Inflation remains 'debilitating' to the average U.S. worker amid Fed rate hikes: Strategist

Sanders Morris Harris Chairman George Ball joins Yahoo Finance Live to discuss inflation, the Federal Reserve's rate hikes, the state of the market, and tech stocks.

Video transcript

- Well, the word's heard around the world-- inflation. The latest data around the globe is showing some signs inflation might be slowing, but it's not exactly a clear picture. Now, let's let the data speak for itself, and we can start right here at home. The consumer price index, a key inflation gauge, rose 4.9% from a year ago just a touch lower than March's 5% figure. And the producer price index, which the Fed prefers, rose 2.3% on an annual basis. Now that's below estimates and the slowest annual increase since January of 2021.

Meanwhile in China, consumer prices rose 0.1%, that's the slowest pace in 10 years. Taking a look at the Eurozone, inflation there has dipped from a double digit peak for the first time in 10 months, allowing the European Central Bank last week to slow the pace of its unprecedented rate of interest rate increases. In the UK, however, inflation remains stubbornly high sitting above 10%, which caused the Bank of England to hike rates today to the highest level in almost 15 years.

But the truth is we're not even close to where we need to be. Eurozone inflation stands at more than three times its target and UK inflation remains in the double digits. Here at home, we're way above the Federal Reserve's 2% target. So for now, inflation worries will linger. Well, what does the inflation picture mean for the Fed here in the US? The latest report this morning was another sign price rises are starting to slow if very gradually.

April's producer price index rose 2.3% on an annual basis. That's below estimates and the slowest annual increase since January of 2021. Let's break it all down with George Ball, Sanders Morris Harris Chairman. Thank you so much for joining me this morning. So obviously, trying to make sense of here, searching for some direction, you had the CPI print and today's PPI print, you know, slowing but perhaps not as fast as the Fed would have liked. How hard though will it be do you think for the Fed to justify not pausing in June?

GEORGE BALL: Professor Minsky is famous for the Minsky moment, which I think said that if debt levels get to be too high, there's a catastrophic impact on asset prices. He also said one other very interesting thing, which was the past is instructive, but not predictive. And the data sets that we, that the Fed, that everybody is getting are past and instructive, but they aren't necessarily predictive of the future.

With that said, there are some things I think that are predictively quite commonsensical. A, the Fed's not going to cut rates anytime soon. It's not going to happen, it's a dream. I don't care what the odds are. The Fed is not going to cut rates anytime soon. Their job is not finished. B, if you step back and say, well, you've got inflation running at two or three times what a norm would be as you pointed out before, it's still very debilitating to the average man whose wages are diminishing in real terms quite substantially.

Thirdly, my prediction-- people won't talk about it very much, but it's sort of being said, the Fed's not going to try to get inflation down to the 2% goal. It's going to get to something like 3%. And at that point, it'll consider the job done because the Fed wants to be popular, not unpopular. Getting to 2% is going to cause a recession and a lot of gnashing of teeth. And so 2% is gone, it's 3%. Really 3% is the new 2%.

- So then realistically then, when can we expect to get down to that 3% level? Based on what we're still seeing, some of these repercussions from tighter lending, some of these regional banks are still under pressure as well.

- The one sentence answer, I think, is by the end of the year. Fed is not going to cut rates between now and the end of the year. What it's done up to now is more than sufficient to gradually drag the various components of cost of inflation, PPI, CPI down to something like a 3% pace in November, December, January, around then.

Banks are slowing their lending very markedly. Their credit standards are much more stringent than before. And that alone with nothing to do with the Fed and the rates is going to slow the economy down quite a bit and actually cause either job losses or a halting in job gains over the next few months. So bank lending standards unrelated to rates are much more stringent than they were just a few months go. And that will put a brake on the economy and bring the inflation rate down to something like 3% around the end of the year, but no cuts prior to then.

- And it's funny because investors, at one point, just seem to be jumping ahead ignoring the Fed even though they were saying, higher for longer, higher for longer, seeing some selling off today. But I mean, when you look at FANG stock performance so far year-to-date, I mean, they seem to be looking past the Fed. You've got Meta NVIDIA up more than 90% year to date. But when you look at some of the other indexes outside of the FANG effect, what is the real story here? What are markets actually doing?

- The FANG type stocks, which were down 50% to 75% in 2022 rebounded 25% plus or minus from this lower base in January. Since then, they've been comparatively dormant. There's a rotating up/down a little bit, not much. But if you go and exclude just six stocks-- big technology stocks-- the markets are broadly up between 1% and 2% depending on the measure that you want.

So the market this year has been flat, except for a dead cat bounce or a rubber ball bounce in the FANG stocks off the very depressed levels. That said, as you point out, the market is quite resilient. And I think that investors believe companies can prosper and maintain their profit margins even at a 5% rate environment. Corporate managements are very skilled, they know what the backdrop is going to be. And the current rates of interest are not going to be calamitous for earnings or for the economy in later 2023 and into 2024 I think.

- And you mentioned earnings there. We heard a lot about AI and a lot of these promises about what companies-- how companies plan on investing really pouring in here. So obviously, it's going to benefit some companies more than others. But as you look ahead at how you're allocating your portfolio based on what you heard on some of these earnings calls, where do you see the best places to really approach the rest of 2023?

- Let me answer your question upside down. I think that the biggest tech stocks the FANG, FANG pluses, as broadly defined, are not the right place to invest. They're so big now. They're great companies. They have a whole lot of cash. They're doing well. But they're so big that they can't grow nearly as fast as they used to. They can't therefore, justify the same multiples of earnings or revenues that they sold once upon a time.

They will improve profit margins, that was anticipated in their stock prices, but they're single digit growers, not multi-double digit growers any longer. However, technology is where the world is going to grow. And there's a large set of substantial, profitable, well-capitalized technology companies that I think will be the right place to invest and to overweight investments in the second quarter and then in the second half of this year. They're apt to do quite well because they are growing at 20%, 30%, 100% a year in revenues and they are profitable or profit conscious now. So that's a very good place to put money.

- We appreciate you joining us this morning. George Ball there, Sanders Morris Harris Chairman. Thank you for joining us. Have a great day.