The 2020's: A decade of Inflation

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#1
Occasionally, someone fundamentally changes how you see the world.

These articles by Lyn Alden are about the coming decade of high inflation.  None of us have experienced this unless we were working in the 70's.  Its a lot, but worth it.  I think VB'ers are used to reading stuff longer than tweets.  Its all backed up by numbers:

a) Fiscal and Monetary Policy
b) An Inflation Primer

TLDR:
1) We're at the end of a long term multi-decade debt cycle: Debt has built up since 1987, with the fed continually lowering rates (Greenspan put).  See the chart "Total Debt % of GDP vs Interest Rates" in a)
2) Now debt is so high and rates so low that monetary policy (lowering interest rates) is useless.  Fiscal policy is needed (injecting cash into the economy).  MMT.  See the chart "A Century of U.S. Monetary and Fiscal Policy" in a)
3) This causes inflation (currency devaluation), which deflates the built-up debts.  In effect, interest rates are lower than the inflation rate.  Cash loses value.  Bond/debt holders get screwed.
4) Every country must devalue.  Or their economy becomes uncompeditive.
5) Previous inflationary decades were the 40's and 70's.  Our current scenario closest to the 1940's.  "Wartime MMT".
6) CPI inflation (from fiscal policy) gives money to workers.  Wage inflation is a key part of this.  As opposed to monetary policy, which inflates asset prices for the rich.  Both the 1940's ad 1970's reduced wealth concentration.
7) Typical inflationary decades have "spikes" of inflation.  eg: The inflation *rate* hits 10-20% in one year, then is low the next few years.  However the prices themselves don't drop in these few years, they remain high.  Your cash has permanently lost value.  The inflation *rate* is transitory, inflation is not.
8) The general stock market may or may not do well during inflationary periods.  Depends on their starting valuation.  Did well in the 40's, not in the 70's.
9) Commodities have always done well in high inflation periods, especially oil.  See the chart "CPI vs Oil Price" at the end of b).  Can't tell for gold, not enough samples.
10) We won't get hyperinflation like pre-war Germany or modern Venezuela.  This is not ZeroHedge.

You really have to read the full thing.  And see the graphs.

My thoughts on this later....
I wait until there is money lying in the corner, and all I have to do is go over there and pick it up.
Jim Rogers
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#2
My thoughts on investing for a decade of high inflation.

1) Cash is trash.  Be 100% invested.
  Last time, safe and conservative people held money in the bank.
  Now, reckless and irresponsible people hold money in the bank.

2) Be a borrower, not a lender.  Buy REITs, avoid banks, finance & insurance cos.

3) I don't mean run a leveraged portfolio.  Interest rates are so low everyone is juicing returns by leverage.  We get long periods of gentle rising markets to suck people in, followed by vicious volatility spikes as the market makes leveraged players puke.  Bill Huang was a small example of this.  March 2020 was a bigger example - basically 1987 (Black Monday) with circuit breakers.

4) I expect the Fed to spray money at every market correction.  So expect a series of short 15-20% corrections.  Until one day they can't.  Then the market falls 30-50%.  No idea when.  Again, don't leverage your portfolio.
  The 30-50% drop could be a decade away, so I'm not waiting for it.  Point 1) again.

  I'm not choosing the best options.  I'm choosing the least worst ones.

5) Long-term-Bonds are dog-Sh**.

The bond part of a 60/40 stock/bond portfolio only works in low inflation.  Maybe  substitute gold for bonds - like bonds, gold generally goes up when markets fall (with lower interest rate expectations), but it doesn't lose value from inflation.

6) Lets talk Commodities:

a) Gotta move overseas, out of SGX.

b) Good commodity producers are hard to find.  Developed countries have extracted all their easy-to-find resources, so their companies are on the high end of the cost curve.  Buying these is like buying decaying OTM call options.  Companies at the low end of the cost-curve are in places like Russia, Malaysia, Mexico, Indonesia.
  I wouldn't touch companies with assets in sh**holes (like DRC).

c) Less developed countries often change the rules.  Indonesia just added an export tax to Crude Palm Oil.  Peru and Chile are planning to increase their copper extraction tax from 30% to 70%.  Try to find a single  listed copper producer that doesn't mine in these 2 countries!

d) Mining is a risky business.  Mines often flood, even in developed countries.  Sometimes the ocean catches on fire.

e) ESG is a political risk for resource companies in developed counties.

f) Since mining is unpredictable, I hold a lot of small (2%) positions.  No big 10% positions.  These are not Buffet stocks, they may go to zero.  Usually I just take a cursory look at their position on the cost curve,  debt and reserves.  I personally prefer dividends.  I rely a lot on external services to find a large number of small positions.  Can't do it all myself, even if I wasn't working. Also smoothens the learning curve.

g) You need a whole different set of skills to assess exploration companies and junior producers.  I don't have these.

h) Given all the risks and unpredictability above, it may be worth learning to trade futures.  eg: buy 5 years out. No political or operational risks.  I haven't done this.

i) Small positions I have are Gazprom, Lukoil, Kazatomprom.  Low cost producers, low debt, paying dividends.  In places with not-the-best rule-of-law.
  Medium position in United Plantations (paid link)
  Like Nutrien, Lundin Mining, SCCO, Adaro Energy, Equinor, but no position.


7) Still on commodities:  not keen on wheat, corn, rice.  High prices one year means  everyone plants more next year.  Fertiliser is a better bet, but I missed the boat.


8) I'd love a little crypto (2%).  But can't value it, so waiting for a time when no one wants it.  Just gotta guess based on sentiment...I don't know if it will happen.  I think Bitcoin (decentralised wealth transfer) and Defi (Eth + chainlink) will still be around in 5 years.  Cardano looks interesting technically, but no one uses it yet.


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Any one else have other ideas for investing in inflationary times?

Basically, anything with a limited supply.  Thats hard to grow or mine.  Preferably something you can't live without.
I wait until there is money lying in the corner, and all I have to do is go over there and pick it up.
Jim Rogers
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