What should investors be watching if inflation moves higher – as money supply data portends it will – into year end? What happens to equity markets and other parts of the economy if the AI trade loses momentum?
Fortress Chief Investment Strategist Elizabeth Burton joined CNBC Power Lunch with Brian Sullivan to share her views on these questions and more.
- On inflation: Elizabeth is watching M2 data and the velocity of money - data points which indicate inflation will increase by year-end, an out-of-consensus view.
- On AI: it’s potentially the single biggest risk to the broader equity story, and if more jitters emerge in AI investments there could be wide-spread impacts across the economy.
- On investment opportunities: defense themes like water, energy, cybersecurity historically have kept pace with broader markets with less beta, and the opportunity window should extend beyond 2026.
Transcript
Brian Sullivan, CNBC
Thanks for joining us. There you could see the markets. They are down across the board. Not big declines. The Nasdaq off about six tenths of one percent. And let's start right there. Because really, there are maybe two big questions that matter the most right now. One, is the AI and semiconductor trade finally fully played out? And two, is inflation here to stay and gonna lead to more interest rate hikes? Your first guest may have a view on both. Elizabeth Burton is chief strategist at Fortress Investment Group. $55 billion in assets under management, and she joins us on set to kick things off. Elizabeth, great to have you on.
Elizabeth Burton, Fortress Investment Group
Thanks for having me.
Brian Sullivan, CNBC
How are you?
Elizabeth Burton, Fortress Investment Group
I'm good. How are you?
Brian Sullivan, CNBC
I'm doing great. Thank you. Two questions to kick off this show. Number one, the great rotation. We're gonna get to financials in a minute. Everybody's a little bit jumpy about AI and chips now. Are you?
Elizabeth Burton, Fortress Investment Group
No, I'm not jumpy about AI and chips. I think in the short term, things look alright. I think over the longer term, there is cause for concern. And I think people are looking for reasons to be concerned in the headlines. Every single little pullback, I think, becomes more and more meaningful. But the big risk to this broader equity story is in fact this AI issue. So I think there's a right to be concerned here.
Brian Sullivan, CNBC
Well, know, let's call it AI is a gigantic cruise ship, and everybody's been getting on it. Yep. There are some people looking for rowboats right now. I think it's fair to say, right? Are you? Are you looking for a rowboat?
Elizabeth Burton, Fortress Investment Group
I'm not trying to get out of the AI trade. I think what I'm more focused on is what everything else is doing if this AI trade falls apart. And you know this about me, one of my concerns has always been that we really truly haven't solved the inflation issue yet. And I think that once, if anything happens in this AI story, we'll move on to other stories, and I think that might be one of them. And I think inflation is going higher. And a lot of these names are long duration equities. And some of the pullback that you see here and there is probably warranted on the base of that.
Brian Sullivan, CNBC
So let's talk about that because I think it'd be fair to say that your inflation view is a little out of consensus.
Elizabeth Burton, Fortress Investment Group
Yes.
Brian Sullivan, CNBC
Explain what you believe and how it impacts how you think about the markets and where to invest.
Elizabeth Burton, Fortress Investment Group
One of the interesting things to me is how many people want to fight me on this inflation story, and I get that. That's my job, is to debate the macro markets. But everyone is so convinced and so excited for inflation to go lower. And look, I hope I'm wrong, it would be better for all of us if inflation went lower. But one thing that I've been watching is the money supply, and M2 has been increasing. We know the Fed doesn't take M2 into account. By some accounts it's almost eight percent annualized, and some it's as high as eleven. But one thing I'm also watching is the velocity of money, you know, how much that's turning over, and that's increasing at a twenty five percent rate over the last five years.
Brian Sullivan, CNBC
Why? What does that tell you?
Elizabeth Burton, Fortress Investment Group
Well, one thing I do wanna point out is that people will say it's much lower than it used to be, right? Like pre COVID, up in the twos, and it's only about 1.4, but that's up from 1.1. So, it could go higher. What hurts my story, or what I think might happen, is if that velocity doesn't pick up. But one thing that is happening is a lot of this newly created money looks like it's pushing into risk assets, which is part of the reason this money supply velocity story hasn't worked towards inflation in the past. But I think it could be different this time, particularly if it's coming from debt monetization, which is essentially just more money feeding, you know, chasing more goods.
