Inflation Nation

 Inflation Nation

Nothing makes America poorer faster than inflation. Last Friday's annualized Consumer Price Index (CPI) number came it at a sizzling annualized 6.8%, the highest since Reagan had to go to work defeating the last remnants of the Carter's administration's handiwork. Reagan broke the back of inflation by jacking up interest rates to the point where inflation was tamed. The greatest Bull Market the world has ever witnessed soon followed. We might not have that luxury of both a prudent leader and the liquidity to tame inflation this time around.

Simply put, inflation is the by-product of a fiat fiscal and monetary policy run amok, too much paper money (fiat money) is created rather than actual value. Gold has well stood the test of time for literally thousands of years because it cannot be created by man. It must be acquired by toil. Not the case with Benjamins. The Treasury Department can keep on a-printing those bad boys all day long. In fact, with the modern marvels of blockchain and digitization 1s and 0s can now account for the actual "money." No need to even print it...just add a couple comas to the supply and viola, you have more money!

The Biden Administration is in a serious bind. There is tremendous demand for a limited set of real products; read housing, energy, food, education, healthcare, and hard goods. Consumers are not stupid. They are moving their digital paper money as quickly as possible into goods and services, hence simply via a classic supply & demand scenario prices go up with increased demand and diminishing supply.

Although the headline number of 6.8% annualized is bad, the reality is far, far worse dear farmers. The fact is the majority of Americans do NOT live in Megacities. As evidenced by the population density map of the USA below, the country is pretty well distributed with the East (loosely East of the Mississippi River) being at least 2X more dense than the West (up until you get to coastal California of course.) Why does this matter?

This matters financial farmers because both the CPI data set is a fallacy. The majority of Americans are seeing double digit inflation in everything that matters, and most importantly they're actually paying for it out of pocket. Let me explain. A significant portion of the residents of Megacities are subsidized in terms of housing, food, and healthcare. Meaning the government is picking up the tab. Whereas outside these areas, the median (not average) citizen is paying through the nose for higher gas prices, housing, food, healthcare, education, etc., etc.

The end result is a total theft of wealth from the very people who the Government SHOULD be focused on improving their opportunity in life with lower taxation, less regulation, and more opportunity for goods and services sold in the USA. The opposite is happening. The government is subsidizing cheap labor and goods overseas which then compete at a significant advantage against home-grown goods and services. The net result is the loss of market share, employment participation, and meaningful opportunity for the very citizens the government was elected to serve.

What is a hard-working financial farmer and patriot to do? First, keep calm and carry on. Second, look to circle the wagon(s) around physical goods and vital services. There is nothing "transitory" about the hordes of people competing for the same goods and services...lock up your share of real estate, blue chips (larger-cap monopolies paying a dividend, see "Rapko's Rules"), gold, education, and healthcare. Oddly enough having some cash might not be a bad idea, because even though its buying power decreases by the day (hour?) there is something to be said of "buying the dip" in terms of assets.

When will the ship turn around? It might not turn around. We have a timid Fed unwilling to buck the interests of the Biden Administration. An impartial Fed does not exist, if it ever did. So what this means is interest rate hikes will be milquetoast at best, especially if the "BBB Plan" is enacted by some unfortunate miracle. Part of the BBB Plan relies heavily on low rates, forever. As an investor this means 2022 doesn't look particularly bright in terms of upside as investors will be fighting for survival against the Fed.

2022 is all about finding assets which offer REAL growth in terms of capturing market share, increasing dividends, and raising their prices for goods and services. A great question to ask is "can this business pass along costs?" For companies without positive cash flow and living on the largess of zero interest rates it becomes a eloquent kabuki dance of finding investors willing to stomach volatility spikes. Only those that create and sell real value will survive.

Inflation Kills

 Inflation Kills

Coming soon to a purchase near you...inflated prices! Often called "the silent killer," in economic terms that's exactly what inflation does; it strips away the buying power of the consumer. This morning's Consumer Price Index (CPI) release by the Bureau of Labor Statistics was truly shocking, well at least to people who haven't eaten food, driven a car, or purchased any physical goods for the past several months. For average Americans, there has been no doubt the damage being done to their purchasing power. Everything of value is markedly higher. A lot higher.

Over the past 12 months the all items index rose 4.2%, the largest increase in 13 years. That doesn't sound like much, right? Consider some of the outlying data: the index for used cars and trucks rose 10% in APRIL alone, this was the largest 1-month increase since 1953. The energy index has risen 25.1% over the past 12 months. Food they claim "only" rose 2.4%...assuming you're buying in bulk, and I don't mean Costco, I mean TONS of soybeans. Who are they interviewing for these price points, animals on a farm?

As previously mentioned, inflation is the silent killer. Why does inflation kill? Inflation kills because it marginalizes the backbone of our society: the American Middle Class. The Middle Class is the most sensitive to out-of-pocket purchases; typically they are small business owners or employees subject to the inelastic demand for vital goods-and-services; like gasoline, food, housing, education, medical for example. Inflation ravishes the American Dream because the cost for life necessities consume an ever-increasing share of the Middle Class wallet.

What can be done? As financial farmers you can vote with you money by buying stocks in companies that have the power to pass on increased costs to consumers. Darwinian? Yes. Effective? Yes. Buying inflation pegged consumer staples puts you in lockstep with bad government policy, at least you don't get crushed twice. Second, you can vote members of Congress out of office who do not have a sense of fiscal responsibility. Unfortunately, this takes years. So an alternative approach is to vote with your feet to lower cost areas of the country. If this isn't a viable option, then stick with ideas 1 & 2, and in particular make a God-awful stink to your local, regional, State, and Federal government. Remember they work for you!

