Inflation

So, you’re covered. I’m not overly concerned, just want to take prudent steps if I can. I THINK my dividend stocks will hold up - consumer staples are readjusting from the stay at home movement. I have a lot more international now. I’m not concerned, but wondering if others are thinking about it and taking any steps.

          E - well we’re overdue for some type of market swoon I think. If you wouldn’t add to what you have or can’t find suitable replacements at a discount markets may correct. The computer programs can’t find values or buy back company stock. The tide comes in and the tide receeds. We’ll see. That’s why we chose CEF’s to live on. 6%- 8%’ers might work. We chose PIMCO management for the most part, 7 of 10. Use the rule of 72 to determine minimum yields.

          Dual citizenship. Born in Canada, schooled in the states and the U.K. Citizenship through the U.S. military and my wife is naturalized Québécois. We live in the northern part of Michigan now full time. We used to split time between here and Santa Fe.

            Based on past patterns going back to post WWII and 50 year patterns going back 100-150 years, I completely guess (market timings cousin) flat markets with corrections up to ten years and low rates. If you can’t find anything to invest in, add to or can’t force yourself to do something, start collecting cash because maybe the end is near. PYPL may be one of many canaries in a cage. Right now the P may be ahead of the E for many investments. How far or how long is an unknown.  

             I’ll do nothing but wait for factual investing opportunities. Well managed companies like AMZN, MSFT and AAPL will continue to drive the E forward as much as possible under all market conditions. With patience the P will eventually catch up after flat or downward market moves.

Well - 1) maybe that’s right, maybe not. That’s the question. Many agree with those 2 points - jobs and tech, many don’t. I’m not betting on it.  Didn’t Yellen just say something about full employment by 2022?  2) I think the market well knows that it will be higher this spring because of last year making it look much higher. Not thinking there will be any sustained moderate inflation until a reopening - who knows when, but consensus is later this year. 3) market declines don’t bother me either. A buyer as well.

FD - this is the great debate. I don’t pretend to analyze/interpret all the factors that cause an economy to run hot, but I read a lot that give both viewpoints as to potential outcomes. I do see a lot of comments that the Fed saying they will hold rates down for a few more years makes it a non-issue. I definitely don’t believe that. I think there is a good chance we will experience sustained moderate inflation. If we don’t, we don’t, but it certainly seems more likely now.  Just taking some steps until it becomes more clear - like not buying bonds being a Joe Investor and all.  I don’t think you focus on the equity side, but it’s pricey. Economist Robert Shiller has been saying for years that stocks are overpriced based on his CAPE ratio, but finally threw in the towel and said it might be justified given low rates. Those rates change and re-valuations are certainly more likely. Will it happen or will low rates for the next 2 to 3 years, the Fed’s tools will win any war on inflation? I don’t know and I hear very smart people take both sides. From fortune.com 1/25/2021 online edition (remember this is not geared towards bond traders!):

But Shiller recently introduced a new yardstick that give the optimists a fresh narrative, and they're mining it with relish. It's called the Excess CAPE Yield. The formula takes the inverse of the CAPE, which is really Shiller's earnings yield––his measure of the profits the S&P is delivering for each dollar investors are paying. He then subtracts the "real" or "inflation-adjusted" yield on the 10-year Treasury. That number represents the margin that stocks are paying over bonds.

What puts the gloss on the Excess CAPE yield, and hence on equities, is that the real yield on Treasuries is now famously negative, an extremely rare occurrence. As of January 21, the regular CAPE yield was a paltry 2.85% (the inverse of the CAPE at 35.13). That looks pretty bad. But Shiller puts inflation at 1.68%, which is 0.56% higher than the long bond rate of 1.12%. So the "real" yield on the 10-year is a negative 0.56%. The Excess CAPE stands at 3.41%. That means stocks, which are extremely pricey, still beat bonds by a wide margin, mainly because bonds are offering lousy, less-than-zero returns far into the future.“

Gabe - I am as well. As part of a plan to hedge against low returns in the US, I allocated 20% of my portfolio to international. I’ll keep adding on dips.

