Inflation, the Public’s Main Bogeyman, Is Peaking, Says Wall Street Savant

Inflation: transitory or intransigent? Escalating prices are the US public’s biggest worry. Even Federal Reserve Chair Jerome Powell has abandoned his use of the term “transitory” for a rising Consumer Price Index (CPI), which in November reached 6.8% year over year.

Well, hold on a minute, says David Rosenberg, president and CEO of Rosenberg Research. Inflation might be peaking, he contends. And it should abate sometime next year, in his view.

Evidence for his sanguine take: In a research note, he pointed to commodity prices starting to fall from their peaks. Rosenberg follows 30 commodities, including gasoline, tin, and wheat, which are off their highs. Gasoline, for instance, fell to $3.44 per gallon in December’s first week, down from a US high of $3.50 in November’s second week (gas started the year at $2.33).

Only a handful of commodities are still climbing, he wrote: milk, coffee, burlap, and cattle. In November, whole milk was $3.67 per gallon, up from $3.47 in January.

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To Rosenberg, who once was Merrill Lynch’s chief economist for North America, today’s inflation also stems from housing and “anything with a chip in it.” Housing will correct with new supply on the way, he predicted. What’s more, cure the supply bottlenecks and you cure the chip problem, as semiconductors began to proliferate, he declared.

“My outlook for the economy—for the lack of a better term in two words or less—is ‘muddle through,’” Rosenberg told Germany’s NZZOne website. “And that means inflation will come down next year.”

Housing costs have been swelling during the pandemic, adding to overall inflation, but Rosenberg argued that this will peter out by 2022’s second half. That’s when “the flood of multifamily units hits the real estate market,” he wrote. Reason: There is a construction boom underway for apartment buildings, to make up for a shortage that has dogged the housing industry since the 2008-09 financial crisis. “The multifamily housing segment is being driven by a demand for rentals as consumers move back to the city and remote workers prepare to return to their offices,” the National Association of Realtors observed in a research piece. Starts in the category jumped 20% most recently.

Inflation is top of mind for the public nowadays. In a University of Michigan consumer confidence survey, respondents ranked it as the biggest problem confronting the nation. That no doubt is why the Fed’s Powell shifted his description of inflation. On Wednesday, at the end of the Fed policymaking body’s two-day meeting, he is expected to announce accelerated tapering of the central bank’s bond-buying program, which is aimed at keeping long-term rates low—and he may even talk about lifting short-term rates higher sooner. Higher rates should be a brake on the inflation trend, the thinking goes. Not too long ago, the CPI was south of 2%.

The funny thing is that the fixed-income market isn’t as worried about inflation as the general public is. When the November CPI number was released Friday, the 10-year Treasury rate rose a mere 0.002 percentage point yield, to 1.487%. What’s more, the 10-year breakeven rate (what the futures market predicts for inflation) is 2.44%. That is nowhere near where the current CPI increase lies.

Rosenberg indicated that the severity and length of the current inflation increase surprised him. Still, the CPI surge won’t stick around, he added. “If you believed that transitory meant weeks, months, or even quarters, this is obviously not proving to be transitory,” he said. “But transitory truly defined just means an event that is expected to be short-term or brief in nature.”

6.8% Inflation Is Highest in 39 Years—What Does It Mean for Investors?

Why Inflation Might Not Be Temporary

Tags: 10-Year Treasury, apartment buildings, breakeven rate, chips, consumer confidence, CPI, David Rosenberg, gasoline, Inflation, milk, Rosenberg research

The founder and former CEO and CIO of real estate private equity investment firm MG Capital Management has been sentenced to five years in prison for his role in a $58 million securities fraud scheme.

Eric Malley pleaded guilty to scamming 335 people out of approximately $58 million by fraudulently inducing them to invest in two real estate investment funds: the Capital Management Residential Fund III and the MG Capital Management Residential Fund IV.

According a complaint filed in the Southern District of New York, Malley promised potential investors that the two funds would allow them to own an equity interest in hundreds of luxury income-producing properties in Manhattan. He said the properties would be leased mainly to corporate tenants, including well-known technology companies and a prominent New York City-based university, among others.

Malley also claimed that the funds followed a debt-free investment strategy that used sophisticated proprietary analytics he had created, and told investors that their capital was “100% protected from loss” and secured by a nonexistent $250 million balance sheet.

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“Contrary to his claims that the funds were debt-free, Malley had in fact mortgaged multiple properties held by the funds, and the vast majority of properties held by the funds were leased to individuals, rather than corporate tenants,” said the complaint.

He also told investors that two previous funds he had created were extremely successful. According to a separate complaint filed by the US Securities and Exchange Commission (SEC), Malley claimed that one of those funds had a portfolio of 19 properties valued at $169.9 million, represented gross unrealized gains of just under 209% and had annualized gross unrealized gains on equity of 25.3%. He also claimed the fund outperformed the S&P 500’s six-year average nearly three-fold. However, according to the US Attorney’s Office for the Southern District of New York, neither of those funds had ever existed. And the two funds that did exist lost millions of dollars and are currently in the process of being liquidated.

Malley also allegedly misappropriated more than $7 million for himself by improperly retaining cash rebates received from the sellers of the apartments purchased by the MG Funds and by charging the MG Funds unearned transaction fees in connection with certain real estate acquisitions. He then tried to hide this by submitting false invoices and reporting inflated purchase prices to the funds’ administrator and investors.

“For years, Eric Malley swindled investors through false promises about himself, his credentials, his track record, and the state of his real estate investment funds,” US Attorney Damian Williams said in a statement.

In addition to the five-year prison term, Malley, 51, was sentenced to three years of supervised release and ordered to make restitution of more than $33.2 million and forfeit more than $5.6 million.