Failed fiscal and monetary policy results in rampant inflation. The first flight is usually into dirt (real estate) and gold...fiat paper money continues to lose purchasing power until costs become absurd. In Weimar Germany wheelbarrows full of money were needed to purchase simple goods. Are we there yet? Not by a long shot, but rampant spikes in real estate, food, and vehicles indicate that people aren't dumb to what is occurring...money for nothing never ends well. You can't expect to burn a candle at both ends and not have the lights go out.

 

Truflation

Truflation

Truflation, a portmanteau I've coined from "True Inflation," is probably in the range of 10-12%, just don't share this information with the U.S. Bureau of Labor Statistics! According to the BLS, inflation in the United States is nonexistent. In fact, conditions are SO benign that it is actually wise to CUT interest rates! Well dear financial farmers, I have a different perspective.

For the past 45 years there has been almost no real wage growth. From about the time Nixon took the USA off the gold standard rampant inflation has devastated the earnings growth of the middle class. And in the late 1980s things got significantly worse in terms of calculating the Consumer Price Index (CPI).

The CPI was changed from a constant cost of living to one where substitutions were allowed. No big deal, right? Wrong. This allowed politicians from both sides to effectively mask the true inflation numbers. Why was this done? Well when you significantly underreport official inflation you don't have to make cost-of-living adjustments to Social Security. Or account for increased pension plan returns. Or worry about the size of the deficit. Fudging the numbers solves a lot of big problems.

Examining the "growth" of income over the past 45 years is another way to take a look at this problem in a pragmatic way; real buying power has barely budged, yet the cost of acquiring the same goods and services has SKYROCKETED!

Anything of value in life whether it is housing, education, or medical care to name the "big 3" have increased exponentially. What college student can pay for tuition now from the proceeds of a summer job? Can a family put 20% down on a house after working for just a year? Why would a single medical bill now cripple a family? The answers to all these questions, sadly, is Truflation.

What is an aspiring member of the Middle Class to do? Vote? That obviously doesn't seem to work. Rebel? Hmmm...good luck with that. Earn more? Maybe, but earning more alone won't fix the problem, as the U.S. Dollar loses more buying power by the day and taxes have a sneaky way of eating up even more of any higher income. Invest? Yes! 

My argument is the best way to fight Truflation is a combination of earning more and investing, and ultimately funneling as much tax-deferred growth as possible into investments, particularly stocks, real estate, and gold. In terms of stocks I'd highly recommend readers take a look at my "Rapko's Rules" in previous posts. In terms of real estate, well they ain't making any more of it (except in the South China Sea and in Dubai) Take a hard look at quality vacant land, commercial real estate, and single family homes. Finally, gold is a really interesting element. And it has been used for thousands of years for storing VALUE. I wonder why that is...hmmm.

Bottom line? Borrowing costs are going DOWN, but the PRICE of everything is going UP. Invest.

Shrimp Inflation

Sadly it appears that shrimp inflation is upon us. A recent report has identified a spike in the price of shrimp in the high teens and land-based protein inflation running into the mid-single digits. Indeed, even a basket of groceries notched a 2.4% increase in the second quarter. For an economy in many respects still emerging from the 2008/2009 financial crisis, this isn't good news.

We're now seeing solid evidence of food inflation. Add that to increases in health care costs, housing, and most notably eduction, and we have the beginnings of an inflationary environment. Some argue true inflation is currently running in the mid-single digits; if your personal consumer price index (CPI) includes food, housing, medical care, and education it probably is, if you prefer to use the established CPI like the Federal Government of tons of soybeans and computer processing power, you probably haven't seen a cost of living increase in decades.

Although the prospect of shrimp inflation may seem laughable to many readers, those who wish to Invest Like A Farmer should pay heed to inflationary signals, even in such small data points as shrimp; these can have jumbo implications for the financial farmer. Inflation eats away at your real returns; even a 27% increase in the S&P 500 eventually succumbs to inflationary pressure. This has the possibility of impacting both the wallet and palate of the average investor. Inflation is truly an enemy of the Republic and is most notably the sign of a fiscal and monetary policy run amok.

I read this shrimp inflation report as a solid signal that wholesale food costs are going to be rising markedly, which means REAL purchasing power is decreasing. The ability for retailers to pass along price increases depends largely on the type of customer; large chain-based restaurants are going to have trouble passing along meaningful price increases, whereas higher-end restaurants will have considerably less pushback. Along those lines, the same school of thought should also hold true for grocery retailers; the high-end retailers should have the ability to pass along prices increases whereas the lower-end shops are going to see their revenue and profit lines narrow. Keep in mind however, this isn't the whole story; inflation is insidious in that it has butterfly effects among asset classes.

Luckily, it appears that energy costs (especially in North America) are falling. Recent news out of Mexico indicating a push towards privatization of many of the resource-rich country's fields may further increase the supply and push prices down further. Notably, we're also seeing significant production increases in the United States which suggest even more pricing pressure to the downside. This impacts food pricing positively, meaning theoretically in North America it should be cheaper and cheaper over the coming years to product land-based protein and potentially harvest more ocean-based protein at a lower price point.

Nonetheless, I would argue that shrimp prices are a useful leading indicator similar to the lipstick index; it is something we at first smile and laugh about, yet often proves to be a harbinger of things to come.