inflation hedges

Pump Up the Prices: Putting Inflation in Perspective
graphic shows a dollar bill inflated

We’ve been hearing plenty out of the Federal Reserve Board from the business news outlets in recent weeks. Every wiggle of the Consumer Price Index has been dutifully tracked and reported, for those on inflation-watch. With recent inflation measures above the FRB’s 2% target, the finger-pointing becomes bigger news than the numbers themselves.

While we have fingers that are capable of pointing, we know they have better uses. One such use is preparing your portfolio to account for inflation. And this may actually take less energy than pointing and wagging our fingers after all!

When inflation dominates headlines, straight-line thinking starts taking over: how will we afford to buy groceries when gas is $300 a gallon? (I’m going to guess that we would find cuts elsewhere, like our cable bill, well before we starved.) And investors sometimes hop out of the market because the cost of doing business gets higher.

And those high-growth, pre-profit darlings will take a hit because a rise in interest rates—nominally to combat inflation—means these companies will pay more for the money to continue their pre-profitable journey.

When we invest in individual companies, we’re able to spot those holdings that benefit from a position of strength, whose business gives them the pricing power to ride out inflationary pressures. We’re excited about these holdings, and since we’re investing for the long haul, we’re expecting to ride along through multiple periods of rising and falling rates.

When we stretch out our time horizon, these major events look more like occasional bumps on the road to wealth.

So, in a way, we’re already investing for times of higher inflation. We make no guarantees that our way is better than any other, but we recommend caution when anyone acts like they have a crystal ball for this topic.

Let’s zoom out even more. At its core, asking about “when to get out” means that an investor will also have to ask “when to get back in”: success would require the investor to be lucky twice. We don’t prefer any scenario that slashes our odds so unnecessarily.

Clients, when you have questions or concerns, please reach out.

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Play the audio version of this post below:

Pump Up the Prices: Putting Inflation in Perspective – 228Main.com Presents: The Best of Leibman Financial Services

This text is available at https://www.228Main.com/.

Wishing For A Gold Mine?

© Can Stock Photo / snokid

We know a fellow who built a gold mine. Whenever we mention this, people usually ask what it was. The answer is…a gold mine. This client worked as a construction superintendent for a very large contractor. He had built coal mines and a gold mine among many other large projects.

This anecdote comes to mind as we prepare to tell you our latest thoughts on investment tactics. We invest time every week looking for the best bargains, trying to figure out emerging trends, thinking about the economy and the markets. In a recent research meeting, Greg Leibman posed the question, “What can we own that might benefit from rising inflation?”

We humans tend to think that recent conditions or trends will persist. This makes it hard to realize the long spell of very low inflation might come to an end, with inflation outpacing expectations.

One way to weather periods of rising inflation is to invest in companies that own things: land, buildings, factories, raw materials, and so on. An oil company already owns the oil in their reserves and the wells to pump it; when prices go up, they get to sell it for more profit but most of their capital expenses have already been baked in.

Miners similarly benefit when the prices of their existing mineral reserves go up. Like oil companies, their stock price tends to move in correlation with natural resource prices, making them a potential inflation hedge. Some mining companies have exposure to the gold market, which some people may see as a particularly important hedge against inflation.

We have had raw material companies on our radar for some time now: they tend to be big cyclical movers, and we have been bullish about the current cycle so far. But we believe that this same sentiment may have created buying opportunities in the mining sector.

We look for potential gaps between expectations and the unfolding reality. That is where profit lives, in our opinion. When Greg posed the question, we put our heads together and started looking at potential opportunities. To summarize,

• Inflation may exceed expectations in the years ahead.
• We believe that some companies within the mining sector are at bargain levels.

There are no guarantees. What we think of as bargains sometimes have the dismaying tendency to get cheaper after we buy them. But we think we have identified potential investment opportunities that may be appropriate for some portfolios. Clients, if you would like to talk about this or anything else, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Au Naturel

© Can Stock Photo Inc. / kadmy

We’ve written before about our positions in natural resource sector companies. They were key to both our pain in 2015 and our pleasure in 2016.

Noted investor Jeremy Grantham of Grantham, Mayo & van Otterloo (GMO) recently published additional insights on this topic in a white paper. Three of his nine key points are worthy of special mention:

1. “Resource equities have not only protected against inflation historically, but have actually significantly increased purchasing power in most inflationary periods.” Regular readers know we believe that prospects for increasing inflation are under-appreciated in today’s markets. Although we have no guarantees that we are correct in this view, and past performance is no guarantee of future results, we may be very well-positioned for a rise in inflation.

2. “We believe the prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources.” Low prices have curtailed future supplies; we know how this works.

3. “Despite all of this, investors generally don’t have much exposure to resource equities.” As eclectic contrarians, we are used to marching to a different drummer. This is certainly the case in 2016 with regard to our exposures in this sector. The unstated premise is that when the crowd decides to gain exposure, a lot of money may shift into the sector. Again, no guarantees.

We are watching economic, business and market trends closely to see how this all comes out. We enjoyed the analysis by Jeremy Grantham, even as we guard against the fallacy of believing he is a genius because he agrees with us. As always, please call or email if you would like to discuss your position.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.