Paulsen: Cocktail of Factors May Spark Inflation Fears In 2014

Could 2014 finally be the year that long-simmering inflation fears boil over? Wells Capital’s Jim Paulsen thinks it just might be.

“In the last five or six years we’ve been worried about nothing but deflation and weak growth,” Paulsen tells Yahoo Finance’s Breakout, “so it’s very difficult to imagine that we might get to a point where we’re worried about an overheated economy again, but I think we’ve got a shot at that (this year).”

Paulsen says a number of factors — a new dovish Federal Reserve chairman, tightening labor market, rising factory capacity utilization rate, rising commodity prices — could combine to trigger inflation fears. “If you put all those together I think that could cause people to worry about overheating or inflation,” he says. To be clear, though, Paulsen is expecting only a small pickup in inflation this year. But he thinks that slight pickup could trigger bigger fears.

Paulsen: QE Has Had Little Impact

One strategist who likely is pleased with the Federal Reserve for finally beginning to taper its asset purchasing plan: Wells Capital’s James Paulsen.

Paulsen said last week at the Wells Fargo 2014 Investment Outlook conference that quantitative easing “has not had much impact,” except for there now being $3.5 trillion in bank reserves that has not reached the economy, the Las Vegas Review Journal reports. The Fed, he said, “should have stopped (quantitative easing) a while ago.” In buying up $85 billion in bonds every month, the Fed has essentially been “screaming, ‘we are scared and you should be too,’” he said.

Paulsen also said the “good news is the recovery is looking normal” and similar to recoveries that occurred in the early 1990s and early 2000s. He thinks the recovery has another five it six years to run. He did say that he expects a “mini-crisis” sometime next year because of the Fed’s taper plan.

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Paulsen on the Debt Crisis, and Earnings Upside

Wells Capital’s Jim Paulsen says he has been viewing the debt debacle in Washington as a buying opportunity, not a long-term problem. Paulsen tells CNBC that he’s high on non-U.S. stocks right now; in the U.S., he likes cyclical areas like industrials, materials, and financials. Paulsen also talks about why he thinks third-quarter earnings and revenue results may be better than most expect.

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Paulsen: Market “Digesting” Big Issues

Wells Capital Chief Investment Strategist James Paulsen says that, with the market digesting several major issues, he expects stocks to remain in a trading range for the remainder of the year. Paulsen tells Bloomberg that the market is digesting three major things: a big upward move in multiples; a repricing of long-term interest rates; and the Federal Reserve’s tapering of its asset-buying programs. He thinks the bull market won’t be stopped, but that the market may pause for a few months.

 

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Paulsen: Tapering Will Lead To More Confidence, Not Less

Wells Capital’s James Paulsen thinks that the “great Fed myth” about the stock market rally being a “sugar high” will soon be debunked. Paulsen tells Bloomberg he thinks the market’s moves this year have mainly resulted from increased confidence, not the Federal Reserve’s policies, evidenced by rising price/earnings multiples. CEOs remain hesitant, however, which has limited capital spending. Paulsen thinks part of their hesitance is a concern that the Fed, which has continued its quantitative easing programs well after many have believed the economy can stand on its own, may know something they don’t. If the Fed starts shows confidence and starts tapering, he thinks that corporate confidence may also increase, which will lead to more capital expenditures. That’s in part why he likes the technology and manufacturing sectors. Paulsen also talks about why he thinks the dollar will fall, not rise, when the Fed starts tapering.

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Paulsen: Fed A Hindrance To Long-Term Gains

Wells Capital’s James Paulsen says that, with valuations low compared to historical standards, stocks could provide investors with double-digit annual returns over the next decade — if the Federal Reserve gets out of the way.

“In the post-war era, when the inflation rate has been as low as it is today, the U.S. stock market PE multiple has been higher than it is currently almost 70 percent of the time,” Paulsen writes in a recent research note. “Although earnings will need to rise, investors should not fret too much about the speed of earnings growth because the primary driver behind continued gains in the equity market will likely be rising PE multiples rather than rapid earnings growth.”

But Paulsen says one big fly in the ointment is Federal Reserve policy. “The greatest risk to this rosy scenario is current Fed policy,” he says. “Should its unconventional and massive monetary easing policies of the last several years ultimately produce problematic inflation, PE multiples will contract and stock market investment outcomes, while not disastrous, will prove disappointing.” Paulsen provide several charts showing how higher inflation has historically meant lower P/E ratios. He says that while many investors seem to fear the end of the Fed’s stimulative policies, they really should be welcoming it.

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Paulsen: This Isn’t a Sugar High

Wells Capital’s Jim Paulsen thinks stocks are on their way to record highs, and says the economy is stronger than the Federal Reserve is giving it credit for. Paulson tells Bloomberg that he sees growth in the U.S. continuing to outpace expectations — he expects GDP to grow at about 2.5% to 3% this year. He also thinks factors like an improving housing market are causing confidence to rise. Treasury yields should be about 2 points higher than they are right now based on economic fundamentals and inflation levels, he adds, saying that the Fed’s crisis-level interest rate policy has fostered the idea that the market’s rise is a “sugar high” — a notion he disputes.

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Paulsen: Strengthening Economy Driving Market

Wells Capital Management’s Jim Paulsen says the recent rally in stocks isn’t a sugar high resulting from the Federal Reserve’s actions. “This [rally] is a fundamentally driven advance in the stock market by growth in the economy,” Paulsen tells CNBC, pointing to economic stabilization in Europe and China, and improvement in the U.S. He also says he thinks the coming debt ceiling debates will have less of an impact than some think on the markets. “I think we’ve been desensitizing to some of these Armageddon stories,” he says. “I think the markets will react less to this debt ceiling than they did to the fiscal cliff.” And Paulsen makes the case for the Federal Reserve needing to normalize its policies and stop acting as though the economy is in crisis.

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Could Wage Inflation Rebound Soon?

Wells Capital Management’s Jim Paulsen says that declining wage inflation — which has allowed the Federal Reserve to continue its “crisis-like” loose monetary policy — may be coming to an end sooner than many think. 

Paulsen says that for the past 30 years or so, wage inflation has continued to decline for two-and-a-half to four years after the end of recessions. “Many believe the continued deceleration of wage inflation in this recovery is a unique event tied to the severity of the 2008 recession and to the still elevated 7.7 percent unemployment rate,” he writes in a recent research note. “However, the behavior of wages in the contemporary recovery is certainly not unique. Rather, wage inflation is following its pattern of the last three recoveries quite closely. If wages continue to respond as they have in the last 30 years, labor inflation will likely begin to rise again sometime in 2013.”

Paulsen says that could have significant implications for investors. “Investors may want to ponder how ‘out of line’ the current Fed policy may appear should the unemployment rate continue a decline towards 7-ish percent this year and wage inflation surprisingly begins to rise,” he says. “Could the Fed lose its mandate (falling wage inflation) much sooner (i.e., in 2013) than most can imagine?”

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Paulsen Sees Signs of Solid Growth

Wells Capital Management’s Jim Paulsen sees a number of positive signs for the U.S. economy. Paulsen tells Bloomberg TV that third-quarter growth may have been around 3%, and that a number of factors — housing, job creation, and lending activity among them — are providing the economy with a boost. He sees growth coming in at about 3% in 2013.