Investors are "woefully unprepared" for inflation, The Wall Street Journal's James Mackintosh wrote Wednesday.
Mackintosh acknowledges that historic financial turning points "have proven remarkably hard to spot" — there was concern about sustained inflation in the aftermath of the Great Recession, as well, for instance — but "the evidence for a generational shift is strong across five fronts." Central banks are less concerned about inflation, governments are more willing to spend, globalization has peaked, birth rates are declining, and labor rights are strengthening, all of which should combine to drive up wages and prices, Mackintosh writes.
And "if we are at a turning point ... Investors who are buying 10-year Treasurys at 1.6 percent" appear dangerously exposed. Even if inflation settles at the Federal Reserve's 2 percent target over that period, it would lead to a "loss of spending power." But if the figure ticks up to 3 percent "it would be extremely painful." And if it inches toward 5 percent? "Treasurys would be massacred," Mackintosh writes.
The trends Mackintosh sees may be a "false alarm" and "it is too-soon to go all-in on the idea that inflation is inexorably headed higher," but, he argues, "it would be crazy to build a portfolio that didn't consider inflation a major risk." Read more at The Wall Street Journal.