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Supply chain issues are ‘a cover for the inflation the Fed has created’: Opimas CEO

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Octavio Marenzi, Opimas CEO, joins Yahoo Finance Live to discuss the dynamic between inflation and supply chain issues, bank earnings, and outlook on the Fed.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's stay with the markets now and bring in Octavio Marenzi. He is CEO of Opimas. Octavio, always good to see you. So here we are in the middle of earnings season. So far, the big banks are out, and they've been pretty good. What's your take so far from the companies you've heard from?

OCTAVIO MARENZI: [AUDIO OUT] because that's the area that we cover. And I must say, Q3 was an absolutely beautiful quarter for the banking industry. All the major banks reported last week in rapid succession, most of them on Thursday and Friday. And it was absolutely outstanding results. And I think this really is a group of firms that doesn't get the credit they deserve for having come through this pandemic, this crisis so swimmingly and so fantastically.

KARINA MITCHELL: And sir, we also got some weak economic data out of China overnight. GDP slowed, retail sales were down, industrial production down. How does that augur for growth in our country? And what does that mean for equities going forward in Q4 and Q1 2022?

OCTAVIO MARENZI: Well, I think if you look at the Chinese market, what's really happening there, we've seen a slowdown in the most recent quarter. The most recent months are slowing down a bit. It seems that most of that is due to power outages and problems they're having in that end. So supply chain issues, I think, in China are rather different. It's really those brownouts and blackouts they're having in Hubei province, which is sort of the manufacturing part of China, that's really causing the problems and concerns.

And the issue there is really nothing other than the fact that the Chinese government has put in place very, very strict caps on electricity prices, so you can't raise your prices beyond a certain point when you sell your power. And on the other hand, things of the inputs, things like coal have seen their prices go up enormously over the course of the past few months. That means a lot of power plants in China are just sitting there idle because they can't afford to buy the coal power, the power plants.

And as soon as the Chinese governments lift those caps, that power shortage will go away. They'll fire those power plants back up and start producing just as before. So that's the real problem in China at the moment are these blackouts. And that's really because of the Chinese government's policies. In addition to that, they're sort of cracking down on all sorts of other providers as well. They're sort of twisting on internet companies, on tech companies. They're sort of seeing the heavy handedness of the Communist Party in China. And that's having a big impact as well.

ALEXIS CHRISTOFOROUS: Octavio, I'm curious how you've positioned the portfolio here in the fourth quarter. We're continuing to see inflation move up. And it's not looking as transient as the Federal Reserve had once thought. What are you doing in terms of investment choices based on what inflation is doing and the supply chain issues, which seem to be-- there's no end in sight, at least right now?

OCTAVIO MARENZI: Well, I think, you know, you and I had a discussion about how transitory inflation was a few months ago. And I think I forwarded the argument that wasn't transitory at all. This was purely a monetary phenomenon as a result of the Fed printing so much money. And now we're seeing that come down in this direction. In terms of the supply chain and inflation, it's interesting sort of the relationship that you see there or don't see there, actually.

I think the supply chain issues that we're seeing mainly around the Port of Los Angeles and Newport Beach are basically simply there as a cover for the inflation that the Fed has created. So they're pointing that and saying it's not our fault. It's over there. That's the issue. It's all those ships sitting off the Port of Los Angeles. And that is also really creating all these shortages. When, in fact, this kind of inflation really is a monetary phenomenon. And if their argument were correct about that, we wouldn't see the kinds of goods and services increasing the price that really don't have a supply chain.

So we've seen rents go up enormously. You mentioned Zillow before. Zillow's rent index has gone up 8% year on year in the most recent measurement. We've seen secondhand cars go up 24% in terms of their values. That's got nothing to do with supply chains. So it's really a monetary phenomenon more than anything else. And the Fed is basically pointing its finger-- or the government's pointing its finger at something else that just detract from that.

KARINA MITCHELL: And sir, to that point, there's been a much more of a hawkish turn by central banks from the RBNZBOE overnight. Does that signal to other central banks to also turn in that direction? And what does that do to the Fed as far as moving the needle? Do we see interest bond-- do we see bond tapering any earlier? And then do rate hikes come immediately after that?

OCTAVIO MARENZI: Well, I think the Fed has been talking about talking about doing something at some unspecified point in the future for some time now. So I think they're starting to lose credibility there if they don't actually start to do something I think by the end of the year. So I think they'll start to talk about-- will actually start to taper their purchases. But I expect that to sort of be a homeopathic dosage more than anything else. I don't think they'll go full-throated tapering off down to zero anytime soon. So that's going to continue for some time to come.

When that does happen, I mean, a lot of them pointed out, they're not going to tweak the interest rates. They're just going to taper their bond purchases. Well, if they do that, the value of bonds will go down, and interest rates will go up kind of mechanically. That's just the way the markets work. So, in effect, by tapering their bond purchases, they will be changing the interest rate simply by necessity. It's just mechanical in terms of how the bond markets work.

So they are going to be tweaking the interest rates, although not directly. They might not change the Fed fund rates, the rate at which they lend to banks. But I think they will be tweaking the interest rate indirectly by tapering their purchases. And we'll see basically interest rates creep up then. And then the market might have a bit of a fright.

ALEXIS CHRISTOFOROUS: All right, we're going to have to leave it there, but always an interesting conversation with Octavio Marenzi, CEO of Opimas. Thanks so much for being with us.