- Hedge-fund billionaire Bill Ackman said a sustained rise in inflation could be a “black swan” event to markets.
- He detailed his take in a recent interview with Interactive Investor.
- Ackman said the US could hit full employment by the end of the year, forcing the Fed to change its policy stance.
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“I think one of the ‘black swan’ type risks for markets is a real spike in inflation that’s not just a three-month spike, that’s more sustained,” Ackman said. “Also, meaningfully higher interest rates, which I think will affect the discount rates that people use to value companies, and I think those could be countervailing stock market forces.”
A “black swan” event is a rare and unpredictable event that potentially has severe consequences.
The Pershing Square Capital Management founder said the trillions of dollars of stimulus from COVID-19 relief bills and Biden’s infrastructure package, historically low interest rates, and “benign policy” from the Federal Reserve is setting the US up for “explosive GDP recovery and probably inflation.”
Ackman said that with the pace of vaccinations in the US, the country will be close to full employment and near all-time low unemployment rates at the start of 2022. Those factors are the triggers for the Federal Reserve to change policy.
“I think you could see certainly expectations change as soon as the next few months, about how accommodative the Federal Reserve will be,” Ackman added.
Ackman’s interview comes as more investors begin to question whether inflationary pressures from the economic recovery will be temporary or have a lasting effect on markets. The Federal Reserve has signaled it will keep its accommodative policy stance, which has long driven gains in stocks, in place for much longer. Chair Powell has also emphasized that any rise in inflation will be transitory.
But many on Wall Street are predicting the Fed will need to change its hand sooner than expected, and that will spook markets. On Friday, Wharton Professor Jeremy Siegel told CNBC the Federal Reserve will change its policy stance at some point in 2021, and that will cause a “day of reckoning” in the stock market.
Ackman recommended investors own businesses with pricing power to combat inflation.
“I think inflation is going to be real, and you’re going to see wage inflation. I mean, everywhere there are ‘Help Wanted’ signs, it’s very hard to hire people to fill its jobs, particularly with a stimulus package which includes extra unemployment benefits,” said the investor. “So it’s a lot of pressure on wages which I think ultimately is a good thing but could have, again, depending on the nature of the business, could have a negative impact”