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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