'We’re also seeing immense demand… from an inorganic source,' that's from stimulus: Axonic Managing Director

Axonic Managing Director Peter Cecchini joined Yahoo Finance Live to break down how stimulus has impacted the U.S. economy and investors.

Video Transcript

ADAM SHAPIRO: Well, let's just talk about inflation right off the bat-- the get-go, because Warren Buffett wasn't the first to worry us about inflation. You were writing about this prior to this weekend. How serious is this, because we keep hearing transitory?

PETER CECCHINI: [AUDIO OUT]

ADAM SHAPIRO: Peter, I think you might be muted.

PETER CECCHINI: I was indeed. Thank you very much. Nice to be here. Thank you. So relative to inflation, inflation can be a very tricky thing to gauge. And generally speaking, in fact, inflation really doesn't come as much from the demand side as it does from the supply side.

And what we're seeing right now is an odd combination of two factors. We're seeing supply chain disruptions, especially in chips. And of course, that's not just limited to tech, right. That's bleeding all the way through into things like daily car rental rates, for example. And we can talk about that connection in a moment.

But in addition to the supply chain disruptions, we're also seeing immense demand. And that demand is coming, that bounce back is coming from an inorganic source, that is, it's coming from stimulus. And that combination of a massive surge in inorganic demand combined with shortages in supply, which are organic, can combine to make for a very dicey inflationary scenario. And I think Mr. Buffett was speaking to that anecdotally when he saw-- when he was talking about the fact that most of the companies within his portfolio were, in fact, seeing inflationary pressures.

JULIA LA ROCHE: Well, Peter Cecchini, we're going to have you stick around, because we're going to play that-- that sound from Warren Buffett, those comments on inflation right now.

WARREN BUFFETT: This economy right now is-- 85% of it is-- is running at super high gear and people can't-- you know, and you're seeing some inflation and all of that. It's responded in an incredible way. And we learned something out of 2008 and '09 and then we applied it. But I don't think it was a sure thing that would happened.

JULIA LA ROCHE: Peter, I want to get your reaction to that. But I also want to bring up something you did talk about and were talking about the labor market as well, and you were writing about the labor slack, it makes that analysis very different and an argument here that the labor slack won't offset the supply side impacts that you were discussing. So kind of building off of Warren Buffett's comments around inflation and your own thesis around the labor side of the equation here.

PETER CECCHINI: Yeah, well, the analysis, Julia, on the labor slack part of the argument would be that we are still seeing slack, and have been seeing slack, obviously, since the pandemic began. But the difference is the fiscal stimulus. And when we look at the propensity of consumers to spend, largely driven by these stimulus checks, consumption and incomes, for that matter, simply don't comport with what we see in the unemployment rate.

So therefore, simply looking at the unemployment rate or, frankly, any measure of employment and saying, well, there's still labor slack there, it doesn't necessarily tell the story in the way it might have in previous cycles. And in fact, cycle analysis overall, I think, is very different this cycle, given the enormity of the fiscal policy response, which isn't going to wear off now probably for another several months.

ADAM SHAPIRO: So you brought us the stimulus checks, Peter, and there was a report out that stockholdings among US households now at 41% of total financial assets in April. Are we setting ourselves up for a big, perhaps, correction that impacts Main Street when we talk about investing, especially when you look at the inflationary pressures that you and Buffett and a lot of people are drawing our attention to?

PETER CECCHINI: Yeah, you know, Adam, I think so. And I think-- and I've been talking about it for some time. I think stocks have been overvalued now for a while and valuation simply hasn't mattered. And so my work has really shifted towards investment flows rather than towards valuation.

And obviously, they're both important at all times. But right now sentiment in flows is really what's driving equity markets. And I think the equity markets are set up in a very pretty fragile way where, yeah, we have this virtuous-- this virtuous impetus vis-a-vis the stimulus, which will continue for a little bit longer, but equity market valuations are very high.

And as that stimulus wears off, it could be difficult for companies to perform in the way the investors have come to expect because of this fiscal stimulus. And lastly, we've been at zero rates now for a while. And so the ability of the Fed to stimulate the real economy and keep asset prices inflated with rates already at or so close to zero, depending where on the curve you look, becomes more and more difficult.

JULIA LA ROCHE: And to that point, Peter, you're mentioning that the market's kind of set up in this fragile way, you've been looking at investment flows, valuations are high, they're pretty much dependent on the stimulus. Where do you want to be allocated right now?

PETER CECCHINI: Well, you know, I've always been of the mind that cash flow is king. Cash flow at the right price is even better. And in fact, at Axonic, that is what we look at. There are actually opportunities in structured product markets and in the real estate markets, believe it or not, to find cash flows at a reasonable price that just aren't presenting themselves anywhere else.

I mean, you can go out and buy Bitcoin, and I'm not really sure what you're buying. You're certainly not buying cash flows. You're buying a story, certainly, and that's-- that's something, I suppose. But cash flows at a reasonable price in certain alternatives like real estate, frankly, in my view, are really the place to be looking.