Wanted to share this piece from Bridgewater Associates (Ray Dalio's firm) on inflation resulting from demand increase and supply not able to keep up.

If that is the case, what would be the play in such a market?

Contrarian Investor Media's avatar
Sell consumer discretionary? If they think this is a shock that will soon subside then it stands to reason demand for that stuff will drop off
Sankha Narayan Guria's avatar
This is a demand shock though. Wage increases, job market growth has increased labour participating and thus people are looking to spend. The demand is sky high without supply being able to keep up. So shouldn't consumer discretionary companies with good pricing power be able to make bank in this market?
Todd Campbell's avatar
Fantastic share. Thanks! Wage growth isn't transitory (try asking a worker to take a voluntary pay cut) without economic deceleration. As a result, massive wage growth is fueling discretionary spending, as the report reflects. The business cycle is intact (alive and well). The data suggests that the Fed may be (yet again) behind the curve and forced to significantly accelerate tapering and Fed Funds hikes (the dot plot is way to optimistic). I shared this in another thread, but it's a helpful read on the business cycle/econ cycle and the typical baskets that do well within each stage: https://www.fidelity.com/webcontent/ap101883-markets_sectors-content/18.12.0/business_cycle/Business_Cycle_Sector_Approach.pdf
Sankha Narayan Guria's avatar
Thanks for sharing this! I am thinking of what are possible sectors that can do well in such a scenario. I anticipate interest increases (aka banks benefit) if Fed increases rates. I guess the Fidelity report gives more ideas on what which sectors are always in demand.
Todd Campbell's avatar
The Fidelity report shows you historically, what sectors perform best at different spots in the business cycle.

Banks can see net interest margin expand if 10-year Treasuries (the benchmark to many loans) rise faster than the Fed Funds rate. Eventually, however, that sweet spot comes to an end as higher rates result in fewer loan originations and the Fed causes economic downturn, resulting in more delinquency and defaults (we're no where near there , yet)



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