Paul Christopher, head of Global Market Strategy for Wells Fargo Investment Institute:

Inflation hasn’t risen along with the economy’s growth rate here because of several long-term factors that remain really pretty disinflationary. That means working against inflation. One of those is demographics. We’ve got a large cohort of the population in their 60s and 70s. They simply don’t spend as much as younger people do. What’s more, younger people are opting to stay in cities and live in apartments rather than move out in their 20s and buy starter homes and get started that way, in the suburban way, the way their parents and grandparents did. So that’s a big factor. And globalization also is another big factor where the supply chains that provide us goods from overseas have the capacity to move to places where wages are always lower. And that’s a big difference from the 1970s, where we relied mostly on domestic production. We had strong labor unions that were always using leverage with employers to get higher wages. So we just don’t have the same factors at work, long-term factors, today to push inflation higher. But you will see inflation on short-term basis move higher here in the next year. Don’t be surprised to see a 3% or a 4% inflation number where in the past we’ve had more like 2% inflation. That, we think, will be transitory and it’s going to make a good buying opportunity if markets get to be a little bit concerned about that. Again, we think it’s transitory. 

There’s really nothing particularly inflationary about deficits per say. In the 70s, we had very small deficits as a share of the total economy. Today, the deficits are much larger, but we’ve had really very limited spending by businesses, unlike the 70s — businesses were very expansive in the 70s — and people, simply put. Remember that baby boom generation is getting into their 60s and 70s now. In the 70s, the baby boomers were in their 20s and 30s and they were spending a lot of money buying homes and getting started with families. Today, people are opting for smaller places, living in apartments. We’re just not seeing that kind of spending from the private side today. So government can spend a lot more and it’s not inflationary. 

The spending and the saving of stimulus money, some people are spending, others are saving, is going to have a really very large, but we think probably shorter term, impact on the economy. Let me explain. When you put $1,400 checks in the hands of people who have had not much income, they are able to continue their spending. When you put those checks in the hands of people who didn’t lose their jobs but have maybe lower income, they’re inclined to spend that money. And then there’s still a lot of other people who don’t get the checks at all from the government, but have kept their jobs, but they simply don’t have anywhere to spend the money. No cruises, really very little travel. Dining out is not as possible as it used to be, even going to movie theaters, not as possible as it used to be. So what we have measured is about $1.2 trillion in pandemic-related savings is waiting to be spent out there, call that dry powder, alongside the $1.9 trillion just approved by the Congress and the president. And another large chunk of it was being spent in January and February and that was approved in December. So we’ve got an awful lot of spending either going on now or set up to go into the future. We think that lasts a good 12 to 18 months into 2022, and that’s going to really help financial markets here. And there’ll be a lot of spending.

There’s been a very long period during which foreign investors have relied quite a bit on U.S. Treasuries. You know, if you take the size of the U.S. Treasury bond market, it’s more than double, in some cases triple, the size of the bond markets elsewhere in the world. And that means that countries that are looking to hold a rainy day fund of their own, maybe they’ve accumulated dollars through trade with the U.S. They want to save that money for later for that rainy day that may come along, that emergency or disaster. They are buying and have been buying U.S. Treasury securities. We don’t think that’s going to stop any time soon. What’s more, if you look at the higher credit-rated countries of the world like Japan and Europe, Germany, for example, the U.K., their yields are much, much lower than ours. So if you’re saving for that rainy day fund and you’re in India or you’re in Mexico or even in China, you’re going to be preferring, we think, U.S. yields on an ongoing basis. Having said that, though, we have issued a lot of new Treasury debt recently and that has mostly stayed domestic. So actually, the share of total Treasury debt today is lower overseas. In other words, the foreign holders are a smaller share of the total than they used to be, just by virtue of the fact that the domestic folks have been buying a lot more of the new issues. 

The long-term impact of the deficit for the younger investors needs to be kept in mind. And we don’t think that the deficit will so much be inflationary as it will probably slow economic growth into the years ahead as the government will have to raise taxes in order to service and pay off that debt. So investors should keep their eye on the economy. But we think there will still be good investment opportunities, particularly in equities, going forward.