Since the rate of inflation has been increasing this year and hit a high of 5.4% in June, it has certainly reached the level of concern for us. We just sent a letter to our investors regarding this topic, so will share some of those thoughts with you.
Our belief is that there are two major contributors to inflation right now. One of those factors is disruptions in our supply chains, due in large part to Covid. This has resulted in circumstances like:
- Empty car lots and very low inventories of other new and used vehicles, including boats, trailers, RVs, etc.
- Skyrocket prices on rental cars, if you can even find one available
- Lengthy wait times and much higher expenses for building and home improvement supplies, appliances, etc.
These situations have been much discussed, and most agree that the supply chain is the main culprit, along with a shortage of “smart” chips for vehicles. They are in the process of gradually improving and will likely be resolved toward the end of the year, so it is considered a temporary inflation effect: Too much money chasing too few goods.
The other factor however may have a more lasting impact, which is the increase in the money supply: the sheer amount of money that is currently in our system, which has the effect of reducing the value of the dollar. This factor may take quite a bit longer to absorb…think several years.
So, while inflation is painful enough for us as consumers, we have to think more broadly about the impact on our investors, and this has added more credence to our view that we need to adjust our accepted thinking of the past 20-30 years:
We will now have to accept more “risk” in our investments in order to keep pace with inflation.
We have previously written about and discussed this idea, especially over the past couple of years: Our investments must keep pace with inflation, at a minimum. Will this be accomplished with Bonds, CDs, and Cash-instruments? Nope. What was previously considered “safe” is now subject to the almost forgotten Inflation Risk. Folks tend to focus on Market Risk or volatility and have been willing to accept lower returns to have more predictable or more certain returns. But those perceived safe-er returns now subject you to a virtual guarantee that your investments are losing value due to inflation. At the current rates of inflation, the target returns need to be between 5 and 6% on an annual basis.
But despite these issues that are associated with inflation in the near term, we are encouraged by the broad outlook of our economy and taken as a whole, things generally look good on the horizon. While not fiscally healthy, the seemingly unlimited funds Washington and the FED are creating and distributing to virtually every cause imaginable serve as a stimulus for the economy in the interim. And, as companies expend every effort to meet the unprecedented demand of consumers and businesses, profits and stock prices and dividends will increase accordingly.
