Acting on the 'News' Can Cost You

By the time you see cover stories on a particular theme, that theme is already old news. As often as not, it is too late to act on that for investment purposes. Just three years ago the following headline from Bloomberg BusinessWeek's April 22, 2019 issue asked if inflation was as dead as the dinosaurs. The global inflation rates shown on the right side on that graphic were as of July 22, providing concrete proof that the BusinessWeek cover was a contrary indicator, not something that you should have acted on. Other than economic basket cases like Venezuela, Turkey, and Argentina, only U.K.-based countries plus troubled Spain, Brazil, Poland and Russia were as bad, or worse, than the U.S. in terms of officially released inflation rates. I'm old enough to have lived through the horrendous inflation during the late 1970s through early 1980s. In 1980 you could earn over 13% in an FDIC-insured bank money market account. 30-year Treasury bonds peaked at around 15%. Government actions to lower inflation consisted of two main techniques. Most notably, Fed Chair Paul Volker jacked up interest rates high enough to induce a major recession. The Dow Jones bottomed on March 27, 1980 at $729.95. It touched $773.59 intra-day on Aug. 12, 1982. A period of rising rates during 1982 knocked the Dow down to south of 1,087 briefly on June 15, 1984. Each of those sickening bottoms proved to be fantastic times to buy/own stocks. The second way that our Bureau of Labor Statistics (BLS) used to lower inflation from 1980 onward came from changing the way they calculated it. I believe they did this to make it appear things were less bad than what consumers were seeing with their own eyes. Today the term used for that would be Gaslighting. Various changes in both 1980 and 1990 were employed to reduce official consumer price index inflation rates published by the BLS. The excellent charts from ShadowStats.com show today's inflation rates under the old 1990-based and 1980-based original ways it would have been calculated. Based on identical methodology 2022's recent inflation tallies well above 15% on the 1980s method and about 12% on the 1990s version. Most readers know that is true based on their own trips to grocery stores, and in paying bills. My own experience with the price of eggs at Wegman's supermarket is telling. Two 18-count egg cartons bought together were $6.60 about 10-days ago. On my trip yesterday those same 36 eggs cost $9.00, a 36.4%, 9-day increase. BLS techniques to lower stated inflation today include the substitution principle. That simply assumes that if a favorite item like rib-eye steak goes up too much in price that you'll buy chuck steak or even hamburger instead. Presto, no price increase to report. Move on, there's nothing to see here, they say. Why does the government lie to us about this? COLA adjustments for Social Security payments, pensions, union contracts are all keyed to inflation. Fessing up to reality would mean even larger Federal and state level outlays than will take place next year. That would be a budget buster, which would further strengthen the chances of even higher inflation. So is the Fed's push for higher interest rates. With over $30 trillion in national debt, and rising, each 1% interest rate hike means Federal debt service expense goes up by about $300 billion annually. Taking average rates to 5% from near zero would make for an extra $1.5 trillion in debt service each year. For that reason alone, I expect political reality to keep further Fed rate increases well below what Paul Volker did back in the 1980s. What does this all mean to you? You'd have to be nuts to buy long-term government or corporate bonds at today's coupon rates. The artificially low rates virtually guarantee you will lose substantial buying power over time. Over the long run stocks have been the best way to hedge against inflation. Nominal gains from 1928 through 2021 saw stocks more than double total returns from 10-year treasuries and provide 143.9% more than the gains in real estate. Inflation adjusted returns on stocks were positive during seven of the nine decades since the 1930s. The two exceptions were not overly significant, at -1.1% (1970s) and -3.5% (2000s) respectively. Bonds posted three losing decades out of 9. Housing dropped slightly twice (1960s & 1990s). Can stocks make money during periods of rising inflation? Absolutely. From 1928 through 2021 they rose 7.1% more than inflation in periods like that. That compares to just 4.4% or 5.2% real returns for fixed income and housing. Even during 3+% inflation stocks outperformed bonds and housing on an inflation adjusted basis. The real payoff of staying in stocks comes from owning them when inflation is retreating. That is when equities shine most compared with other asset classes. Nobody can predict exactly when inflation trends will reverse. The only way to catch those great gains come from being in stocks all the time. Companies with pricing power can operate profitably in almost any environment. Fixed income can't possibly do that. In theory, housing could run up significantly over time. In reality, though, people simply can't pay more than they can afford to own homes. State and local governments also get greedy during periods of rising prices ramping up property assessments (read: higher taxes) as do school boards desperate to cover increasing operating and labor costs. The Fed might have just one or two rate increases left at its disposal. By this time next year rates will likely be declining again on the combination of fighting recession as well as reigning in debt service expenses. Take advantage of today's bargain valuations on equities that you like. They will make you rich whenever the mood changes as it will inevitably.

Acting on the 'News' Can Cost You

By the time you see something in print, it's often outdated. Let's use rising prices as an example, and how you can position now to profit later.

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