The Age of Inflation Is Here.. What would I invest in?

The Warnings

During last week’s annual Berkshire Hathaway shareholder meeting, Warren Buffett mentioned: “We are seeing substantial inflation….We are raising prices. People are raising prices to us, and it’s being accepted.”

Warren Buffett just sounded the alarm on inflation — here are 8 ways to be ready (read here)

In fact, months ago (in Feb 21), Michael Burry of “The Big Short” fame, already mentioned about the dangers of inflation.

‘Big Short’ investor Michael Burry turns to Warren Buffett to underscore the dangers of inflation (read here)

‘Big Short’ investor Michael Burry says ‘prepare for inflation’ – and warns bitcoin and gold might be at risk (read here)

“Prepare for #inflation,” Burry said in a now-deleted tweet on Thursday night. “Re-opening & stimulus on the way. Pre-COVID it took $3 debt to create $1 GDP, and it is worse now. In an inflationary crisis, governments will move to squash competitors in the currency arena. $BTC #gold.”

Between Congress and the Federal Reserve, the government has committed record levels (more than $ 6 trillion) to try to stop an economic calamity. Just recently, President Joe Biden signed his US$1.9 trillion (S$2.5 trillion) stimulus Bill into law on Thursday (March 11), commemorating the one-year anniversary of a US lockdown over the coronavirus pandemic with a measure designed to bring relief to Americans and boost the economy.

The U.S. has thrown more than $6 trillion at the coronavirus crisis. That number could grow. (read here)

Biden signs US$1.9 trillion stimulus Bill into law on US lockdown anniversary (read here)

Flood of money

Now a bit of context here:

In the US, it was previously reported that fewer than 4 in 10 people had enough savings to pay for an unexpected $1,000 expense in cash. The rest would have to borrow, use a credit card or take out a personal loan. Or just in 2019, it was reported that 40% of Americans did not have $400 in the bank for emergency expenses.

Just 39% of Americans could pay for a $1,000 emergency expense (read here)

40% of Americans don’t have $400 in the bank for emergency expenses: Federal Reserve (read here)

Due to the pandemic, the US government has been issuing stimulus checks. In fact, the total number of payments issued out is approximately 164 million, or about $386 billion. Just this month (May 21), a new set of $1,400 stimulus checks has been sent. More than 1.1 million payments were sent this time, representing more than $2 billion. About 600,000 of those payments were made using direct deposit, while the rest were sent via paper check.

The new payments mark the eighth batch sent since Congress approved the checks in March. Payments are for up to $1,400 per individual, as well as $1,400 per eligible dependent, so long as recipients fall under certain income thresholds and meet other requirements.

More than 1 million new $1,400 stimulus checks have been sent. Here’s who got a payment (read here)

So currently, millions in the US who previously did not even have $400 in their bank account for emergency expenses, now have stimulus cheques money to spend (issued over the past year).

In addition, just recently, it was reported that Federal Reserve has shut down its money supply data as money supply has increased 500% and inflation is a major threat. The M2 money supply is up 30% in the past year.

Gold: Fed Shutting Down Its Money Supply Data Is Alarming (read here)

Everywhere I looked… Signs of inflation

When I look at the commodities charts, the sign of inflation is everywhere. See below.

Over a 1 year period, WTI Crude Oil is up by 120%, Copper is up by 95%, Soybeans is up by 91%, Corn is up by 137%, while Lumber is up by 397%.

Well, in the US, shortage housing is starting to be an issue. The market is red hot now.

U.S. Housing Market Is Nearly 4 Million Homes Short of Buyer Demand (read here)

The Pandemic Ignited a Housing Boom—but It’s Different From the Last One (read here)

Yet to rear its ugly head?

The part that is still holding up is the U.S. Core Consumer Price Index. I reckon it is the slowing economy and people are still not willing to spend (a lot). In the latest release, the YoY rise is only 1.6%. (See below)

Note: The Core Consumer Price Index (CPI) measures the changes in the price of goods and services, excluding food and energy. The CPI measures price change from the perspective of the consumer. It is a key way to measure changes in purchasing trends and inflation.

However, the CPI is far from perfect as a measure of either inflation or the cost of living, and it has a number of inherent weaknesses. For instance, one limitation of the CPI is that the consumer goods it considers do not provide a sampling that represents all production or consumption in the economy.

On another note, many companies have already announced that they are passing on the rising prices to consumers, to offset the pandemic related inflation. Eg. Coca-Cola, Nestle, Hasbro Inc, Mattel Inc, Boston Beer, Kimberly Clark, Reynolds, Procter & Gamble, Whirlpool, etc… and the list goes on.

