Inflation and Assets

Speculation abounds about the direction of both inflation and interest rates. Interest rate cuts in September appear to be built into asset pricing. We aren’t willing to speculate on short-term inflation. We remain convinced that inflation and interest rates in the 6% range are much more likely than not over the next twenty years. We will keep an eye on this regarding our accuracy.

Does it make a difference what assets we own, based on inflation/deflation and economic growth/recession? Yes.

INFLATIONARY BUST When inflation is present in the midst of a recession or bust, hold cash and sell financial assets.

INFLATIONARY BOOM When inflation is present in the midst of economic growth, buy stores of value. Examples are real estate, gold, commodities, and cyclical producers, many of which have high fixed costs. Sell long-term bonds.

DISINFLATIONARY BOOM During periods of disinflation with economic growth, buy innovative companies with pricing power. Sell companies with little pricing power.

DISINFLATIONARY BUST During periods of both disinflation and recession, buy safe government bonds (typically U.S. and Germany) and sell everything else.

OUTLOOK We don’t know what’s going to happen tomorrow, let alone by election time or in 2040. However, we are called upon to offer guidance and must make some judgment calls. Our observations?

The U.S. may experience a recession at some point in the next 18 to 24 months. This too will pass. Inflation will stay with us because it serves the federal government and the political class, in spite of the interest cost to the federal budget.

The U.S. will find resolution to the immigration question and legal immigration will once again accelerate. Demand for housing and real estate will remain constant and grow, though prices may fluctuate due to interest and insurance costs.

The political class will continue to transfer funds to individual taxpayers through a variety of transfer payments and tax subsidies. This will assure continuing demand for housing and basic foodstuffs.

Immigrants, as they have done since the early 17th century, will pursue a better life for themselves and their children, spurring innovation and creativity. Philosophers of the early 19th century referred to “Manifest Destiny”. Author Rich Kaarlgard often used the phrase “Animal Spirits” during his time at Forbes. As a result, America will continue to be the “Golden Land”.

Worldwide demand for oil and gas will continue to grow 3% to 4% annually, in spite of the emphasis on alternative power sources, and will likely do so through 2050. Renewables and other low-emissions sources of energy will continue their strong growth, which is a positive, though oil, coal, and gas will be a backup for many years. The timeframe for infrastructure implementation of alternatives is very fluid. What’s telling is that 80% of global primary energy demand is supplied by coal, oil, and gas, which is about the same as 1997, the year of the first global climate conference.

ACTION Our general assessment is one of an inflationary boom over the next twenty to thirty years. What am I focused on buying with my own dollars? Real estate. Specifically industrial properties, farmland, timber, and to a limited extent, residential real estate. This collection checks both the real estate and commodities boxes. Dividend-paying stocks. Many of these companies are manufacturers with high fixed costs and significant barriers to entry. I own no government bonds short of 90-day T-bills held within money market accounts. And I have no plans to buy any.

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