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Naomi rovnick

Asset price inflation ‘will move from Wall Street to Main Street’ after coronavirus lockdowns end, Bank of America strategists predict, as they predict investors will exit stocks and bonds to turn towards collectibles, raw materials and even diamonds.

In a research note, bank strategists argued that the release of “pent up savings” combined with a government stimulus package in the United States will create a surge in inflation caused by factors such as bottlenecks. supply constriction and rising food and energy prices. “Real assets will outperform financial assets,” they wrote.

Since 1950, according to BofA, commodity, platinum, real estate and diamond prices have been the most correlated with accelerating inflation, with long-term government bonds doing the worst.

Proponents of these “reflation trade” arguments often point out that stocks and bonds could suffer from rising consumer price indices. Inflation is eroding the spot value of coupons paid by bonds, which could encourage the sale of assets such as US Treasuries.

This would raise the yields on Treasuries, make investors demand higher yields from stocks and depress stock valuations which have reached record levels.

Financial markets are forecasting faster inflation, while the US central bank has said any price hikes during the economic recovery will be temporary.

Meanwhile, a debate rages on whether US President Joe Biden’s multibillion-dollar relief and infrastructure spending program will drive the world’s largest economy. overheat.

The 10-year break-even rate, a market measure of future inflation in the United States, is around 2.2 percent.

Federal Reserve Chairman Jay Powell, however, said this week that any rise in inflation in the United States would be “neither large nor sustained” because the US labor market remains weak.

Another senior Fed official has mentionned that the strong disinflationary forces of globalization and technology will keep prices moderate.

Christopher Wood, strategist at Jefferies, said that even if the Fed does not respond to an overheating economy by raising interest rates, “the prescription of the progressive wing of the Democratic Party will be to remedy this with more taxation. high ”, which would also be bad news for stock prices.

“Risks are rising for clearly overvalued US stocks,” Wood wrote in a research note.

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