Coca-Cola CEO says company will raise prices to offset higher commodity costs (read here)

Nestlé warns of prices increases, against ‘excessive’ growth (read here)

Hasbro toys to get more expensive as costs surge (read here)

Higher commodity costs lead to price hikes from Kimberly-Clark and other consumer giants (read here)

These companies are jacking up prices because of exploding inflation (read here)

Attention shoppers: Price hikes are ahead, but consumer companies hope you won’t notice (read here)

Investing in an inflationary era

With the rising prices, however, given that we are still not out of the pandemic.. many sectors are thus still affected (travel, tourism, retail, hospitality, etc). For many, there may not be any substantial pay increment/bonuses. For others they may even be jobless.

In fact, the US unemployment rate is still relatively high at 6% (see below).

So I guess, the real question to us retail investors, is how to invest during this period of substantial inflation? While searching, I came across the below article.

Inflation Proof Investments: 6 Ways to Brace Your Investments (read here)

1) Keep Cash in Money Market Funds or TIPS.

2) Inflation Is Usually Kind to Real Estate.

3) Avoid Long-Term Fixed-Income Investments.

4) Emphasize Growth in Equity Investments.

5) Commodities tend to Shine During Periods of Inflation.

6) Convert Adjustable-Rate Debt to Fixed-Rate.

Personally, I feel that having a mixture of REITs (selected sectors though eg. Logistics, Data Centres, Business parks, Industrial) and high cash flow big tech growth companies (FAANG, BAT) would help. Typically the latter group should have sufficient pricing power to ride over the inflation waves.

In addition, in view of the potential rising interest rates, banks / financial stocks should do well too.

For tech stocks, there are really two sides of the coin. The recent ‘inflation tantrum’ early this year caused sell offs in many of the highly valued tech stocks (more speculative and loss making companies). Tech stocks get hit harder during inflation tantrums because they are “long duration assets.”

On the other hand the US mega tech stocks (and with their recent blow out quarters reports in general), seem less affected.

Having said that, I am not saying only mega techs, just have to be selective and probably focus on companies with more pricing powers and with high cash flows. Also it is more of a balance…with a mixture of stocks, with more weightage on certain sectors.

Opinion: The inflation tantrum scared investors — here are eight tech stocks to buy when it happens again soon (read here)

Warren Buffett Berkshire Hathaway Annual Meeting Transcript 2021 (read here)

Apple is the largest position in Berkshire’s investment portfolio, in a bet worth nearly $111 billion. In last week’s annual Berkshire Hathaway shareholder meeting, one person (Jack) asked the following question to Warren and Charlie: “What’s your mindset, when you see so many of these high flyers, not the GME or meme stocks, but more like the big tech growth stocks gaining 50%, 100%, 200%, et cetera, in a matter of a year or less? I know you eventually bought Apple in 2016, because of the quality of their businesses and their management. How do you assess if these high flyers are worthy of your investment, given this crazy high valuations that muddy the waters?”

And Warren answered: “Well, we don’t think they’re crazy. But we don’t… at least I… Charlie… I feel that I understand Apple and its future with consumers around the world, better than I understand some of the others, but I don’t regard prices, and that gets back, well, it gets back to something fundamental in investments, I mean, interest rates, basically, are to the value of assets, what gravity is to matter, essentially….

But if present rates were destined to be appropriate, if the 10 years should really be at the price it is, those companies that the fellow mentioned in this question, they’re a bargain. I mean, they have the ability to deliver cash at a rate that’s, if you discounted back and you’re discounting at present interest rates, stocks are very, very cheap. Now, the question is what interest rates do over time. But there’s a view of what interest rates will be based in the yield curve out to 30 years and so on…

It’s a fascinating time. We’ve never really seen what shoveling money in on the basis that we’re doing it on a fiscal basis, while following a monetary policy of something close to zero interest rates, and it is enormously pleasant….

And if it doesn’t cause anything else, you can count on it, continuing in a very big way. But there are consequences to everything in economics. That is why the Googles and the Apples, but we don’t have a Microsoft, but they are incredible companies, in terms of what they earn on capital. They don’t require a lot of capital, and they gush out more money. And if you’re trying to find bonds that gush out more money from the federal government, we got a 100 billion that’s gushing out like 30 or $40 million a year, or whatever it may be depending on the short term rates.

As for cryptocurrency which many deem it to be a hedge against inflation (BTC – the Digital Gold), I am still very much on the fence. Sure nothing wrong with having a small portion of your assets in it (1% to 5%), however, ask me on its valuation, I would be hard-pressed to answer.

As a speculative ‘tool’, prices have been stubbornly up, hovering around USD 50k+ to 60k (from Feb 21 till today in early May 21), although there were a recent correction to the high USD 40ks… (still that is not a significant correction, in view of crypto’s relatively short history). Let’s not go into Ether or Dogecoin…

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