Data Points Endorsing Our Case for Buying What You Need?
We do not make macro forecasts. The evidence is overwhelming….they are difficult to make.
We do know there is a gasoline shortage. People will say it is because of hacking and not a real shortage. Right. The last time it was because of OPEC and that wasn’t a real shortage either. Here’s a simple question: if there’s a shortage of the most basic input to US trade and commerce, is the issue real? What did the people sitting in gas lines think in the 1970s? Could this be a sign we need to spend even more on infrastructure?
I see macro people debating endlessly about CPI and a declining dollar as if they were two totally different topics. My macro textbooks are old and dusty. Let me define “inflation” according to my family: when the prices of the stuff we buy rises in leaps and bounds, for whatever reason, that is inflation to us.
Below is the CRB Commodity Index. I don’t care if it is hackers, a shortage of chips, shortage of labor, shortage of lumber due to closed sawmills, shortage of shipping, “excess” demand due to central bank buying and legislative hand-outs, a shortage of housing, pay gapping higher at little employers like Amazon and Walmart, a massive infrastructure bill driving up input prices, a shortage of water driving up food prices etc. My family doesn’t care. Stuff is more expensive today.
Inflation Assets are Not Always Exciting:
A friend owns an auto repair business. He has an endless demand for his services. But it has been difficult to generate a profit. To do a brake job he has to go to a minimum of two parts stores to get what he needs.
He had a business spraying in the super-tough bed liners for pickup trucks. That business is closed. He ran through his last barrel of spray yesterday and the supplier is saying months till another barrel is coming. Total assets and asset turnover in that line of business has fallen to zero. For the moment.
My buddy said he has to put prices way up on auto repair. Again. I don’t have a clue if brakes, transmissions, serpentine belts, cam-chains and spray-in-bed liners are going to show up in CPI or a weaker dollar. But I do know we need all those things and the price of getting them is going higher.
What struck me is that while he may lack purchasing power, his services require real assets, they are tangible and necessary. His ability to generate profits is relatively certain due to his long term ability to increase prices. Auto repair is one of those services you need. His suppliers therefore also have pricing power. The necessity of those goods and services means they are, if imperfectly, inflation hedged as well.
Firms that Benefit From Inflation
As documented in our research pieces on Inflation & Equity Duration: Buy what you know and need. Here are the Staples Stocks that have announced price increases to date: Coca Cola, Hershey’s, Hormel, JM Smucker, P&G, Kimberley Clark, Colgate. For more research on buying simple, proven and profitable makers of the stuff we all must have at discounts to the market last seen at the peak of the internet bubble click here and here.
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If you are reading this, you are probably much like us: folks who prefer to buy what has been proven and profitable at reasonable prices. There are many asset classes out there that might benefit from inflation. Real estate investments and treasury inflation protected securities TIPS might be great as well. Our missives are not investment advice. They are designed to help use history to bring context to markets that, lately, seem ever more surreal.
We are big fans of old-fashioned financial ratios. Our models “study” a company’s balance sheet, typically trying to avoid those with excessive financial leverage. Our screens prefer more modest and sustainable growth rates. While considered tedious at the moment, our models are also going to prefer a stock with positive net profit margin and the ability to calculate a return on equity.