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Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

A significant portion of current inflation pressures will ease in 2022 if and when global supply chain issues get sorted. The one type of inflation I’m concerned about is wage growth, which, while socioeconomically necessary, will put downward pressure on profit margins and equity prices. Wages rarely go down, which makes rising labour costs a permanent driver of inflation.

BMO reports on wages,

“In case you were missing your daily dose of inflation warnings, add unit labour costs (ULC) to the list. The revised U.S. Q3 productivity figures saw ULCs pushed up to a towering 9.6% annualized rate in the quarter. This left them up 6.5% year-over-year, the fastest annual rise since the early 1980s. True, many measures have been heavily distorted by the pandemic, and some of the sprint in costs reflects base effects. So let’s look a the average annual change from two years ago (chart). This only somewhat dims the picture, with ULCs rising at a 4.9% clip over the past eight quarters, the fastest such rise since — wait for it — the early 1980s. Canada’s productivity and ULC figures were published for Q3 just last Friday (and were buried by the jobs data). Curiously, Canada’s results are strikingly similar to the U.S., with labour costs up 6.2% y/y and up at a 4.8% a.r. over the past two years.”

“BMO reports on rising wage costs” – (research excerpt) Twitter

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BofA quantitative strategist Savita Subramanian notes something ominous about the S&P 500,

“We live in a world where negative real rates are almost acceptable as a norm. Nearly $14T worth of bonds have negative nominal yields, and on a real basis, a lot more assets are included in the category, including the S&P 500. The S&P 500 currently yields -2.9% in real trailing earnings (-2.1% forward) – i.e. without continued earnings growth, investors would lose 2.9% adjusted for inflation. Last time the real earnings yield was this negative was 1947. And there were only four historical instances of negative real earnings yield, all of which resulted in bear markets: the post-WWII bear market, the 70s stagflation era, the 80s Volcker shock, and the 2000 Tech Bubble. Moreover, current inflation expectations imply CPI moderating to 2.5% over the next 12 months from 6.2%, the biggest magnitude in history (since 1981), which may prove too optimistic … In this negative real rate world, we recommend inflation-protected yield (Energy, Financials and Real Estate).”

“U.S. equities are a negative real yielding asset” – (research excerpt) Twitter

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Lisa Shalett, chief investment officer for Morgan Stanley’s wealth management arm, sees a change in sector leadership in 2022,

“Recessions give birth to new business cycles, and no two are ever the same. Herein lies the biggest risk for the crowd that counts on interest rates remaining lower for longer. The GIC has long argued that this new cycle would be different. It would be ‘hotter but shorter’ because of the sheer size, scope and speed of dual monetary and fiscal stimulus … the confluence of massive stimulus, deleveraging of the household and US banking sectors and a favorable demographic tide would break the hold of secular stagnation. Demand would return! … trends mean investors need to be positioned for abundant growth. The focus should not be on a handful of technology makers but the swelling legions of technology takers… We suggest a ... robust global recovery; a moderation of US growth and inflation; and more balanced monetary and fiscal policies. We expect the S&P 500 to be range-bound and volatile, and bond returns to be negative net of inflation. Consider rebalancing portfolios: US equities versus non-US; growth versus value; cyclicals versus defensives; megacap versus small- and mid-cap stocks; and active versus passive management. Fixed income should be reduced to fund greater exposure to real assets and to absolute return funds.”

“MS Wealth Management suggests rebalancing portfolios for The Great Rebalancing’” – (research excerpt) Twitter

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Diversion: “Top 25 News Photos of 2021″ – The Atlantic

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