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Wages: Small-cap managers indicate 'we're close to the end of cost pressures rising,' North Star CIO says

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North Star Investment Management Corp. CIO Eric Kuby joins Yahoo Finance Live to discuss inflationary pressures hitting the market and investors, wages and labor force participation, investing in small-cap companies, and metals such as gold.

Video Transcript

- We're going to stay on the markets and bring in our next guest, Eric Kuby, Northstar Investment Management Corp CIO. Eric, Thanks so much for being here today. So listen, you take your pick. Hot inflation, crude looks like it's set to climb well over $100 a barrel, a potential war brewing. It is a complete mess. In all of that, the NASDAQ climbs higher. What do you make of it all?

ERIC KUBY: Yeah. Well, I mean, I think that all of those negatives that you discussed have been out there, part of the narrative for a little while. And I think that the market is digesting those risks. And on the flip side, you are seeing, you know, terrific corporate earnings. You are seeing the pandemic kind of beginning to wane pretty rapidly. So there are some positives to go along with those negatives. And the market climbs the wall of worry. So there's a lot of worry and a lot of climbing to be done.

- So the St. Louis Fed President James Bullard says we need to act more aggressively, right, and interest rate hikes need to go up by 100 basis points by this summer, by July. How worried are you that the Fed is behind the curve because we've heard nothing about QT yet, and we're still buying bonds.

ERIC KUBY: Well, the Fed is, I think, pretty clearly behind the curve. It has been for quite a while. And I do think that rates are going to continue to rise. And I think the market expects that-- the flip side of that is if the economy starts presenting data that shows softening, significant softening, I think we've learned over the last few years that the Fed will pull back on that hawkishness.

So inflation's been hot. But why is inflation hot? It's really hot because of supply disruptions, you know, just a lot of problems related to the pandemic. So I actually believe that the positive bullish case is that a lot of these issues that have really caused these inflationary pressures are going to abate as the year goes on. And that lower inflation data will allow for less aggressive Fed policy once rates get way off of 0, maybe close to 2% on the short end.

- So then do you think we've seen peak inflation now? When do you see it moderating? And then I'm wondering, how big a concern is wage inflation?

ERIC KUBY: Well, yeah. I mean, the thing about wage inflation, unlike the other areas of inflation, are that once you raise wages, it's hard to go back. We talked to a lot of smaller companies. We focus on small cap companies and talk to management. And that's one kind of consistent message that they say is that, you know, that the wage pressures that they're having, they don't think that those will likely go away.

There will be more people re-entering the workforce. That will make that a little bit easier. And we've seen a little bit of that last month with the labor force participation rate. So there's some positives there. But I talked with companies. I think we're close to the end of the cost pressures rising. So I think that you'll start seeing inflation getting less problematic over the next couple of months, although not immediately.

- Eric a lot of people are starting to feel a little bit jittery. So I'm wondering, there is a consensus out there that says cash is king and perhaps it's time to sit out. Do you agree with that? Or do you disagree? And if so, where do you think looks good to invest? I know you mentioned small caps. Any particular areas in small caps, and any other sectors as well?

ERIC KUBY: Yeah. I mean, so exactly. So I think that when people get fearful, that's the time to shop for bargains. And we think that this would be the wrong time to increase your cash percentages. Hopefully, people had reasonable allocations you going into this downturn. The Russell 2000 did decline 20% from its high in November. And we think that this has created a lot of bargains in the small cap area. We tend to think that it's company specific. There's winners and losers. There's lots of different types of companies in there.

But we think there's a lot of really good companies with great balance sheets in the small cap world that are-- a lot of consumer stocks, a lot of industrial stocks that we think have gotten unreasonably inexpensive. Great bargains after this big sell off. So we would encourage people to look at small cap, particularly small cap value, which has been a really tough area, but I think getting better this year. And I think the future is bright for, again, small cap, the financials, the consumers, the industrials. I think there's some really great bargains in there.

- Eric, I'm really interested to know how you feel about commodities, how you're looking at them right now, particularly metals like aluminum, and nickel, and gold as well.

ERIC KUBY: Yeah. So we think that the commodity markets, you know, supply and demand is obviously the big factor in commodity markets. There's been a real constrained supply on a lot of these commodities. And so you are seeing prices rising. We typically have not been very constructive about commodities in general. But over the last year and a half, we turned positive and had tried to add gold to most of our portfolios. We do think that the gold market could continue to rise.

We've looked back in the past interest rate increase areas periods, and contrary to the common misperception, gold has actually done quite well. So we like gold in particular in the commodity area. Continue to be underweight traditional energy. We think that that's showing a lot of fear over Russia and, again, also these what I think are short-term supply issues.

So we are not positive on crude oil, per se. You know, dabbling a little bit into clean energy because we do think that the higher price of oil makes clean energy areas interesting again. They've suffered really dramatically. So we think there's some bargains there as well.

- OK. Still a lot more to ask you. But, unfortunately, we're out of time. We will have to leave it there. Eric Kuby, Northstar Investment Management Corp. CIO. Thanks so much for your perspective today.