Your Daily Reckoning service has been warning about inflation for some time.
We just got another warning shot this week. The US CPI numbers took the bean counters by surprise and spooked the market.
But it’s only ‘temporary’ according to the central banks.
Ha!
I’m reminded of an old quote from Jim Rogers that he said in the 1980s.
I can’t find the book, but the gist was ‘always bet against the central banks’.
That’s because they are usually trying to defend something unnatural or absurd. Eventually the markets are too big.
The central banks now have the task of keeping inflation and interest rates within the boundaries of the expectations they have created.
Good luck with that!
For example, anyone holding a long-term US bond is starting to get nervous that their purchasing power is about to be shredded.
After all, there is an endless supply of bonds to be issued thanks to the gargantuan deficits of the US government.
But who is going to buy them at their current pitiful yields when inflation is running riot?
Now, we know that the Fed can step in and print up as much money as it likes to buy those bonds if need be.
What the Fed can’t do is create actual production of what we need.
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Take semiconductors, for example. These are in short supply everywhere.
See this from The Guardian:
‘A global shortage of one crucial piece of technology is causing delays in everything from cars and televisions to video game consoles and Australia’s National Broadband Network rollout.
‘A temporary shutdown in the production of silicon computer chips at the start of the coronavirus pandemic, as well as severe storms in Texas causing more recent delays, has caused worldwide chip shortages, with a knock-on effect for the production of phones, laptops and even automobiles.
‘Samsung, which is the largest manufacturer of computer chips in the world, as well as one of the biggest users, has said the chip shortage comes amid rising demand for consumer electronics during the pandemic.
‘“There’s a serious imbalance in supply and demand of chips in the IT sector globally,” the company’s co-chief executive, Koh Dong-jin, said.’
We can also see huge price rises in the commodity markets. Iron ore is US$220 a tonne.
Copper has surged 35% since the start of the year. And the price of lumber in the US has increased the cost of building a house by $35,000.
Raw material inflation like this shows up in higher input costs for manufacturers and end users.
They either absorb the rising cost (lower margins) or pass them on to their customers.
Now is an excellent time to take stock of your share portfolio and consider how it might cope in an inflationary dynamic.
Conventional wisdom has it that stocks that own ‘hard assets’ can be good plays.
However, Warren Buffett debunked this notion in his 1983 share letter.
This is where he talks about inflation and goes through an example of an asset-light business versus an asset-heavy business.
He also makes the point that inflation hurts everyone, it’s just that it hurts some businesses less than others.
I remember talking to my colleague fund manager Chris Mayer about this. Generally, he told me, you want businesses that have pricing power and that are asset-light.
Imagine a company that makes critical parts for a variety of end users and they are already the low-cost option by a large percentage.
This means they have room to increase pricing to preserve their margin if need be.
There are also businesses whose pricing naturally adjusts to inflation.
Of course, it also depends on how the inflation plays out…is it against a generally strong economic environment? If that’s the case, there are more options.
Don’t forget the classic play of real estate and fixed-rate debt. The inflation will take the price of the property higher…and the value of debt is eroded in ‘real’ dollars.
Today’s dynamic is further proof that the upward march of Australian real estate is onwards and upwards. Make sure you’re positioned to take advantage of it by going here.
Regards,
 |
Callum Newman,
Editor, The Daily Reckoning Australia
PS: Australian real estate expert, Catherine Cashmore, reveals why she thinks we could see the biggest property boom of our lifetimes — over the next five years. Click here to learn more.
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