It has been so long for most of us and never for many to consider the impacts of inflation as a driver of investment decisions – but then again, the last two years of the pandemic have accelerated radical and essential changes to business and society (to use an old-fashioned summary phrase).
There are traditional ways we have thought about inflation but many of these are tinctured with models we either grew up with, formally studied or both. The general thought is to divert money into tangible assets or as Elon Musk has advised, “physical things like a home or stock in companies you think make good products.” Warren Buffett in the same article advises investments in revenues generating assets such as great companies that produce products or deliver services and provides jobs.
The Financial Times notes a distinctive shift:
Investors are buying more US farmland in search of a hedge against inflation as commodity shortfalls caused by Russia’s invasion of Ukraine drive world food prices to record highs.
Land values in the Midwest grain belt have gained 25-30 percent in the past year while auctions draw intense bidding for available ground.
FT notes that larger investors, funds, and institutions are not new to this asset class, but the volume of increase is what’s notable, which is driving inflation in the farmland itself, which in some cases has, “outstripped farmland’s earnings potential” which is thought to be offset by the overall value.
Another post on Investopedia, 9 Asset Classes for Protection Against Inflation covers a blend of asset categories that may function as a hedge, including some that may address the impact of devalued currency.
CPI: Consumer Purchasing Power (U.S. Dollars)
Absolutely inspiring – after practicing law for decades, in Life 2.0, “it’s time to do something else.” This something else involves healthy body and mind, and interaction with people.
From the Los Angeles Times:
Dick Schulze, 76, didn’t take up snowboarding until his early 50s. Since then, he has competed in amateur and professional events around the world, including the 2006 Olympic qualifiers, in which he competed against Shaun White.
…Up he goes, toward the blue sky, scaling the bank of snow before a hop and quick pivot sends him sailing back down again. Down he glides, across the slope like a knife smoothing butter on toast, before pinwheeling through a series of small turns…Dick Schulze…at age 76 defies both age and gravity. He is the country’s oldest competitive snowboarder, a relative late bloomer who didn’t take up the sport until his 50s and plans, despite a titanium knee and a fall that crumpled his helmet and blacked him out, to keep going until he hits at least 100.
Because the combination of speed and agility — the sensation of skimming through a giant bowl of whipped cream, of hurtling forward like the brakes have gone out, of moving with the fluid ease of quicksilver — thrills him in ways he can’t describe. Unlike when he navigates a field of moguls…or flies down a black diamond run…Schulze struggles to explain his passion and obsession. “There’s something very sensual about the way a snowboard moves,” he finally said after grasping for the words. “That’s about the only answer I can really give.”
This Day In Market History: The Debut Of The Edsel, Ford’s Biggest Flop…in 1957, Ford Motor Company unveiled the Edsel.
The Edsel is infamous as Ford’s costliest mistake in history. Experts estimate the Edsel cost Ford roughly $350 million ($2.3 billion in 2016 dollars) in losses, or roughly $3,200 per vehicle sold.
The Edsel had such a negative impact on Ford’s finances that the company’s net income per share dropped from $5.40 in 1957 to just $2.12 in 1958. Ford also cut its dividend from $2.40 to $2.00 to mitigate the Edsel’s impact on its balance sheet. Ford’s share price itself dropped from above $60 to below $40.
Experts cite a U.S. economic recession, the Edsel’s unappealing name, poor marketing, unreliability, unappealing design and other of potential explanations for the car’s poor performance in the market. Whatever the reason, Ford discontinued the Edsel in 1959, just two years after its launch.
Source: The Henry Ford
It is difficult to imagine this kind of event in the age of NFTs and red hot IPOs (that in some cases we may not be entirely sure what it is the company will produce, if anything). a Washington Post article concluded, “the idea for the Edsel came from Ford executives who were thinking about market niches when they should have been thinking about cars.” But the story is still cautionary from the standpoint of hype, and consumer sociology as the Edsel ultimately failed:
because consumers did not buy it…in reality, however, Ford terminated the Edsel largely because shortly before Ford introduced the car a change in leadership brought a change in corporate strategy that made the Edsel irrelevant to Ford Motor Company’s (FMCs) long-range plans (Dicke, 2010).
The same author in an interesting assessment of what went wrong strategically concludes:
The Edsel was also a reassuring failure in the sense that it in no way challenged the basic soundness of the American economy. As the Wall Street Journal pointed out in its editorial/obituary, consumers could reject any product for any reason or for no reason. After the 1958 model year people rejected the Edsel because they did not like the brand not because it had any serious mechanical deficiencies. Consumers could afford to reject a US$ 250 million investment by an automaker for trivial reasons because they had faith that the auto industry could absorb the loss and come up with something more in tune with their tastes (Dicke, 2010).
See the full paper on Wiley here.
According to the County of Alameda:
Using the older definition of COVID-19 deaths, a resident who had COVID-19 but died due to another cause, like a car accident, this person would be included in the total number of reported COVID-19 deaths for Alameda County. Under the updated definition of COVID-19 deaths, this person would not be included in the total because COVID-19 was not a contributing factor in the death.
With much discussion on public trust, it is possible to suspend judgement but still ask about the timing of this decision and announcement? The County states, “aligning with the State’s definition will require Alameda County to report as COVID-19 deaths only those people who died as a direct result of COVID-19.” Why wasn’t this a discussion during the highest period of impact during the pandemic? See the full press release here.
We are a full-orbed panic buy culture, and current behavior would indicate this will be the post-pandem norm as noted the other day:
— Soc of finance (@inside_finance) May 12, 2021
But now it is bleeding over into corporate panic buying due to supply chain restraints. From Yahoo Finance, The World Economy Is Suddenly Running Low on Everything:
A year ago, as the pandemic ravaged country after country and economies shuddered, consumers were the ones panic-buying. Today, on the rebound, it’s companies furiously trying to stock up.