For me there is no debate as I don't invest based on predictions and opinions over 20 years. To put it "nicely" I don't care what Shiller, Gundlach, GMO, Arnott, Bogle said over the years because they were wrong trying to predict markets, categories, interest rates and performance. Shiller CAPE looks "bad" for years and stocks keep going up so why are we discussing CAPE?  Actually, why these "gurus" are being quoted or why I still see them on my TV? I know the answer, because someone has to talk about it, otherwise we won't have anything to listen too and we are doing the same thing discussing investing ideas because that's what we do 

Markets are never clear and/or consistent, by the time it's clear it's too late.
Just because I don't invest a lot in stocks now doesn't mean I don't have an opinion.  It reminds me that years ago a poster said that I don't understand retirement because I didn't retire.  Then, I retired and I still have the same opinions.

It's very typical to disregard bonds BUT NOT ALL BONDS are high-rated bonds or treasuries and why we have special threads for this.

So KISS again: most should know their goals and risk tolerance and invest accordingly and stay the course and maybe use 20% for explore/play.

I will continue investing in the best funds I can find at the moment and keep switching to meet my criteria. 

I also don't believe that most people who lose 20-30% of their portfolio don't care, especially when you have a lot of money.  I doubt you don't care when your one million portfolio is worth now just $700K?

I’d like to clarify why I started this thread. To discuss any actions folks are taking with inflation in mind. Any interesting currency hedges, real estate funds, inflation resistant companies, gold? I get that many think that inflation is a non-issue right now. To each his own, but please pass on any good ideas.

Some food for thought from Ben Carlson’s Wealth of Common Sense page - awealthofcommonsense.com/ - “The Simple Asset to Hedge Against Inflation” , “Could inflation give us a wonderful buying opportunity”. First article - nothing new to this crowd, but a good read - Stock, cash, low duration are best ways to hedge. Second article - same old - inflation spike this spring and summer spooks market - buying opportunity, then subsides. I will be interested in the degree of the latter if it comes to pass since the Fed has been communicating a spike for months now due to low inflation last year resulting from the pandemic. Would think it already factored in. Standing by to buy if stocks on my list react.

Mostlyu - thanks for commenting. What was your thought in swapping some AAPL for PCI?

Concise article on current inflationary issues and arguments, along with some good definitions:

www.vox.com/policy-and-politics/22346376/inflation-rate-explained-federal-reserve

Good generic article but before I look at it, my opinion is that the economy isn't the stock market, especially not in the short term and not minor changes.  Many economists try to connect the two, but they are not correlate in real time.

1) Inflation:  FD: until you don't show me consistent several months of inflation running at 3-3.5% there is no high inflation.  So far I don't see it so no need to change anything
2) Why should I care about inflation? the economy, along with things like unemployment and wages (FD: don't have high correlation to the stock market)
3) Where is inflation showing up in the economy? Where isn’t it?  (FD: don't have high correlation to the stock market)
4) Why are people suddenly worried about inflation now?  (FD: don't have high correlation to the stock market)
5) What does inflation have to do with interest rates set by the Fed?  FD: The fed told us they will not raise the federal funds rate for months to come. It was pretty clear and mentioned many times already.
6) Can inflation be good?  FD: nothing to do with the stock market
7) What are some worst-case inflation scenarios?
8) Is the worst-case scenario the likeliest scenario?  FD: The above 7+8 are a complete nonsense.
9) If inflation happens, can we fight against it? FD: yes, raise rates

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In Texas it is the same with housing - anecdotally as well. Too little supply. I have noticed a big increase in bread prices. Gasoline jump is huge of course. As an equity investor it is not something I am concerned about as I feel my portfolio should do fairly well. One of my larger equity positions, PG just had a 10% dividend increase. Home buying - unfortunately I don’t think there are many bargains or fair prices to be had these days. I am just starting to do a few more things - going out to eat, shopping a bit more (online), booking some travel. I think that probably applies to most the world. Let’s see if those price increases don’t accelerate. Having said that, and as the article states, there are factors in play - many novel - so that no one can guess the endgame.

Enjoy the coming boom. When generations get into their 30' they start buying houses, start families and spend spend spend. For me that was the 80's. We got raises every 6 months things were going so well. I just read an article there were about 70 million boomers. Well guess what, there are more millennials (about 72 million) than boomers and they are now starting to buy houses, start families and spend spend spend. The housing shortage is a combination of covid19 and people wanting to get out of the cities, work from home and the onset of the millennials getting to their peak earning years. Enjoy the boom IMHO.