Podcast Summary: Thoughts on the Market – "How to Navigate a High Inflation Regime"

Date: December 18, 2025
Host(s): Andrew Sheets, Lisa Shalot
Podcast: Thoughts on the Market (Morgan Stanley)

Episode Overview

This episode explores whether current high inflation is a fleeting phenomenon or signals a longer-term regime change to persistently higher prices. Andrew Sheets (Head of Corporate Credit Research) and Lisa Shalot (Chief Investment Officer, Morgan Stanley Wealth Management) discuss macroeconomic drivers behind the current inflation dynamic, the constraints policymakers face, and tactical strategies investors can use to manage risk in this shifting environment.

Key Discussion Points & Insights

1. Is Inflation “Transitory” or Here to Stay?

[00:11–01:14]

• Inflation is holding around 3%—above the Fed’s 2% target—even as the Fed has recently cut rates and fiscal policy remains loose.
• There’s debate among economists and policymakers about whether inflation will decline or persist.
• Lisa Shalot’s recent report argues for a structural shift to higher inflation due to combined factors from both the demand and supply side.

Quote:

“We see factors for inflation coming from both the demand side and the supply side.” — Lisa Shalot [01:15]

2. Demand-Side Drivers: Infrastructure & Economic Inequality

[01:14–02:00]

• AI Infrastructure Boom: Massive global investments in generative AI (GenAI) technology are driving up demand for commodities (e.g., copper, nickel, precious metals) in 2025.
• K-Shaped Recovery: Wealthier consumers are increasing demand even as inequality rises, buoyed by financial asset inflation.

3. Supply-Side Challenges: Policy Constraints and Demographics

[02:00–02:52]

• Immigration & Housing: Labor shortages exacerbated by immigration policies and housing constraints are feeding into higher costs.
• Policy Limits: High government debts and deficits restrict the flexibility of both fiscal and monetary policy to combat inflation.
• “Determining how to fund those debts and deficits actually removes some of the degrees of freedom that central bankers may have.” — Lisa Shalot [01:58]

4. Policymakers’ Dilemmas & Constraints

[02:52–04:59]

• Voters dislike inflation but also oppose conventional anti-inflation measures (higher rates/tight fiscal policy).
• Central banks and politicians are hemmed in: The Fed is increasingly reliant on balance sheet management (rather than rate hikes) to influence markets.
• High interest payments on debt begin crowding out other public spending—a sign of “fiscal dominance.”
• “Policy itself, in this era of fiscal dominance, becomes constrained...” — Lisa Shalot [04:41]

5. Energy, Technology, and the AI Power Squeeze

[04:59–07:09]

• Data Center Growth: Surging AI data center construction is sharply increasing electricity demand in the US, stressing an already outdated grid.
• Global Competition: Countries like China have far lower power generation costs, conferring competitive advantages.
• “We have to consider that power generation writ large is potentially a force for upward inflation, at least in the short term.” — Lisa Shalot [06:53]

6. What Should Investors Do? Key Portfolio Strategies

[07:09–08:58]

• Asset Correlations Change: In high inflation, stocks and bonds tend to move together—reducing the effectiveness of traditional 60/40 diversification.
• Portfolio Recommendations:
  • Invest beyond fixed income; equities can pass on cost increases.
  • Add real assets, infrastructure, energy, transportation, commodities, and gold to diversify and hedge against inflation.
• “Stocks very often are pro-inflationary assets...” — Lisa Shalot [07:55]

7. Are Markets Mispricing Long-Term Inflation Risk?

[08:58–11:13]

• Inflation Expectations Anchored: Lisa argues markets are confident inflation will remain tame, partly because of short investor memories, faith in policymakers, and belief in technology’s deflationary effect.
• But: These market expectations may not price in the risk of a true regime shift. Investors should consider hedging against that “non-zero” risk.
• “It takes a while for people to appreciate regime change.” — Lisa Shalot [10:29]
• “We think that we’re going through a period where diversified portfolios and hedging for these alternative outcomes…is the preferred path.” — Lisa Shalot [11:04]

Notable Quotes & Memorable Moments

• On Macro Policy:

  “Voters really don't like inflation, but they also don't like some of the policies that would traditionally be assigned to fight inflation.” — Andrew Sheets [02:54]

• On Unavoidable Risks:

  “The risk is non-zero.” — Lisa Shalot [09:54]

• On Diversifying:

  “Diversified portfolios and hedging for these alternative outcomes because there are such powerful structural cross currents is the preferred path.” — Lisa Shalot [11:04]

Timestamps for Important Segments

| Segment | Time | |--------------------------------------------|-------------| | Introduction & theme | 00:01–01:14 | | Demand- and supply-side inflation drivers | 01:15–02:52 | | Policy dilemmas & fiscal constraints | 02:53–04:59 | | Energy/AI infrastructure & power costs | 04:59–07:09 | | Portfolio construction strategies | 07:09–08:58 | | Inflation expectations vs. regime shift | 08:58–11:13 |

Takeaway

Lisa Shalot and Andrew Sheets conclude that investors face a “new inflationary regime” shaped by powerful, intertwined forces. Traditional 60/40 portfolios may not offer the protection of previous decades. Investors are encouraged to hedge their bets and diversify exposure with real assets and infrastructure plays, even if the market’s consensus is that inflation will moderate. Because the cost of being wrong about a new inflationary era could be high—and the risk is far from zero.