COVID has wreaked havoc on much of what we have known over the last 14 months. But, there have been a few positives to come out of this. There’s an annual conference called the Mauldin Economics Strategic Investment Conference that has been on my bucket list for a number of years. The lineup of speakers is always one of the most impressive i’ve ever seen, including famous investment managers, elite research analysts, and former central bankers. Such an impressive conference has been cost prohibitive for me, though. That all changed last year. They moved it to a virtual conference and I was able to join in. I was so impressed by what I heard from the speakers last year, I couldn’t wait to participate again.
The way that John Mauldin structures his speakers also makes for a great conference experience. There are usually panels of two or three people who take different sides of an issue. They lay out their case, then debate their side. It creates some thought provoking dialog.
So far (there is still two more days of speakers), there have been two predominant themes - Inflation and Crypto-currencies. I’ll write something more about some of the discussion about crypto later, but will just say that I have been dismissive of it up until now. There was enough discussion and informative presentations that I want to learn more about it and the impact going forward. I’d like to spend the rest of my time today sharing some of what I’ve heard and my thoughts on inflation and why it matters.
One of the panel discussions was between Lacy Hunt, an internationally known economist and Chief Economist at Hoisington Investment Management Company, and Jim Bianco, president of Bianco Research. Lacy believes that the amount of debt taken on by corporations and governments around the world will have a chilling effect on economic growth and not only keep inflation in check, but could lead to deflation. Jim is in the camp that with the amount of “stimulus” being injected into the financial system, it will lead to higher and higher inflation. They both gave compelling reasons behind their position.
It reminded me of when I was in the process of getting my securities license in 2002-2003. I was studying for the Series 7 exam on Thursday, January 2nd of 2003. I had CNBC on. as it was the first trading fay of the year. Maria Bartiromo was on the floor of the New York Stock exchange, which was a rarity at the time. She turned to one trader and asked him what he though the Dow would do for the year. He said he though it was going to be a great year as we recovered from the tech bubble burst and recession that followed September 11th. She then turned to another trader with the same question. He said that he thought it was going to be a tough year, as he didn’t believe that the economy was recovering yet.
The reality is that we don’t really know what may happen in the economy, with inflation, or interest rates. So, if we can’t effectively predict what will happen going forward, why bother with having the debate? I think it’s important to think through the various scenarios so that we can be prepared to adapt and maneuver as appropriate.
So, why does it matter of inflation does come back? We have been fortunate to have had low inflation for a number of years in the US, so many people don’t really remember life in an inflationary environment. I remember going to the grocery store with my parents before the era of bar code scanning. There were often price stickers on top of other price stickers because the price had gone up while the cans and boxes sat on the shelves. A trip to Lowes almost feels that way today. I noticed last week that Lowes has installed digital price tags in the lumber section so they can raise the posted price quickly.
It’s not just the impact of rising costs of lumber and fuel that are making the markets nervous. When prices are rising, investors require higher interest on their loans. As interest rates go up, the cost of borrowing goes up, causing pressure on businesses and their ability to maintain profit margins. The cost of mortgages, credit cards rates, and all other loans will be impacted.
Part of the debate amongst the participants of the SIC has been whether the inflation we’re seeing now will be “transitory”, as the Federal Reserve has said they believe it will be. They feel that it will be short lived, because it’s only really being fueled by shortages of products and supply chain issues due to the reopening of things post COVID. I loved it when one of the moderators of a panel asked the participants how they defined “transitory”. They all had a different answer. Again - no one really knows.
After listening to all of these opinions and thinking about it in the context of all that I see around me, I do suspect that we’re in a place where prices are going to be going up for the foreseeable future and probably more than many think. I think that with the labor shortages we’re seeing, businesses will have to increase wages to attract employees. They cannot adsorb those higher costs, in addition to the higher prices for things needed to run their business. They will have to raise prices and it will have a domino effect.
But, I do think we’ll see price increases moderate after the rest of the country gets opened back up and we move on to the next normal. The pandemic has sped up the adoption of technology that will likely increase productivity. The increase in productivity should put a longer term lid on rising prices. Also, with the large amount of debt incurred by the US government, they cannot afford for interest rates to get too high. I think the US Treasury and the Federal Reserve will take whatever action they can to keep inflation and interest rates from getting too high.
For the average household, I suggest taking a close look at your own financial house. Review the debt you have and, if appropriate, now may be the time to refinance and pay down whatever you can. It’s also a good idea to build in some “wiggle room” in your monthly budget for paying more for things. When it comes to your investments, diversification is crucial. Some of the stocks that have performed well over the last few years may struggle in an inflationary environment, so it may be time to rebalance your portfolio. It’s also a good idea to understand the risks inside your investment portfolio.
If you are nervous about what all of this may mean for you, please don’t hesitate to call or schedule an appointment. I’ve recently added a digital calendar to make it easier for you to schedule time for us to talk. Click here to access it. You can schedule a phone call, an in person meeting, or a zoom meeting.
Next week is the last week of school for Sam Henry and Clara is done the following week. It’s hard to believe that summer is here, especially with the blast of cold weather we just got. But, it’s time to get back out and start doing some of those things we’ve not been allowed to do for the last year. I hope that you have some great plans for the summer!