Brian Sullivan, CNBC
So it looks like the the dot plots or the as I call it, the Fed light-bright, because they're just kinda doing this and this may go away. I hope it does. I've never liked it. You could talk about whether you like it or not. I'm assuming you don't, given what you've just said. If you had to do the thing, the plot, the dot, would it be an interest rate hike?
Elizabeth Burton, Fortress Investment Group
I like your light bright analogy. I've also thought of maybe the Fed acting more like a robot, we called it the dot plotter instead of an actual committee. One thing is that inflation is really hard to predict. If it was easy, all we would need is a robot to do it for us, right? So it's very tricky. But what I'm noticing is that everyone's picking their own preferred measure. Well, okay, so if you look at flexible, then you're at five percent annualized on inflation. And if you're looking at sticky, then you're at three. And if you're looking at PCE, you're at four. So pick your favorite measure and then tell your own narrative. So that's why I'm saying instead of cherry picking, let's look at a couple things that historically might have led to these higher rate environments. And M2 is not the only thing telling that story, by the way. There's other forces happening. You've still got sticky services inflation happening. And then, not to mention just on the yield side, so away from inflation, you've got things pushing up the 10-year in yield.
Brian Sullivan, CNBC
Yeah. Know what else has been up? Is the financials. And what's interesting is that, you know, everybody's talking about this rotation or the risk of a rotation. Healthcare has done well. Financials have done well. Financials, in fact, have been kind of quietly rising for like the last two months. It's kind of an interest rate story. Right? Banks and financials tend to move on net interest margin and rates. Do you have a view on banks and financials generally?
Elizabeth Burton, Fortress Investment Group
I probably got a bull bear, a bull view and a bear view on financials. On on the bull side, obviously, some of this feeds into, you know, my theory, my thoughts on rates going higher, and that should be good for certain parts of financials. Net interest margin can increase as long as the rate jump isn't, you know, a step function, as long as it's a grind upwards. On the other hand, a lot of these money center banks have been making quite a lot of money off of some of these AI themes, right? You're getting fees on the IPOs, and you're issuing debt. So a little bit of this can cut both ways, but I do think in general, in a higher interest rate environment, tying your investments to things that should do well in a higher rate should work out.
Brian Sullivan, CNBC
Those are like the bigger bank, right? The Morgans, the Goldman Sachs of the world, your former shop by the way. Like those stocks, they'll benefit off a SpaceX IPO. The mid sized bank in Indiana or Oklahoma or Virginia, they're a little bit different. Do we have to separate the two?
Elizabeth Burton, Fortress Investment Group
I think you do. I think actually in a lot of markets you start having separate, right?
Brian Sullivan, CNBC
Yeah, with ETFs, everyone likes to just lump everything together now. Let's make an acronym.
Elizabeth Burton, Fortress Investment Group
Because it's easy. But you look, financials aren't the only thing that can win here. I've been saying for a couple years now that I think, you know, security themes, and that's not just defense, although I think defense is certainly important now. But security of water, cyber security, AI security, these security themes can hold up with the markets and actually did two years ago. They kept pace with the broader S&P with less beta. So there are other things that should benefit from this. Certain energy stocks should benefit from this. So I think that hopefully we'll start looking for more of a broadening out.
Brian Sullivan, CNBC
Well, you had me at energy stocks.
Elizabeth Burton, Fortress Investment Group
Great.
Brian Sullivan, CNBC
No, it's all right. So we're just gonna spend more time when we start talking about energy. What may benefit?
Elizabeth Burton, Fortress Investment Group
I think anything tied, specifically within energy, I think folks may have thought, by the way, this 2026 energy theme is over or that all the inflation tied to that or the higher energy prices are a 2026 thing. And I think, you know - you know better than anyone - if you go back to past conflicts, this short duration ends up being years before we know it, and this could get dragged out even further. So, you know, I know that there's a push for this fifty dollars you know, oil price. I don't, I don't think that that's super likely to happen. I think there's a higher right tail risk there. And I think we're going to see continual back on forth on that, so you should see sustained energy prices. Also, was a fair amount of demand destruction. If that comes back online, you could see higher energy prices there as well. So I don't think this energy story has really fully played out.
Brian Sullivan, CNBC
Alright, but it goes to the inflation story. We're watching M2. We're watching money supply. We're watching the velocity of money. Elizabeth Burton, glad you kicked off the show. Thank you very much for joining us.
Elizabeth Burton, Fortress Investment Group
Thanks for having me.
Brian Sullivan, CNBC
Elizabeth Burton, Fortress Investment Group.
