“All the evils, abuses, and iniquities, popularly ascribed to businessmen and to capitalism, were not caused by an unregulated economy or by a free market, but by government intervention into the economy.” - Ayn Rand.
The economic newsflow from North America continues to deteriorate. US consumer sentiment – as measured by the University of Michigan’s consumer sentiment index – has weakened to its lowest level in a decade, reflecting misgivings about rising prices and a growing belief that the Joe Biden administration has lost the plot with regard to inflation. On Wednesday, alleged president Biden conceded that inflation was putting pressure on family budgets. “Everything from a gallon of gas to a loaf of bread costs more.. It is worse even though wages are going up. We still face challenges.” Richard Curtin, chief economist of Michigan’s consumer surveys, commented as follows:
The description that inflation would be ‘transient’ has the undertone that consumers could ‘grin and bear it’ as economic policies counted on a quick and automatic self-correction to supply and labour shortages. Instead, the [government overreaction to the] pandemic caused economic dislocation unlike any prior recession, and has been intertwined with partisan interpretations of economic developments.
The great Austrian economist Ludwig von Mises coined a phrase that appears grimly appropriate to our current economic predicament, the “crack-up boom”:
If once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the ‘twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse).
Analyst and financial historian Russell Napier recently took Stephanie Kelton to task for her timeless contribution to the MMT (Modern Monetary Theory) genre, The Deficit Myth: “Having previously described financial repression as a policy that is designed to ‘steal money from old people slowly’, it is very clear why MMT proponents would prefer not to mention the implications for savers from their policies..”
“What politician would endorse a policy that is designed to destroy savings, given the socio-political devastation that such destruction has wrought historically ? Perhaps, more importantly, what savers would choose to subject their savings to such theft when it would be possible to move money out of any jurisdiction pursuing an MMT / financial repression policy ?”
The mechanism by which financial repression operates is to keep interest rates below the rate of inflation. In other words, the aim is to inflate the government’s debt away. At first, this may even seem welcome. As Jens O. Parsson wrote in his 1974 book, Dying of Money – Lessons of the Great German and American Inflations: “Everyone loves an early inflation. The effects at the beginning of an inflation are all good.”
Parsson continues: “There is steepened money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. Everyone benefits, and no one pays.”
However, things soon change. “That is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad.” Parsson outlines the issues: “The government may steadily increase the money inflation in order to stave off the later effects, but the later effects patiently wait..
“In the terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of all traditional remedies. Everyone pays and no one benefits. That is the full cycle of every inflation.”
In the midst of surging and probably long-lasting inflation, low or zero- (let alone negative-) yielding bonds are uninvestible. Cash and other forms of besieged, distressed fiat are to be avoided as far as practicable. That leaves common stocks – but, from our perspective at least, only those issued by companies with genuine pricing power, that is to say, the ability to pass on higher input costs to their customers. Happily, such companies exist, and many of them can be found today in the industrial and commodities sectors, while the ‘investing’ mob chases NFTs and all things crypto.
We own shares in one such company, by way of example – the diversified industrial firm Mueller Industries. Despite its shares rising by over 28% last month, this producer of copper, brass, aluminium and plastic products still offers us a robust 20% cashflow yield. In the commodity bull market of 2000 to 2012, Mueller demonstrated an ability to pass on higher input costs to its customer base. Mueller has just posted strong third quarter earnings. The average price of copper rose by 47% through Q3 compared to the same period last year, yet over the period in question Mueller grew its operating income by 337% to $233.4 million, and its earnings per share by 396% to $3.01.
As regards the malign impact of stickily high inflation upon the broader stock market, this essay by Warren Buffett has merit. But the financial markets in all their glory continue to offer up opportunities to those with the mental dexterity to seek them out. As fund manager Chris MacIntosh observes, for example:
It’s no secret we are now in a new commodities super cycle. Our contention is that oil, gas, uranium, fertilizer, gold, silver, copper, and nickel, to name a few, are set to outperform.
Investors today essentially have to decide whether they wish their assets to be nominal, or real. We say: keep it real.
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: email@example.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and specialist managed funds.
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