The 1970s Inflation: Revisiting 1969 – 1984 to help Identify the Best Investments for Inflation Protection

Introduction: A Brief Contemplation of Inflation Investing & the 1970s Inflation

Kailash does not make macroeconomic forecasts.[1]

This newsletter seeks to prove that our prior paper, The Case for Common Sense, represents good investing basics in any environment but also survives the lessons of the Great Inflation of the 1970s. Despite 10-Year Treasury yields having nearly tripled since their lows in August last year, real yields are still negligible, and inflation is topical. Summarily, one could suggest the following are signs that inflation is possible and hence another powerful reason to buy quality at reasonable prices:

  1. Charlie Munger: “…we’re in very uncharted waters. Nobody has gotten by with the kind of money printing we are doing now, for a very extended period without some trouble. And, I think we are very near the edge of playing with fire. [The amount of money printing] is astounding. What kind of lunatic would loan money to a European government for 100 years at less than 1%”[2]
  2. Social Stability & Math: Thoughtful work by Collaborative Fund shows that the incredible financial health of the average consumer masks a wealth and income disparity that, similar to LBJ’s policies in the 1960s, could accelerate government largess to stave off social instability while excellent work by Advocate Capital shows a strong predictive link between GDP growth and Treasury Yields
  3. The Fed Said So: TD Ameritrade recently noted that the Fed’s 2% average inflation guidance is effectively an explicit promise to overshoot – an assessment that makes a lot of sense to us
  4. The Market: With Tesla worth nearly all the energy stocks in the S&P 500[3] and investors applying record valuations to firms that incinerate cash, the market seems very “short” inflation
  5. George A. Roche: The legendary helmsman of T. Rowe, who started on the New Era fund in 1969 when it was launched as an inflation hedge, instructed investors to look to the inflation of the 1970s to gauge stock performance during inflationary periods[4]….and so we did

Companies that provide what people need benefit from inflation & can reduce equity duration:

The inflation of the 1970s teaches us to invest in firms that provide what people need and avoid companies that sell items people want. As our piece explaining what does volume in stocks mean showed, investors are focused on shiny objects that often make discretionary goods. This paper encourages a disciplined focus on the exact equities others are ignoring.

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A Brief Contemplation of Inflation: The Fatality of Fixed Income

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  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

March 31, 2021 |

Categories: White Papers

March 31, 2021

Categories: White Papers

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