In investing as in life it pays to take a step back, consider what everyone around you is saying, and think about whether it is really true, or whether it is just lazily-repeated nonsense or indeed deliberately misleading tosh.
And with that in mind let’s think about inflation. Transitory or structural, doesn’t matter.
As everybody knows, inflation is doubleplusbad and is terrible for stocks and bad for everything everywhere.
We know this because we have been told it since around 1980 when the Chicago School theory of inflation gained political clout amongst what were to become known as neoconservatives. In the US and in the UK the doctrine was adopted with gusto in the early 1980s.
The logic amongst the Reagan and Thatcher governments in the US and UK went something like this: inflation is bad because it tends to run away with itself and wages don’t keep up. And before long you have hyperinflation where bread costs 2x tomorrow what it did today except your wages are like 1x tomorrow what they were today. And when folks can’t afford bread, in a structural not a transitory way, folks tend to get cross, and the streets go on fire and war happens. Evidence, 1930s Europe, evidence, a whole bunch of failed states worldwide over the course of several hundred years. Oh and also, in the 1970s, Western governments spent big money on grands projets in order to prop up failing postwar economies and keep something like full employment in order to keep people from setting stuff on fire on the streets, and then inflation happened, and then interest rates went to 17% and above, and as we said already, inflation is doubleplusbad because war, and rates of 17% plus are bad because then
I can’t afford my mortgage on an politician’s salary structural inefficiencies appear in the market.
Anyway what followed was control of the money supply in a quest to keep inflation down and it didn’t work in the 1980s when there was inflation anyway, not least because control of the money supply and a tightening of fiscal policy meant there were less jobs and people set stuff on fire in the streets and then in the UK the government
had to start a war with Argentina to distract from all this wound back its extreme monetarist policy into something a little more balanced.
But still, we were told, inflation? Bad. Killed the German economy in the 1930s and led to authoritarianism, expansionism and war.
In the 1990s came an increasing vogue for independent central banks which set base rates with inflation-targeting in mind. Very high minded. Keep the politicians from meddling in a quest to be elected. But, your average human being the most devious little capitalist, these low base rates led to plentiful borrowing led to rapid rises in real estate prices led to liar loans led to unserviceable levels of personal debt and insufficiently collateralized webs of institutional loan obligations and low confidence that counterparties could fund in the event of weakness led to Lehman led to the financial crisis of 2007-9. Whereupon deflation became the bogey because nobody could afford anything and folks started putting prices down accordingly which, we were told, was bad for everyone.
Which led to the most beautiful piece of help-the-rich-get-richer-and-who-cares-about-the-poor-they-don’t-vote-anyway policy ever invented by the High Priests of Capitalism. “Quantitative Easing”. They had to give it a novel label designed to make the beholder feel stupid for not understanding it, because if you called it what it is, which is, a big ol bailout for rich folks who have gotten themselves in trouble, at the expense of poor folks’ wage rises, oh coupled with, limitless lines of dirt-cheap credit for rich folks but massively raised levels of credit checks and collateral requirements for poor folks? Then people would have, you know, that old chestnut, burned stuff on the streets. So that was 2009, and, twelve, nearly thirteen years later, here we are. If you own any assets, be it a home, Amazon stock, a car, a watch, whatever, you can thank QE for making it both very cheap to buy on day one and very much likely to have risen bigly in value during the period of your ownership.
And now … post Pandemic Phase I … comes Inflation Phase 46. Why? Pretty obvious really. Stuff is in short supply because nobody made stuff for a year or so. And cash is in plentiful supply because nobody rich spent anything for a year or so. And a generation has decided to YOLO, not with Shibu Inu coin, but by quitting their American-dream-of-deferred-gratification jobs, buying that place in the country using, yes, that limitless line of credit, and then spending even more money on carpets, new kitchens, a new SUV and so forth. So, low supply of stuff, big supply of cash, shocker, prices are up.
We have news. If you’re rich? Inflation doesn’t matter. Inflation only matters if you are poor. Define poor? If your sole source of wealth is selling your labor for US dollars or international fiat alternatives. Because then you are in a whole world of pain. Because as everybody knows, dollars and pounds and euros and whatnot are getting to be worth less every day that passes. So you can be out at work all day, come home, and the dollars you just earned buy you less bread than yesterday. You can ask for a raise but that will only get you back to where you started, minus some employer goodwill of course.
You see what people mean by inflation is really, deflation. Dollar deflation. Meaning, your dollars buy less stuff then they used to. Less stocks, less houses, less cars, less bread. But that’s not because everything is inflating. It’s because dollars are deflating. And that’s because central banks everywhere have printed so many of the dang things that of course the dollar is worth less. How could it not be? Limitless supply of something will do that to its price.
You know this is correct, because, if you take some examples of other assets that aren’t dollars, there’s no inflation. Elon Musk is not suffering inflation because the main currencies he owns, Tesla and SpaceX stock, are going up in price, so when he sells some, he can do more with it than he could a couple weeks ago.
And if your personal wealth is denominated mainly in stocks, other securities, real estate and other real assets? You aren’t suffering inflation either. Your dollars are deflating. But your assets’ prices relative to one another (ie. their price not denominated in dollars) aren’t moving all that much. If you want to buy a new Tesla, and you sold some Tesla stock to pay for it, well, your TSLA stock probably rose more than did the price of the car lately. So, no inflation there. On the contrary, you probably got your car for less Tesla shares than you would have done last year. You see?
If you want to avoid inflation, it’s easy. Just don’t spend all your time selling your time for money. Find some way of amassing assets, be they securities or real assets. If you are in a low paid job and have no assets, of course, you can’t suddenly become a capitalist rather than a labor provider. But you can start small. Like by owning your own table and chair if you are seven years of age and run a lemonade stand. Something. Don’t spend your whole life selling your time for an in-real-terms ever-shrinking amount of money.
And if you already own non-cash assets? Think hard about whether running to cash next time the market plunges is in fact the right thing to do. You have to make your own decision on that, because everyone’s wallet and psychology looks different. But income-investor types will tell you that owning safe high yielding stocks is looking pretty good right now as a cash alternative. Our point is simply that the notion that cash = safety isn’t necessarily true at this point. Because most assets are trending up, and cash is trending down. The problem here isn’t inflation. It’s deflation - fiat currency deflation. And the solution? Take very good care of how much deflating fiat currency you have on hand.
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Cestrian Stocks Bulletin, 17 November 2021
DISCLOSURE: Cestrian Capital Research, Inc staff personal accounts hold long positions in AMZN and TSLA.