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David Chulak
David Chulak
Articles (77) 

Inflation Is Coming, Inflation Is Coming!!

March 17, 2014 | About:

Most know about the famous story of Paul Revere, the colonial patriot that rode from Boston to warn that the British troops were advancing upon the cities. Revere was the son of a silversmith and eventually was successful after the war as a silversmith himself. He also built the first copper mill and designed the original Continental currency. Less known is that Revere was with two other men on that famous ride, Samuel Prescott and William Dawes, who seem to appear only as footnotes in history, and are left out of the famous poem of that historic journey.

Revere was captured before he could reach Concord, while it was Samuel Prescott that was actually the one able to complete the journey to Concord and warn the colonists. It is most probable that Revere and his compatriots actually yelled either, “The soldiers are coming” or “The redcoats are coming.” They were all mostly British, so to yell "The British are coming” would have perplexed all that heard the cry.

Today we are hearing similar cries from many corners that inflation is coming and is upon us due to the massive amount of money printed by the Fed over the last several years. Certainly for every 10 economists you will get 10 different responses to that question. What is certain is that inflation statistics are manipulated more than ever today, perhaps taking a cue from the Fed’s program of unofficial Orwellian doublespeak. For those that don’t recall Orwell’s doublespeak, it is having the capacity to hold two separate ideas or concepts that are contradictory and yet believe that both are true. This is fashionable in Washington these days, and it is not limited to one political party. The sad thing is that most accept it without a critical thought.

Investors that refer to themselves as “value investors” are familiar with Benjamin Graham’s classic, "The Intelligent Investor." Re-reading this book occasionally to immerse myself in some of Graham’s wisdom, I have found myself skipping over some of the chapters that do not seem as relevant as they once were. Chapter two of Graham’s, "The Intelligent Investor," comes to mind which is entitled, The Investor and Inflation.” That seems to be further reinforced by the fact that one scarcely finds an article based upon this chapter. Recently, that particular chapter piqued my interest mostly due to the general acknowledgement that inflation is, in fact, coming… even if it’s a little at a time.

Graham appears to conclude the short chapter with a few key thoughts:

  1. Investors should not always put their money exclusively in stocks, stating that ownership of real estate can be a decent inflationary hedge. It’s doubtful that Graham considered that the Fed would be pumping up real estate by purchasing mortgaged-back securities when he made that remark. Today, one must remain cautious in what appears to be another bubble in the making. With that said, REITS have performed admirably if chosen carefully.
  2. He asserts that stocks are definitely the safest hedge and he gives little attention to precious metals as an inflationary hedge.
  3. He concludes with, “But the possibility of large-scale inflation remains and the investor must carry some insurance against it.”

Graham may have also supported the concept of Treasury Inflation-Protected Securities or TIPS, however; while they go up as inflation rises, they are tied to the CPI, a number which has been manipulated. This is the same concern for our seniors because Social Security is also tied to that CPI number. The endeavor to keep that number down as they have leaves virtually no increase in Social Security for the elderly and minimizes the benefit of TIPS.

Today, it would be wise to listen to the likes of Seth Klarman (Trades, Portfolio) who has returned nearly $4 billion of his fund and is sitting on 40% cash. Listen to Howard Marks (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) or James Montier and you will conclude that some serious times are ahead of us, even while there are “cheerleaders” telling us to buy more! Klarman recently noted, “On almost any metric, the US equity market is historically quite expensive. A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock valuations of fashionable companies like Netflix and Tesla Motors.”

Klarman also warns of buying on dips as we are often urged to do. Klarman's, Buy the dips,” will be supplanted by, “What was I thinking?” "Few if any will escape unscathed:” If that isn’t a clear and certain warning, we are fools.

In March of 2011, GuruFocus featured an article in which Prem Watsa (Trades, Portfolio) was preparing for deflation, while Seth Klarman (Trades, Portfolio) was seeking protection from inflation. They both may get their wish, but either way, we understand that trouble is ahead.

So how bad is inflation? First we must understand the extent to which it eats away at our paychecks. For instance, in 2011, AOL’s Daily Finance ran an article where they reported that down-sized packaging was the current trend in seeking to raise prices without the consumer being fully aware. For instance, Kellogg’s (K) has reduced the content of their cereal by 15%, Heinz Ketchup (HNZ) had reduced the content by 11% and Frito-Lay products by Pepsi (PEP) reducing their air-filled goodies from 12.5% to 20%.

Below are two charts that indicate the amount our currency has been devalued through inflationary measures. The first is from 1913 when the Fed was created to 2014; the second shows a cumulative rate of inflation of nearly 36% since the year 2000.

While the Fed continues to print, we must recognize that even if their accepted range of 2% to 3% inflation stays at that rate, the dollar will lose nearly 75% of its value over a typical life. If it goes beyond that, it could get ugly quite quickly.

Inflation is coming, and now. It may get worse — a lot worse for those that remember the 1970s.

Like the beckoning of Revere, we have modern day heroes that are warning us that inflation is coming and to be extremely cautious and sit in some cash, hedge your portfolio and be wise in your choices during the difficult times ahead.

Disclosure: None

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

Rating: 3.5/5 (2 votes)



Snaggletooth - 3 years ago    Report SPAM

Blah blah blah. What is the author's remedy ? What new idea is here ? Instead it is same old restatement of 'the problem' in other people's words. After suggesting MBS buying actually makes real estate the wrong move, about all the author can seem to suggest, in his own words, is going to cash. This after agonizing over the 1970's ... ? An attempt to actually backup this inflationary end-of-times rant with evidence is founded upon a 2011 AOL blurb. After reading, "... Frito-Lay products by Pepsi (PEP) reducing their air-filled goodies from 12.5% to 20%", we are supposed to be convinced PEP food chemistry is the harbinger of doom ? As for buying stocks, that was copied from another author, so it hardly suggests much in the way of conviction on behalf of Mr. Chulak. No Ideas here, nothing original. Just a broken watch waiting and longing for the time it will be right for just a moment ...

Batbeer2 premium member - 3 years ago

>> Inflation is coming, and now. It may get worse — a lot worse for those that remember the 1970s.

Last week, I was reading an article about how the Chinese economy was "destroying the price of copper" and other commodities. So which is it? Is a deteriorating Chinese economy going to drive down the price of everything or is there going to be inflation?

You can't have both.

Given a choice, I'd rather be born today than in 1913. In general, less work gets me more wealth than I ever could have had a century ago.

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