Weekly Email 05/03/2021

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Hello! 

Today is a quick read but an important one because unlike most of my newsletters, this one affects daily life, not just markets.

Warren Buffet joined the growing list of executives that are reporting serious levels of inflation as the economy recovers from COVID-19. The number of times inflation was mentioned in earnings calls this season tripled year-over-year. I’ve been ringing the inflation bell for the last two months, so let’s dive into what we’re seeing and what it means. 

The main victim of inflation: commodities. 

Lumber, copper, steel. Three of the most important base components of our economy are seeing massive increases in price. Lumber futures are up 31% in April, Copper is up 11.79%. Steel is the most impressive; since October 2020 the price of cold-rolled steel has nearly doubled (92% increase). These commodities are all a part of the Producer Price Index (PPI), which is different from the Consumer Price Index (CPI). If you were to google “inflation rate” the number you would see is the CPI. 

Inflation seems very low because the CPI is low. 

For the last 12-month period, the CPI has risen 2.6%, a historically low number. The issue is that the CPI masks the true inflation rate. For instance, the CPI does not capture the demand for energy components, which has risen 24.3% in the last 12 months. Energy, lumber, and base metals have driven a 7% rise in the PPI.  

This is important because the PPI is a leading indicator of CPI.

When it becomes more expensive to produce something, those costs are passed on to consumers. As Buffet said, the economy is “red-hot” right now and buyers are also driving up demand. We can expect much higher inflation rates for the next 12 months, and it may be enough to spook regulators (more on that next week). 

How you can react. 

If prices are going to go up, own the assets! At the very least, inflation is a great reason to hold as little cash as humanly possible. Rather than holding USD in a savings account, consider alternative currencies like the Swiss Franc (FXF). For our clients, we are recommending only three months of emergency reserves compared to the usual six months. The rest can and should be invested. Another great cash alternative is short-term TIPS. TIPS are inflation-protected US bonds and can be easily purchased through a fund like STIP or TIP.Please remember that this is not direct investment advice and is designed to educate you on the available alternatives. If you would like investment advice tailored to your personal portfolio, we are happy to help. Our Discovery Call is always free and that's probably all you'll need to confidently adjust your portfolio. If you're interested in how HC is hedging against inflation or the research we're doing on the topic, don't hesitate to reply to this email.Have a great week!  

Best,

Nate Hoskin, CFP®

Chief Investment Officer