Inflation: Bogeyman or Legit Threat?
Dear Wall Street Daily Reader,
Investors far and wide are freaking out about inflation.
Case in point: For the first time ever, inflation ranked as the single biggest danger to the markets in Bank of America’s survey of investors.
Don’t get bit by the inflation bogeyman, though. Perception often doesn’t reflect reality. And as you’ll see in a moment, the fears are overblown.
Or as the Financial Times’ Robin Wigglesworth rightly put it, “The inflation narrative has gone way beyond what the markets are actually pricing in, which in turn has arguably gone way beyond what is actually likely to happen.”
With that in mind, today I’m going to share the smartest way to track inflation in real-time. That way you’ll know if and when it’s actually time to freak out.
A Funny Thing About Inflation
But first, we need to get a trio of things clear from the start:
- Fear-worthy, wealth-destroying inflation is extremely rare. We all know this from experience, as it’s been contained for decades. But when fear kicks in, we tend to forget reason and experience and embrace emotion. As Société Générale’s Kit Juckes pithily points out, though, “Inflation is about as common as dragons.” So let me ask you: do you worry about dragons sabotaging your investment goals? Didn’t think so. By the same token, you shouldn’t be overly concerned about inflation, either, because, well…
- Inflation isn’t bad per se. It’s unexpected inflation that can be dangerous. Particularly during economic contractions. The reason investors fear inflation is because it negatively impacts companies by increasing costs for borrowing, materials, labor, etc., which therefore reduces earnings. And since stock prices ultimately follow earnings, lower earnings lead to lower stock prices. But, we also have to remember that the stock market always has been and always will be a forward-looking beast. Therefore, it anticipates inflation expectations and adjusts accordingly. Or more simply put, at any given time, the market is pricing in inflation expectations. It’s unexpected inflation that can wreak havoc, as the market needs to adjust on the fly. And recently, we’ve witnessed some hotter-than-expected inflation readings. Once again, however, context is key. You see, unexpected inflation during economic contractions is much harder to weather for companies. During boom times, not so much. (Newsflash: We’re in boom times). After all, a company’s revenues and profits act as a built-in hedge. They rise at the same or similar rate of inflation, after a period of adjustment, as long as management is doing its job to monitor the market dynamics. Speaking of monitoring…
- Runaway inflation doesn’t materialize out of thin air. I don’t typically quote the man with his hands on the levers of the money-printing, inflation machine. But U.S. Federal Reserve chair Jay Powell was right when he told the Senate last month, “Inflation dynamics do change over time, but they don’t change on a dime.” That means just like company management teams, we can monitor the dynamics and adjust our investment strategies accordingly. Most of the time, the result of this exercise will entail changing nothing at all. And as promised before, here’s the best way to constantly monitor inflation…
Bookmark This Bloomberg Tracker
Thankfully, the dynamic duo of John Authers and Elaine He created an Inflation Dashboard that’s easy-to-follow and self-updating.
Consult it the next time you start freaking out about the inflation bogeyman.
Doing so today reveals that while some prices appear to be heading straight up — I’m talking about things like lumber (+202% year-over-year) — the majority of measures remain in a normal and expected range.
Translation: Keep calm and carry on investing like you have been.
For those worrywarts in the group who can’t simply shake the fear of inflation without an ounce of preparation, I’ve got you covered, too.
In my next column, I’m going to share several specific investments you can add to your portfolio to provide an extra-layer of protection. (Hint: It’s not freaking gold!) So stay tuned!
Ahead of the tape,
Editor and Founder, Trend Trader Daily