Inflation and Rising Rates

 3 April 2021

Dear Fellow Investor,

The debate in the market is between inflation and rising rates and continued low rates. The powers that be including Janet Yellen and Jerome Powell constantly beat the drums for low inflation and low interest rates.  Almost every day they bring out a Federal Reserve or treasury official to promote their low inflation low interest rate views.  

I do not think these officials or the talking heads on Bloomberg or CNBC have our interests in mind. They represent the deep state which promotes big government, high taxes and more regulation.

Friends and clients in Australia, Holland and the US have a  different story to tell. On the ground prices are rising for most goods. That includes food, housing, energy, and health care. Soon Biden will launch the biggest tax increase since 1960 to pay for his stimulus and socialistic  programs. Capital gains taxes will rise 30 % which are designed to punish wealth creation.  From a common sense point of view this is killing the goose that lays the golden egg.  Wealth is created by saving and investing not by inflation and money printing. Universal basic income, extended unemployment benefits, free education  and forgiveness of student loans is being promoted. All this free fiat  money will go to necessities which in my opinion is inflationary.  This is a recurring pattern ever since paper money was invented by the Chinese 5000 years ago. Witness Zimbabwe, Argentina, Cuba and Venezuela  and how money printing and socialism destroyed their economies

Excerpt from the latest Fleet Street Report by Charlie Morris

 

Current inflation trends

Why is this relevant? Because inflation is rising. That has been normal during a recovery following a crisis.

With interest rates already at zero, central banks have minimal room to cut further. Official rates and bond yields could turn (or remain) negative, but the appetites of investors and policymakers for this is limited. Instead, governments have decided to stimulate economic activity with large spending programmes and bank guarantee schemes. These programmes and schemes push money straight into the economy.

Other factors such as a shortage of microchips, and a scramble for raw materials, also put upward pressure on prices.

The move away from globalisation is also inflationary. Companies and governments are encouraging use of local suppliers and shorter supply chains – even if this results in slightly higher costs.

The blockage of the Suez Canal by the megaship Ever Given highlights how global supply chains are also vulnerable to disruption by accidents. Such disruption also almost always results in higher costs for someone.

Inflation is rising quickly

 

As a measure of inflation, the consumer price index (CPI) is published each month and is a lagging indicator. The forward expectations give a much clearer picture of what really matters to investors. Inflation expectations for the next two years are already at a ten-year high, with longer term expectations following behind.

The big question is whether this inflation passes once the recovery slows down. We simply do not know the answer.

However, sustained higher inflation is something that we need to be prepared for.

You will see that we are much of the way there. Our portfolios have a bias towards, value and quality assets.

This is why I have been focusing on “value stocks” – typically very large and well-established companies that are not necessarily growing particularly rapidly and whose P/E ratios are quite low.

Value stocks can go down in price. However, they are less likely to do so because of a compression in their P/E ratios.

It is a good idea to hold some precious metals

Precious metals are due to rise.

This is something that is likely to happens soon as inflation exceeds the yield on ten-year US Treasury bonds.

Take care
Bill

Good news: Someone adopted Pipito the Corgi dog I mentioned last week.