Fight the Fed on inflation -advisor

With wholesale prices marking their biggest annual gain in 9-1/2 years in March, Payne Capital Management President Ryan Payne tells Reuters' Fred Katayama that Fed Chair Jerome Powell's view that inflation will be transitory "couldn't be more wrong."

Video Transcript

FRED KATAYAMA: Wall Street's major indexes rising Friday, so too are our wholesale prices. Well, let's get some thoughts on inflation and what it means for your portfolio. We're joined by Ryan Payne. He's president of Payne Capital Management, and welcome back, Ryan. It's been a while.

RYAN PAYNE: Great to be here, Fred, always good to see you, man.

FRED KATAYAMA: Same here. Love your positive energy. Anyway, Ryan, producer prices, got energy there too, jumping at double the rate they were in February. And on an annual basis, producer prices rising, biggest gain in nine and a half years. So from the way you see it, is this a blip, or is this more of a sign of things to come?

RYAN PAYNE: You know, I think the Fed has really been talking up, or Jay Powell has been talking up about how inflation is kind of transitory here. It's not persistent, I think is the actual language he used, and I don't think he could be more wrong. It's kind of like, let's just ignore that pink elephant in the room, Fred. Let's not look at it, ignore it. You know, inflation is not real. It's not something that's going to be a longer term impact, and I think that's completely wrong. And you're seeing it in so many places, I mean, the Producer Price Index, which is your wholesale inflation.

Now, you know, I don't want to be naive, but these benevolent corporations that now have their costs going up, I suspect they're going to pass that on to you and me. So I think, you know, prices are going to go up. You're already starting to see that. Supply chains are a mess.

You know, we had that supertanker that was caught in the Suez Canal two weeks ago, and I think that really shone light on just how messed up the supply chains are, because you already had ships just sitting out of ports for two weeks on end trying to get into a lot of these ports, and that was even before that traffic we had in the Suez Canal because of the blockage. Because you know, if you get down to it, factories just weren't anticipating all the consumer good orders that have come in. And the scary part about it is the economy is not even reopened yet, so we're already having screwed up supply chains, so what it look like when we get back to some sort of normalization? That's my question.

FRED KATAYAMA: So Ryan, do you think that given the sides that you're seeing that investors should be prepared to fight the Fed?

RYAN PAYNE: I think absolutely the Fed here, and the markets already telling you that. I mean, look at commodity prices. They're up huge. You look at lumber's up 100%. You just mentioned oil, oil's had a phenomenal run. Now it trades for close to $60 a barrel. And you start to look at things like copper, which is more of a leading indicator.

Copper prices are going through the roof, and we've already seen the 10 Year Treasury have a significant move up here. You know, we're up to almost 1.8% the other week. It's come down a little bit here, but I think, you know, if you look, if you're not living under a rock and you've got to be proactive in your portfolio, you know, the reality of it is the dynamics have changed. It's not like the last decade where you had falling commodity prices, falling interest rates. We're now going to an inflationary environment. You've got to position your portfolio accordingly, Fred.

FRED KATAYAMA: All right, so you've got to be proactive on that portfolio, Ryan. What are you advising your clients to do right now?

RYAN PAYNE: Well, you know, we're a big believer in looking at the macro picture and looking at where things are going, so we absolutely have inflation hedges in our portfolio. And I can tell you, Fred, I probably look at like 50 portfolios a month. We see 1,000 portfolios a year. I see what the retail investors are doing right now, and most portfolios are still positioned for the last 10 years. They still have bond funds, but if interest rates go up, that's terrible for bond prices.

In fact, long term bonds are down big this year, and growth stocks, tech stocks which are like the darlings the last decade, they don't do that well in an inflationary environment, whereas you know, small cap stocks, which were more sensitive to the reopening of the economy, they do better. You start looking at, you know, places like commodities, having commodities in your portfolio, which have already gone up. You know, having just outright commodity exposure.

And then economy based, or excuse me, commodity based economies like the emerging markets, you definitely would have exposure there as well. And just a trend on top of all of these other trends is you have a falling dollar as well. The dollar's been a lot weaker in the last 12 months. That's good for anything that's international, so even having developed markets in your portfolio right now, which are also more cyclical in nature typically, that's also going to benefit from a weak dollar and the fact that the economy again is starting to open up again.

FRED KATAYAMA: And Ryan, you mentioned that a lot of your clients are still also stuck on bonds. What should they do in fixed income?

RYAN PAYNE: Well, you know, I've been on your show before, and I abhor bond funds. I really don't like bond funds, because with a bond fund, it's kind of like you're going in an elevator down with a lot of people you don't like. You know, it's a mutual fund. You don't necessarily have a set date where your bonding matures or your bond matures, so if rates go up, they can infinitely just keep going down. And then people start to sell out of these bond funds, other investors do, so the bond manager has to sell.

So if you need to own bonds, and for my clients, we do own bonds, you want to own them outright. You've got to have that set maturity date, Fred, and I think that's going to be a huge mistake. Investors are already feeling the pain, no pun intended, P-A-Y-N-E, and you know, I've warned you about bond funds on this show a lot, but you've really got to transition out of bond funds. And if you're going to own bonds, again, permanence and definition. I know the interest rate I'm getting, and I know I'm going to get my money back to me. And in an inflationary environment, you've got to make that transition.

FRED KATAYAMA: Shorter maturities?

RYAN PAYNE: I wouldn't necessary-- an intermediate maturity is probably always the best. If you're too short, you're getting no interest. As you know, the Fed's keeping rates low. If you're too far out on the curve, then you're way too sensitive to interest rates, and that's why if you look at the long term Treasury ETF right now. It's down like 14% for the year, so the sweet spot is always to be in that intermediate part of the curve even if rates are starting to rise a little bit.

FRED KATAYAMA: OK, Ryan, got your message. We'll fight the Fed this time. Thanks again. All right. Our thanks to Ryan Payne of Payne Capital Management in New York City. I'm Fred Katayama. This is Reuters. Have a wonderful weekend.