Preparing for Inflation
Preparing for Inflation
Inflation, or a sustained rise in overall price levels, can be detrimental to investors by impairing the purchasing power of their portfolios. For example, an investment that returns 3% in an environment of 4% inflation produces a negative return when adjusted for inflation. Inflation is particularly dangerous for fixed income investors who receive stable, but not growing, interest payments to fund their lifestyle. Because the interest payments do not keep pace with inflation, investors risk feeling poorer over time as the prices of goods and services increase. As governments around the world utilize every fiscal and monetary policy tool at their disposal to keep economies afloat during the global pandemic, we wonder if the inevitable result will be uncontrollable inflation. To be fair, skeptics have been calling for higher inflation since the 2008 Great Financial Crisis and, at least so far, instead of rising, interest rates have steadily fallen. However, that may not always be the case. What should an investor do? In our view, the best way to counter the negative impact of potentially higher rates and inflation is to own a diversified portfolio of high quality companies with pricing power. The companies that will succeed most in an inflationary environment are those that can raise prices at a rate that exceeds inflation without losing customers. As Warren Buffett has said, “If you have to have a prayer session before raising your price by 10%, then you’ve got a terrible business.” By avoiding “terrible businesses,” we believe we help insulate clients from the dangers of inflation. Additionally, a big benefit of owning wonderful companies is that they will fare well in low inflation environments, too. There are no free lunches in the market, but we believe owning such companies at attractive prices is as close as it gets.
Articles We Liked:
China's Struggling Rural Children
China has ascended to its place amongst world powers due to careful planning and heavy investment in physical infrastructure. However, the country has neglected its human capital, especially those living far from its populous cities. The plight of rural children in China threatens to derail the massive gains the country has made over the last three decades.
Covid-19 Vaccine Development
Moderna discovered its Covid-19 vaccine by January 13th…of 2020 (!), but it took another 11 months to gain the necessary approval. The author wonders if (and hopes that) a quicker approval process will be possible in the future.
Auction Theory
The Nobel prize was awarded to Paul Milgrom and Robert Wilson for their work devising a new auction format, the simultaneous multiple-round auction (SMRA). The SMRA employs many rounds of bidding, after each of which information about bids is revealed to participants. The framework was lauded for its positive impact on price discovery. Today, the USA uses an SMRA to sell wireless spectrum.
Nine Oil Traders Hit a Gusher
Early last year when coronavirus lockdowns decimated the demand for oil and the industry ran out of places to store the excess crude, oil prices closed at minus $38 per barrel. It was the lowest price for oil in the almost 140-year history of the New York Mercantile Exchange. While a disaster for many investors who had been betting on a rebound, the plunge resulted in a windfall profit of $660 million for nine traders who took the other side of the trade.
Peak in Oil Demand Soon?
As more countries announce plans to transition to green energy sources, we may soon reach a peak in oil demand. Such a transition away from oil could have big ramifications geopolitically. One possible scenario that could play out is a significant ramp in production from Middle East oil producers in an attempt to sell as much oil as possible before it becomes a stranded (and worthless) asset.
Pet-Friendly Lawmakers
Breaking from the European Union has given Great Britain the opportunity to pass more pet-friendly laws. The country’s animal-welfare laws already are among the strictest in the world, but lawmakers, with the support of their citizens, want to go even further. Two examples include increasing the maximum penalty for animal abuse to five years in prison and stiffer penalties for pet theft.
Notable Reads:
Ender's Game
by Orson Scott Card
While set centuries into the future, the book was published in 1985, and the Cold War influence is notable throughout. The story centers on the military training given to a select group of children in service of an impending war. Violence (and its justification) are a central theme of the story. While not overtly critical of the violence, the author makes it clear the damage it did to the protagonist’s psyche. Interestingly, the Marine Corps has since added the book to its reading list for “providing useful allegories to explain what militaries do.” A very entertaining read, Ender’s Game is worthy of its place on the Sci-Fi Pantheon. – AG
Influence: Science and Practice
by Robert Cialdini
If you’ve ever left a car lot wondering how the salesman convinced you to buy a car you didn’t really want, read this book. The author, a professor of psychology and marketing, provides an incredible overview of the various tactics used by what he terms “compliance professionals.” Packed with both scientific research that can be understood by a layperson and real world examples, the book is helpful for those wanting to influence…or defend against being influenced. – AG
The Kill Chain: Defending America in the Future of High-Tech Warfare
by Christian Brose
Written by a former John McCain staffer, this book gives a troubling account of the current state of the “military industrial bureaucracy” (as he calls it). In Brose’s view, decades spent easily containing enemies with less sophisticated technology has put the United States in a vulnerable position. We are ill prepared for future war against world powers (specifically China) who are on equal footing with us. The United States is still attempting to apply its 1990 playbook to today’s problems, and the results could be disastrous. – AG
Recipe Favorites:
Lexi's Favorite Ginger Oatmeal Cookies
Preheat oven to 350 degrees. Makes approx. 4 dozen cookies.
Ingredients:
¾-cup unsalted butter
1-cup sugar
¼-cup light molasses
1 egg
2 tsp. baking soda
1 ½-cup flour
½ tsp. salt
1 tsp. cinnamon
¾ tsp. ground cloves
¾ tsp. ginger
2 cups quick-cooking oats
In mixing bowl, cream butter & sugar until light & fluffy. Beat in egg and molasses until smooth. In another bowl, stir together flour, baking soda, salt, cinnamon, cloves and ginger. Stir flour mixture into butter mixture until blended. Stir in oats.
For each cookie, drop a tablespoon of dough on a lightly greased (or parchment paper-lined) baking sheet, spaced 3” apart.
Bake in 350 degree oven about 8 minutes or until lightly browned. Let cool on baking sheet 1 minute, and then transfer cookies to rack to cool completely.
– MA
More Than A Trusted Investment Advisor
We recently helped a newly retired couple determine how to fund their retirement most tax efficiently, choose the optimal time to begin receiving Social Security payments, and understand the impact of an inheritance.
If you are approaching a financial milestone and need assistance in developing a financial plan, let us know. We are here to help!
The data contained within this newsletter is for informational purposes only. The information contained herein should not be considered investment, tax or legal advice.
This newsletter contains links to external third party websites that are not affiliated with First Fiduciary Investment Counsel. FFIC does not control or direct the content of the information contained on these websites. Information contained on the third-party website is relevant on the date the newsletter was published but may be changed or revised by the third parties without the knowledge of and/or notice to FFIC.
Statistics and other information have been compiled from various sources. First Fiduciary Investment Counsel believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.
Past performance does not guarantee future results. The mention of securities or types of securities in this newsletter should not be considered as an offer to sell or a solicitation to purchase or sell any securities mentioned. Neither First Fiduciary nor the authors hold positions in any of the stocks mentioned unless otherwise stated.
First Fiduciary Investment Counsel, Inc. is a registered investment adviser with the Securities and Exchange Commission. A more detailed description of the company, its management and practices is contained in its firm brochure document, Form ADV, Part 2. A copy of this form may be received by contacting the company at: 6100 Oak Tree Blvd., Suite 185, Cleveland, OH 44131; Phone: 216.643.9100; Email: ffic@firstfiduciary.com.