Is Inflation all that Bad?
This is the time to run to daylight!
Investors and the American public have been inundated for the past two months about the horrors of inflation. We know the litany well: new car prices have risen 12.2%, used cars 40%, and the liquid to fuel them by 40%, January-over-January. Markets have been wringing their hands, wearing hair shirts, and engaging in self-flagellation over the disastrous and direful effects inflation will create. We have heard a continuous loop of media and investment gurus reminding us that inflation is the highest it has been in 40 years. Chicken Little is alive and well. Are there no silver linings?
Since the market has gone up 31% in 2019, 18% in 2020, and 29% in 2021, it is little wonder that valuations have been in the stratosphere for many prominent stocks. Their prices, P&Es, and price-to-book ratios have caused sophisticated and casual investors to treat them as communicable diseases.
We believe that we are currently being presented with an unusual opportunity to purchase equities that are undergoing price adjustments. The breadth of names is impressive in both value and growth stocks. This is precisely the time that Warren Buffett was referring to when he said, “Be greedy when others are fearful.”
While inflation hits most people in the wallet, there are sectors of the economy that benefit. Financial institutions, real estate, and the U.S. dollar will gain. Mortgage-free homeowners are seeing their residences increasing in value by nearly 20% per year. Wages, which are now growing by a record 5.7%, have not kept up with 7.5% inflation; however, when Inflation returns to more healthy numbers, which we believe will happen by the end of the year, workers will see their purchasing power expand.
Our inflation has not been caused by a fragile economy. It is a self-inflicted problem. Excessive demand causes inflation. It is the insatiable appetite of the American consumer that is inflation’s greatest catalyst. Our imports rose 20% in January to satisfy the self-indulgent and acquisitive consumer. We are seeing the results of pent-up demand and growth in disposable income by consumers, who collectively became two trillion dollars richer during our long, dark night of Covid, Delta, and Omicron.
The American economy remains strong. The GDP rose more last year than any time since Ronald Reagan was President. Unemployment is 4%. Supply chains will unclog themselves. We expect a 4% to 5% GDP growth this year. We wish our clients to avoid the opportunity cost of not investing in stocks.
