My Next Plan For Inflation

inflation plan

I had a very long day. I shorted Biotech stocks, made some gains, and then I stopped out. I’ve listened to my spouse complain about my daughter’s doctor for a good two hours. I had someone tell me that a 25% gain on an options trade in about four hours is not enough during this inflation.

So I poured myself a beer. Corona Light. It’s not American, but it gets the job done. And it really goes well with a Baltimore Orioles versus Chicago Cubs baseball game in the afternoon (my two favorite teams). 

Every month, I write an article for Luckbox Magazine. Previous iterations of the magazine included Modern Trader and… the great… Futures Magazine. I do a dive. Here is a preview of what I wrote for next month’s issue…

Bloomberg’s Three Act Play

With aggregate demand under pressure in the gasoline markets, one should examine other possible sectors facing supply challenges. The crushing of aggregate demand with limited supply support can reintroduce inflationary pressures if the Federal Reserve starts to cut interest rates again. If supply is flat and demand increases again, the result of higher prices and a possible repeat of an inflationary cycle. 

This was a critical challenge for the Federal Reserve and Arty Burns in the 1970s. It struggled to contain long-term inflationary pressures. Simon White, a commentator at Bloomberg Markets Live, notes that the conditions in today’s economy could follow a similar trajectory to inflation.

As the chart shows, inflation returned with a vengeance during various periods of the 1970s as energy prices whipsawed. Failure to contain rising inflation and remove excess capital from the markets created three recessions and multiple bouts of inflationary pressure. 

“We are now in Act I, where inflation is high and rising,” writes White. “We will soon enter Act II, where a respite in inflation hoodwinks the Fed into believing it can prematurely take its foot off the tightening ped. This sets the stage for Act III, where price growth stops falling, and takes off again, this time making new highs.”

The central bank solved the challenge until Former Fed Chair Paul Volcker raised interest rates well above the CPI. While the economy fell into a recession in the early 1980s, a combination of supply-side policy efforts helped restore economic confidence and investment.

However – this time is different. The destabilizing nature of deglobalization, record government debt, and inflationary costs linked to the Green Transition creates a series of known unknowns that make Fed policy alone a questionable approach. 

Playing Inflation

The Fed said in the minutes for July that it will need to focus on elevated inflation for some time. That might benefit the markets… it might not. What I know is that I’m going long on certain assets that will benefit. I’m not talking about gold. I care nothing about Bitcoin or silver.

Investors should revisit assets in the oil-and-gas patch. Particularly exploration and production names like Occidental (OXY) and ConocoPhillips (COP). Both continue to return capital to investors in the form of higher dividends or aggressively pay down their balance sheets. 

In addition, real estate investment trusts – focusing on industrial properties – will benefit from reshoring international supply chains. REITs offer protection against inflation through rising rents and strong cash flow. 

In addition, the playbook consists of cheap community banks and financial thrifts that may eventually become takeover targets. An inflationary environment can strain existing deposits among institutions. In addition, the consolidation of the financial sector will remain a social trend for the foreseeable future. In the public markets, dozens of community banking institutions are trading for less than their liquidation.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

Related Articles