Talking

It is said that Richard W. Fisher, the former President of the Federal Reserve Bank of Dallas, had a sort of sixth sense for inflation. Unlike many peers, he was a bit leery on the reams and reams of data that is forever pored over, distilled and shaped into a dominant narrative. Instead, Fisher liked talking to CEOs. He liked asking them what they were seeing. In one Fed meeting, in the throes of the last financial crisis when there was much lip smacking over the inflation outlook, Fisher joked: “By the way, I notice that these little bottles of water have gotten smaller—this will be a Visine bottle at the next meeting”. His point being that companies were raising prices, or shrinking products, across the board. Which, if you listen to companies as they shuffle up to the microphone to report on Q3 earnings, they are currently doing in size. Fastenal CEO Dan Florness could barely sit still recently, talking about how product and shipping inflation is “brutally” high. Fastenal is a company on the front-line of the supply chain crunch and so his words matter more than most. And last week, as the company delivered some blow out numbers, Goldman Sachs President John Waldron agreed. The current inflation “is not transitory”. Enough said. Indeed, Waldron went on to say that he has “never seen a greater divergence between what’s defined as transitory and what’s being seen day in day out”. Hence the shifting tone from the mandarins at the Federal Reserve that the dynamic is actually more “episodic” and is now looking like it will “not be brief”. The issue, it seems, is that money is all a bit too free and available. On his own call last week, Morgan Stanley’s James Gorman suggested that tapering is coming, so too rate rises, and if talking rate rises, “we are 10 rate increases away from what would be considered normal”, causing those with a floating rate mortgage to audibly gulp. With upside risk on the curve then, as we shuffle into 2022, the reflex trade might be to buy banks, but there are no better plays into the gearing of higher-than-currently-expected rates than the online brokerages, such as Interactive Broker. Take a look at how those companies actually make their money. Rising rates is like plugging their earnings into the national grid. Sparks and all.