Is inflation headed back down? Glenview Capital Management CEO Larry Robbins thinks so.
“Inflation will fall, both absolutely and in stature on the wall of worry,” the hedge fund manager said at the Robin Hood Investors’ Conference last week. Robbins said he believed the CPI numbers that came out last week would be the “last uptick” as many components of inflation are starting to trend down.
The conference is off the record, but Institutional Investor obtained slides from his presentation and the audio of his comments.
Robbins’ presentation came a day before the September core CPI number hit 6.6 percent on Thursday, close to the 6.5 percent the hedge fund manager predicted. According to Robbins, housing costs, car prices, and even healthcare costs show signs of weakness.
Robbins, a board member of Robin Hood and a former chairman of the charity, confirmed to II that he presented Glenview’s views on the market environment including the firm’s forecast for decelerating core CPI and its focus on investing in undervalued, secular growth equities such as Tenet Healthcare.
“Inflation is going to ease not because we look at the backward-looking government statistics but because we live in the real world,” Robbins said in the presentation. “So when everybody tells you that inflation has run away and the Fed needs to keep hiking by 75 basis points every single month until oblivion, we would push back on that and say ‘no.’”
Such a dovish view of inflation is still somewhat contrarian, but it is gaining popularity among investors, notably including Ark Invest founder Cathie Woods, who has argued that the Federal Reserve is risking deflation with its interest rate hikes. (New York Times columnist Paul Krugman recently referred to this view as the “buzz from private sector observers.”)
Shelter is the biggest change on the horizon, according to Robbins. Housing makes up 41 percent of core inflation and while “statistically it is accelerating, anecdotally it has peaked,” Robbin said.
He quoted, among other references, CoStar Group, which said on September 26 that “apartment rents are falling from record highs across the U.S. for the first time in nearly two years.”
Another prominent component of the CPI is new and used cars, which each make up 5 percent of core inflation. Those prices are also starting to go down, as auto parts and production rise and inventories flatten, according to Robbins.
The skyrocketing prices of used cars was a phenomenon of the pandemic — a onetime problem. “Does anyone think we fell in love with used cars in March of 2020?” he asked. “You couldn’t find a semiconductor to go into a new car. So when we couldn’t buy a new car, we bought used cars.”
As scarcity has eased, car prices have fallen. “Semiconductor capability is there,” he said. “Just listen to what the companies are telling you. They’re telling you that shipping lanes are opening; they’re telling you that inventories are being built,” he said. “Prices are going to come down because competition can come back into retail.”
Health insurance pricing is another issue Robbins focused on. Health insurance makes up 1 percent of CPI, but because of what Robbins called a “computational quirk,” the numbers are skewed.
According to the government, health insurance went up 24 percent last year, he said. As an owner of Cigna stock, he said, “I would love to tell you that Cigna raised their prices 24 percent last year, they didn’t.”
Based on the 2021 reported results of public insurance carriers, Robbins estimated that starting in October its monthly contribution to CPI will decline by 2 percent a month, instead of last year’s increase of 2 percent. The swing, he said, will lower the CPI by something like 48 basis points annually.
Auto insurance, air fares, and commodities are also trending down, with energy prices down 20 percent from the peak. Even wage growth has slowed, Robbins said.
He argued that “2023’s crisis du jour will not be inflation — the market will pivot to fighting tomorrow’s battle.”
A major positive for equity investors, he said, is that corporate earnings are still growing 6 percent while multiples have come down about 30 percent. “We’ve never seen a risk-free environment, but there’s a lot less risk with multiples down 30 percent than there used to be.”
Robbins’ views may be gaining traction in the investment industry and in corporate c-suites. But another debate is emerging over how much of inflation is cyclical rather than structural, given demographic changes in the population — like the retirement of baby boomers — that could create long-term wage pressures.
One unrelenting hawk on inflation is former Treasury Secretary Lawrence Summers, who spoke just before Robbins at Robin Hood.
On Monday Summers took to Twitter to make his case, arguing that wage inflation is here to stay. “Given dismal productivity growth, likely caused by quiet quitting, wage inflation will have to come down significantly if sustained months near 2 percent inflation is to be attained,” he tweeted. “I do not understand the basis for believing this is likely without a meaningful recession.”