Inflation Indicator

2 May 2020

Dear Fellow Investor,

On 18 April 1906, a massive earthquake hit the business sector of San Francisco. It triggered fires which laid the city in ruins.  Factories, warehouses and businesses were destroyed. Hundreds died.  This led to a 50%  stock market collapse  triggered by the collapse of several large New York banks and stock brokers. It led to a severe recession that took 3 years to play out.

However; by July 1909 the market completely recovered.

Theodore Roosevelt was president then and the US had a  laissez faire system of government meaning transactions between private parties were absent of any government intervention,  regulation, tariffs or subsidy. Businessmen were free to conduct business as they saw fit.  As the US had a gold standard, the government could not print money and deficit spend to bail out those who were demanding free money. It was through hard work, savings, investment the politicians pulling together San Francisco and America quickly recovered.  President Roosevelt took a hands off approach and let the free markets solve the problem.

Today’s 24/7  media induced Covid panic has not destroyed infrastructure but has killed many poor souls and disrupted lives. The media hype and political bickering is making the problem worse. Trump blamed China for releasing the virus and threated to impose new tariffs which caused an over  1000 point Dow Jones drop and multi billions wiped off world stock markets.

A worse problem has been created by the multi trillion dollars of helicopter money printing which is more dangerous than the virus and it is the certainty  of inflation. 

We must be on guard and I follow carefully an inflation indicator which is to track the spread between the US 5 year treasury bond and the US 5 year TIP or treasury inflation protected  bond. If the spread begins to widen it means professionals who buy bonds want inflation protection.

We then need to allocate into shares which benefit from inflation such as those which are commodity related . Gold and silver as well as quality properties will do well.   

On a positive note, the MCO (Movement Control Order)  is working and many businesses will re open next week. Restrictions are being lifted.

Remdesivir a covid drug by Gilead Life Sciences has shown positive results and the US FDA has approved it . It should save many lives.   I have confidence in medical technology to find a vaccine and that should solve the virus problem.

However; I have little confidence in  politicians and central bankers. Their money printing will cause inflation and ultimately financial misery.   

The critter this week is the Covid. Thank God in Malaysia we do not have this political duel about the virus.   Politicians of all the parties seem to be on the same page. 

Keep safe, Bill