“If inflation is 8%, the playbook says you’ve got to raise rates higher than inflation, which means 9%,” the co-founder of Mobius Capital Partners told Bloomberg TV on Monday. While policy makers may not hike so aggressively should consumer prices soften, the 86-year-old investor said he doesn’t see inflation receding “anytime soon.”
The forecast is likely a reference of the Taylor Rule, a model which suggests an optimal policy rate by weighing price pressures and the labor market. The Fed is under pressure to handle the hottest inflation in 40 years after last week’s reading of September consumer prices came in above expectations. Other inflation readings have also remained elevated despite the Fed’s recent rate increases.
Still, Mobius’s warning goes far beyond what the Fed — and rates markets — now envision. Traders in fed funds futures are pricing in that the rate will peak near 5% in March. Market-derived expectations on the one-year inflation outlook have tumbled from as high as 6% in March to 3.2%, while the Bloomberg Commodity Index has tumbled from a peak in June thanks to a slowdown in global economic growth.
Mobius also warned investors to take caution with commodities as demand from some key buyers could cool.
“People that are buying commodities are sitting on weaker and weaker currencies,” he said, referencing emerging-market and euro-area buyers. “You’re probably going to see a downturn in commodity prices.”
Mobius, well known for his emerging-markets investments, said he’s putting money to work in India, Taiwan, Brazil and “a little bit in Turkey, and also Vietnam.” He’s urging caution around companies with high debt-equity ratios, and those with low returns on capital.
“These are the two parameters that are very, very crucial in this day and age because of this problem with currencies and high inflation,” he said.
With assistance from Alix Steel and Elizabeth Stanton.