How rising inflation will impact the U.S. and global economy

Bill Campbell, DoubleLine Fixed Income Portfolio Mgr., joins Yahoo Finance’s Julia La Roche to discuss inflation concerns and China’s role in the post pandemic global economy.

Video transcript

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ALEXIS CHRISTOFOROUS: Welcome back. There is certainly a lot of talk about inflation here in the US today. And Yahoo Finance's, Julia La Roche, is standing by with DoubleLine Capital's Bill Campbell to discuss how inflation might impact countries globally. Hi, Julia.

JULIA LA ROCHE: Thank you so much, Alexis. And Bill Campbell, Portfolio Manager for International Fixed Income here at DoubleLine. Thanks so much for having us for your Investor Day. Inflation seems to be the story of the day. And I know you have some interesting views, as it relates to your framework. Walk us through that framework, as it relates to inflation.

BILL CAMPBELL: Well, Julia, it's great to be with you again. The inflation print today surprised to the upside, and it's clear that higher prices are here. So, we know we're in a period of base effects right now where the closing of the pandemic and the lower prices caused by that last year are now being weighed against the rebound this year, but we're surprising to the upside.

So, I know there's concerns about supply chain disruptions that are raising commodity prices. You know, we're seeing the concerns about labor shortages and raising, you know, the idea that wages need to be raised. And it's very unclear when we get out of this base effect moment for the globe, by the way, which will probably be by midsummer, will prices remain sticky or not. And the framework that I was discussing with you before we came on was we've seen an explosion of fiscal stimulus, monetary stimulus, money supply across the globe in response to the deflationary shock last year. And we're kind of in this period where we're in that price rebound.

Will prices, when we get through this base effect period, remain elevated and will they continue to rise, or will they start to fade, like the Fed is asking? And I think the key to answering that question is to pay attention to the policy stimulus that's coming out of the US and all governments going forward. There's a big difference between this stimulus and what we saw in prior corrections.

In prior corrections, the stimulus pumped liquidity into the banking sector. That liquidity really didn't find its way out to the general public. It found its way into asset prices, but loan demand remained tepid.

This time around, we're seeing policies targeted at giving individuals money. And as we know, individuals consume. So, I think the debate of is this transitory or not is a wide open debate. And I would be very careful about having a wedded view, like the Fed maybe is trying to right now, that these prices-- these price increases are transitory. And actually, this morning, we saw Vice Chair, Richard Clarida, say, which was a little bit of a break from what we saw at the Fed leadership, that, well, if prices do remain high, the Fed will react.

Well, this is a little different tone than the staunch, this is a transitory environment, that we've seen so far. So, again, pay attention to policy going forward. And this time, the stickiness of prices, given the explosion in the money supply, is something that is a question that's open for real debate.

JULIA LA ROCHE: Well, you say, pay attention to policy going forward. Let's talk about-- let's talk about Europe, for example. What is it that you're going to be looking for, some of the policy implications there?

BILL CAMPBELL: Right, well, I think Europe and the US are going to be in a very interesting spot over the summer and into the fall. The higher prices have brought the discussion of taper front and center. We saw over the weekend Philip Lane, the Chief Economist from the ECB, say that, you know, he confirmed taper of the European pandemic purchase program is on the table for discussion at the June meeting.

The Fed has been trying to push that off. And I think, in my mind, I had been watching and waiting for maybe the end of summer Jackson Hole meeting as a potential discussion of US taper. But does this CPI print make them have to bring that discussion forward, I think is an open debate.

Now, for Europe, I think they're going to try to thread the needle. And I don't know if it's going to work. The current pandemic purchase programs at 1.85 trillion, and what they have done in their prior meetings has said, we're keeping the total size stable, but we're increasing the pace of purchases currently. What I think might happen in June, July is they'll say, we're going to keep the total size of the program stable, but we'll just decrease that pace a little bit, but it's not taper, trust us.

I don't know if the market will buy that. So, that could lead for some near-term Euro appreciation pressures, just for kind of how we're thinking about to position the policy between the two. Now, that being said, if the Fed brings the taper discussion forward as, you know, maybe we saw a little bit of a chink in the armor from Vice Chairman Clarida today, well, then that might put a little bit of upside pressure on the dollar near term.

JULIA LA ROCHE: Let's shift and go across the globe, and let's talk about China for a bit, and what you are focused on there, and some of the broader implications.

BILL CAMPBELL: China's fascinating right now. I think one of the most underappreciated elements in the recovery that we saw last year was the amount of stimulus that China had also put forward. We had talked-- we have talked a lot about the US stimulus increasing China's growth via the trade channels, but what we saw alongside that was that China's credit impulse, China's credit growth, was pushed back up to where we've seen it in prior crises.

China has now moved beyond that policy, unlike what we're seeing in the US, where we're now discussing new rounds of stimulus, whether it's infrastructure or family plans. Unlike in Europe, where we're going to see the European recovery fund being brought on. Where stimulus is increasing in the West, China is starting to decrease the amount of stimulus that they're putting into-- into the global markets.

And China has been a first order underwriter of global growth, especially as it relates to emerging markets in the past. So, I think we need to pay close attention to what they do. Let me give you one date to watch.

China in July, at the beginning of July, they're going to be celebrating the Communist Party Centennial Anniversary. Up until then, I think policy is going to make sure that there are no hiccups. After that, we have the GDP releases there, and then the Chinese Politburo is going to meet in July following the GDP release.

I think we need to watch that closely for a more significant change in Chinese policy. And if you do see, you know, a tightening, especially on the credit side, I think you're going to have fairly strong implications, especially in emerging markets, if not more broadly across risk assets, depending on what the tapering policy is in Western central banks and what the fiscal policy is in the US and in Europe.

JULIA LA ROCHE: Well, Bill Campbell, Portfolio Manager for DoubleLine's International Fixed Income. Thank you so much for having us at your Investor Day. And we'll have an exclusive interview with DoubleLine's founder and CEO, Jeffrey Gundlach, at 4:15 PM Eastern on Thursday. So, don't miss that. I'm going to send this back to Alexis. Alexis.

ALEXIS CHRISTOFOROUS: Thanks so much, Julia. Looking forward to that conversation.