ET Podcast #7 – Inflation Investing

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We’re going to Pack-source a slate of investment strategies for an inflationary world.

Here are five tentpoles to organize and support that effort, five sets of questions we must answer.

What should we think about …

1) US Treasuries?

2) US Housing Market?

3) Narrative of Central Bank Omnipotence?

4) Fiscal Policies and Inflation Expectations?

5) Real Assets and Abstracted Securities?

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  1. Good stuff. It’s hard to understate just how much, and at how many different levels, the economy has adapted to (or become dependent on?) deflation. My father started a copier dealership in the early 1970s, all the way into the mid 1980s, carrying a lot of inventory was a benefit. They would even look forward to manufacturer price increases. Back in the day, inventory had positive carry! When it comes to investing in equity, there is no substitute for savvy managers who are ready to adapt at the micro-level.

  2. Nice work! I am open minded about a regime shift in markets. My nagging doubt that seems to be glossed over and underlies all five tent poles is that four letter word we try to overlook. DEBT. It is why the Fed and their peers are backed into the corner of disallowing true price discovery. It is dismissed as a limiting feature of central bank omnipotence, AND when trumpeting the limitlessness of fiscal policy. If economies, businesses, and individuals all have actual limits on productive debt growth, then we can’t just assume financial markets will ignore the credit risk coming from leveraged businesses, real assets, and governments that will see lower market prices for their debt and equity when that risk flares again. We are told to look at the equity market cap and marvel, but look how much negative real yield leverage it took to achieve that outcome! If the equity is marked down, the debt remains. Look at corporate leverage, margin debt, government debt. Can they each grow as rapidly or at all in an inflationary world? If yield curve control is implemented, will the private sector credit system be incented to intermediate credit at a less steep yield curve?

    I don’t have the answer. But, every government and central bank play for every crisis of borrowing more and at lower rates may not work on this debt stack with the entire developed world already at the zero bound -and having priced all of the capital deployed since 2009 accordingly. The Achilles heel of the inflation vs deflation argument will hang on whether the next trillions in credit are conjured or destroyed. Meanwhile, credit today is priced as if inflation, central bank omnipotence, and fiscal policy will never waver. Something has to give.

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