Mattress producers to car manufacturers to aluminum foil makers are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out. The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation.
Copper, iron ore and steel. Corn, coffee, wheat and soybeans. Lumber, semiconductors, plastic and cardboard for packaging. The world is seemingly low on all of it. “You name it, and we have a shortage on it,” Tom Linebarger, chairman and chief executive of engine and generator manufacturer Cummins Inc., said on a call this month. Clients are “trying to get everything they can because they see high demand,” Jennifer Rumsey, the Columbus, Indiana-based company’s president, said. “They think it’s going to extend into next year.”
The difference between the big crunch of 2021 and past supply disruptions is the sheer magnitude of it, and the fact that there is — as far as anyone can tell — no clear end in sight.
An end in sight is yet to be determined but these constraints are certainly related to some of the short-term inflation that is currently being somewhat over-reported but still exists, “essentially what people are telling us to expect is that it’s going to be hard to get supply up to a place where it matches demand.”
As expected, the CPI news release (April 2021) today shows significant inflation, as that has been the anecdote from almost everywhere. The surprise is just how much and how fast:
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in April on a seasonally adjusted basis after rising 0.6 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.2 percent before seasonal adjustment. This is the largest 12-month increase since a 4.9-percent increase for the period ending September 2008.
Pent up and bottlenecked economy
The question is why this pace of increase or does this signal long-term problems. The most immediate causes relate to the re-opening of the economy. From MarketWatch:
The pace of inflation has surged after years of languishing at unusually low levels largely due to the rapid reopening of the U.S. economy.
Businesses can’t keep up in demand, a problem exacerbated by ongoing bottlenecks in the global trading system tied to the pandemic. Computer chips are especially in short supply and that’s held up production of new autos and other manufactured goods.
Americans are also rushing to dine out, travel or go far away for vacation, activities they shied away from during the pandemic. That’s also driving up prices at popular vacation resorts and other venues where people plan to congregate.
The first two reasons are pretty straightforward, but the third reason (pent up demand) is beyond question, even if this one is the most difficult to measure as it’s anecdotal and not enirely precise but we all observe it – everywhere is packed with people looking to get out and do something, anything. But the impacts are real and tangible as seen in the BLS data:
See full interactive (and drillable detail) here.
Benzinga posted a very interesting comparison between gold prices and Apple Computer, as a measurement potential trend:
Gold investors have been waiting for this, The metal has been trending lower since August and after rebounding in April, it ran into resistance around $1,780. That put a halt on the rally…Now that resistance has been broken and a big move higher has been made….There’s a good chance it continues. With inflation here and a potential energy crisis on the horizon, a flight to safety has begun.
But the unexpected correlation: “One reason why the flight to safety has begun and gold is moving higher is the weakness in Apple Inc.” Apple has met resistance for months and the suggestion is that Apple, being so strong in earnings and organizational performance, yet underperforming as a security – could be a bearish signal overall.
Here is gold over the last year:
Of interest as well, the gold backed digital asset PAXG over the last three months:
From the DOF:
California’s population dipped by 182,083 residents last year, bringing the state’s total to 39,466,855 people as of January 1, 2021, according to new population estimates and housing data released today by the California Department of Finance (May, 2021).
The press release also reports that some of the decrease was attributed to excess deaths in 2020:
The COVID-19 pandemic increased California deaths in 2020 by 51,000
average death rate for the three preceding years. “Excess deaths” rates above the past threeyear average – were observed in 51 of the state’s 58 counties.
But the story is a mixed bag – there is significant growth in a number of inland cities, northern and southern but certainly not limited to those areas as illustrated in the interactive graphic from Cal Matters (see Cal Matters excellent write up here).
Of all places to find a commentary of what we are doing to ourselves as a culture – Roger Daltrey (of The Who if you are under the age of 50), in a recent interview gave some interesting commentary as he looks down the road and sees a “miserable world.” It should give pause that someone who is not only toward the end of their life but also lived through the unique time (as a voice) in the 1960s, describe where we are headed, “you just know that it’s a route to nowhere.” What I think is relevant are the comments regarding the lack of geniune discourse in our present time, “it’s just getting harder to disseminate the truth…it’s almost like, now we should turn the whole thing off. Go back to newsprint, go back to word of mouth and start to read books again.”
Imagine that possibility, settling down long enough to enter into the mind of another in the contempletive activity of book length studies. The route to nowhere brings to mind the words of Neil Postman, “the press worked as a metaphor and an epistemology to create a serious and rational public conversation, from which we have now been so dramatically separated” (1985).
Spoiler alert to the Wall Street Journal post, What Happens When Stocks Only Go Up – they don’t. But far more interesting than the impossibility of predicting a major correction, whether this time it’s really different, or some other alternative, is the exploration into the psychology of the investor (or trader):
In February 2020, before the pandemic had fully hit home, these investors estimated the odds of such a bear market at an average of only 4%. By April, just after the S&P 500 had fallen by one third, their expectations that the market would plunge again in the coming year nearly doubled to 8%.
Those fears swiftly faded. By last December, investors in the Vanguard survey estimated the probability of another crash in the ensuing 12 months at only 5%. That was slightly lower than their average estimate during the three years before the pandemic.
But one group was different:
…those who went into early 2020 with the highest expectations for stock returns in the upcoming year. They ended up reducing their exposure to stocks much more sharply during the crash of February and March 2020 than those who had been expecting lower returns.
Again, not necessarily by way of prediction but a historical account of the madness of the crowds that should at least give pause, “in the 1920s, a “new era” of technological disruption made caution look absurd—until stocks crashed by 89%.”