, as I sit recording this video, S&P500 sitting right at all-time highs, having already seen these numbers, therefore you know that they are not terribly problematic because the market, the stock market is always prepricing the next three to 30 months. And that's telling you that it's not terribly bad stuff ahead. Thank you for listening to me on this topic.

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A Series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.

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