Institutional Investor hall of famer Richard Bernstein is concerned renewed Mideast tensions will put the world's central banks in a painful spot.
The CEO and CIO of Richard Bernstein Advisors said any more hostilities could derail their easy-money policies and spark economic troubles — particularly in the United States where a late-cycle bull market is dominating Wall Street.
"Late cycles are hell for central bankers because what happens is you start getting stagflation. You start getting pressures that cause prices to go up, yet growth is slowing," Bernstein told CNBC's "Trading Nation" on Monday. "The turmoil in the Middle East may actually accentuate that."
His example: oil prices.
WTI crude on Monday hit its highest level since April while Brent was trading around September's highs. Since Thursday's U.S. airstrike that killed top Iran general Qasem Soleimani, WTI and Brent were up 3% and 4%, respectively, as of Monday. Prices were down nearly 1% Tuesday morning. If prices continue to rise, Bernstein said, it will contribute to inflation and put pressure on the economy.
"If you're a member of the Fed, what do you do? Do you pay attention to the rising prices or do you pay attention to the slowing growth? And that's being caught between a rock and a hard place for a central bank," he said. "It's a terrible place to be."
Yet, the stock market doesn't seem too worried. On Monday, the major indexes reversed early losses to close in positive territory and are nearing record highs.
Bernstein contends the market is not in the clear.
'We've got confusion and turmoil'
"We've already got kind of slowing or deteriorating fundamentals," Bernstein said. "Now, we've got confusion and turmoil on top of that."
Bernstein, a CNBC contributor who has spent decades on Wall Street, began curbing his enthusiasm for U.S. stocks early last year due to a deceleration of corporate profits and a slowing economy. However, Bernstein kept his overweight rating on stocks because momentum was so strong.
"I don't want to say that in our firm we have been selling our clients' portfolios. But we certainly have been calming down and lowering the beta," he said. "Going into 2020 now, you have turmoil. And, the turmoil in the Middle East isn't going to make fundamentals better."
His top investment ideas right now include gold, which hit its highest level since April 2013 on Monday, and Treasury Inflation-Protected Securities, over nominal Treasurys.
"TIPS give you a little protection in case there is more inflation. If interest rates fall, they do give you protection against falling rates," Bernstein said. "[In] this late cycle environment, there is always this little tug of war between slowing fundamentals and inflation. And so we're trying to, if we can, sort of hedge our bets between those two factors."
