By Michael Connor
NEW YORK (Reuters) - Long hibernating price inflation is taking center stage in America's economy, in part because President Trumps' anti-migrant policies are fueling already rising wages, a top Wall Street asset strategist said on Monday.
Richard Bernstein, a celebrated asset allocator who oversees $3.1 billion at investment firm Richard Bernstein Advisors LLC, also told the Reuters Global Markets Forum that U.S. corporate profits reflected economic growth, that equities will outperform fixed income assets in 2017, and that few investors are prepared for a migration from deflation (global deflation ending).
The following are edited excerpts from the conversation:
Question: Are President Trump's immigration and border security policies affecting prices in the US economy and prospects for investors?
Answer: Inflation is indeed the risk going forward. Just look at bond investors' attitudes. Immigration is an important part of the U.S. labor market, and wages are already rising. In addition, businesses report having increased trouble hiring qualified workers. Removal of a global workforce will cause wage rates to rise further, I think.
Q: You applaud corporate earnings and favor cannot be maintained because very easy Federal Reserve policies are ending. Is that a risk?
A: Not as much as many would lead you to believe. The role of monetary policy has always been to let investors take more risk by lowering the hurdle rate of the economy. This cycle was no different. In addition, what many totally ignore is that corporate profit became the largest percent of GDP ever in U.S. history in this cycle. So, the notion that the only reason the stock market is up is because of the Fed is totally incorrect because it ignores the surge in profitability.
Q: Will a surge in plant investments in the United States be a big boon, as President Trump argues?
A: Relocating production to the U.S. isn't a panacea for the U.S. economy. You will simply be replacing higher productivity with lower productivity. So consumer prices are likely to increase.
People forget that the US economy is roughly 70 percent consumption based. Manufacturing is about 10 to 15 percent. Will politicians really hurt the 70 percent to benefit the 15 percent? Especially with midterm elections again on the horizon.
Q: Are investors ready for higher inflation?
A: Global deflation is ending. Not ended, past tense, but ending. Investors are NOT positioned for that at all, if you ask me. Our portfolios are very overweight equities and underweight FI (fixed income). We also have some gold/gold miners in our portfolios.
(This interview was conducted in the Reuters Global Markets Forum, a chat room hosted on the Eikon platform. For more information on the forum or to join the conversation, follow this link: https://forms.thomsonreuters.com/communities/)