Inflation Introduces a New Investment Landscape
In recent years, the economic backdrop driving America's investing environment has consisted of slow economic growth, easy-money policies, high asset prices, and disinflation. This theme drove prices for risky assets, many of which had no earnings, paid no dividends, and had no clear path to profitability, to valuations never before seen. Returns on "Hyper-growth" stocks, crypto currencies, and other speculative investments lured many workers out of work and into day-trading. Credible economists, like Lacy Hunt, of Hoisington Investment Management, suggested the excessive debt load would keep America's economy in slow growth long-term, which would continue to dampen loan growth, which would allow the Fed to continue to suppress rates and print money, which would continue to elevate asset prices. While this narrative is very logical, and for a dozen years remarkably accurate, those supporting it understood that, should a sufficient amount of the Fed's arbitrarily-created currency units fall into the hands of middle America, as opposed to staying concentrated in the hands of financial interests closest to the Fed's "trough", noticeably rising prices would unseat the narrative and change the investing environment. The hubris of government, to think it could shut down national supply chains and then turn them back on like a light switch, coupled with the historically reckless Fed decision to "do whatever it takes" to create inflation north of 2% annually (as if stealing 2% of your income each year wasn't enough!), have in tandem lit the fuse on inflation, dislodged the old economic narrative, and ushered-in a new investment environment. In regards to the dangers of high inflation, who is most at risk, how might you be exposed, and what basic measures should be taken?
High inflation renders present streams of income more valuable today, and future streams of income less valuable today. This is why the NASDAQ, consisting primarily of growth stocks which pay no dividends, is under pressure, while the DOW JONES, consisting primarily of established dividend payers, is outperforming. The two groups of citizens most damaged by periods of sustainable high inflation are cash savers, or people who keep a substantial portion of their wealth in bank accounts, or similar, low interest vehicles, and pensioners, or people on a fixed income. Savings, after an ample emergency fund is established, must not habitat low interest cash accounts for long. Those on a fixed income should think of ways to diversify income sources, and should consider earning some income on at least a part-time basis. The following should also prove helpful navigating the new landscape:
Maximize positive cash flow by running a tight family budget, then save & invest more to pay for tomorrow’s higher prices
Consider The Alpha Strategy for all purchases (contact the office for a free e-copy)
Don’t relinquish earned income without serious consideration
Avoid big positions in low or non-income producing investments, like cash and speculative growth stocks
Focus on income and dividend investments, especially those able to raise prices with inflation, and are capital efficient
Own some inflation hedges (REIT’s, MLP’s, commodities, gold)
Consider utilizing the Charter Economy
Think about it, Shaun.
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.
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