Today we’re turning things over to our friend and colleague Mike Barrett from Stansberry Research…
At Stansberry, Mike and his colleague Dan Ferris publish the Extreme Value newsletter, in which they find great businesses trading at steep discounts.
Here we believe the inflation concerns are largely overblown… but these concerns still have investors and the markets spooked. So in today’s essay, we’re featuring a warning from Mike about it… and how he recommends preparing. Here’s Mike…
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On a recent trip to the grocery store, I saw more empty shelves than I can ever remember, while the price of what is there keeps going up…
I’m inclined to believe that America’s collective supply chains are ultimately a lot more fragile than any of us previously imagined.
The problems that the COVID-19 pandemic exposed will now be exacerbated by climate warming… And ultimately, all of this is inflationary.
Let’s also not forget the enormous capital spending that’s still ahead to mitigate global warming.
This too raises the prospects for inflation… Dozens of governments and corporations around the world have accepted the conclusions of climate experts who say the only way to limit further climate risks is to reduce additional greenhouse-gas emissions into the atmosphere to “net zero”…
Global consulting firm McKinsey estimates the capital spending required worldwide over the next 30 years to bring this to fruition would be $275 trillion… or roughly $9.2 trillion per year.
That works out to a spending increase of $3.5 trillion from current levels, or, says McKinsey…
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Half of global corporate profits, one-quarter of total tax revenue, and 7% of household spending.
In short, a mind-boggling amount of capital…
And much of that is devoted to building a world that runs on electricity generated by renewable sources, like solar and wind…
One likely result is much higher monthly electric bills… McKinsey estimates the cost to generate electricity could rise about 25% from 2020 until 2040.
That sounds bad, but it could ultimately be way too low of an estimate considering what’s happened in the U.K… In a recent Wall Street Journal op-ed, Bjorn Lomborg, president of the Copenhagen Consensus Center and a visiting fellow at Stanford University’s Hoover Institution, notes that U.K. real electricity prices have doubled since 2003 in conjunction with heavy annual climate-policy spending.
Jeremy Grantham, co-founder of Boston-based asset manager GMO, thinks the “Goldilocks” period of the past 25 years is now coming to an end… and that we should begin preparing for a future of inflation fueled by a warming climate.
As Grantham put it…
Climate change is coming with heavy floods, serious droughts, and higher temperatures ‒ none of these make farming easier. So, we’re going to live in a world of bottlenecks and shortages and price spikes everywhere.
I’m inclined to agree, which is why I believe climate warming is the mega-force that will steer inflation higher over the next decade…
So, what should you do about it?
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For starters, watch this excellent interview my colleague Dan Ferris did on the topic of inflation… Like me, Dan thinks it gets a lot worse from here.
Dan says…
The safe bet – the rational bet – is for significant inflation for a long time. And I’d much rather expect that and be wrong than the other way around.
To help you prepare for ongoing inflation, Dan has published an all-new special report… In it, you’ll learn about the carefully crafted 10-stock portfolio designed to perform through inflationary times and multiply the gains of ordinary defensive ideas.
You should also consider what Aswath Damodaran, a prominent professor of finance at New York University’s Stern School of Business, is teaching his students about inflation.
Professor Damodaran believes there is a very important distinction between “expected” and “unexpected” inflation…
For instance, even if inflation is high but generally predictable ‒ that is, expected ‒ investors can account for this by demanding higher returns and interest rates… And certain businesses can simply raise prices…
Key point… even when inflation is high, if this is the expectation, the reaction to it can be orderly.
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The bigger problem is unexpected inflation…
Unexpected inflation catches investors and business owners off guard.
This is what Dan and I believe investors should be preparing for… Damodaran explains it this way…
Unexpected inflation… leads to a reassessment of pricing (for all financial assets) and an uneven impact across businesses, leaving those with pricing power in a better position than those without that power.
In other words, when inflation is unexpected, the reaction can be abrupt… Investors are not pricing it in… The sudden surge in bond yields and recent implosion of high-flying tech stocks perfectly illustrate this.
Nobody can ever know for sure how bad unexpected inflation will get…
The point is to be prepared for it in advance, long before other investors price it into their expectations…
One way to do that is to own gold… According to Damodaran’s research, gold has delivered exceptional returns when inflation is greater than expected.
Specifically, he estimates that it has earned 46% annually since 1970 during periods when unexpected inflation was highest…
Dan’s inflation-beating portfolio includes gold, but it goes way beyond just owning physical bullion… One recommendation is a royalty on several million ounces of precious metals.
Unlike physical gold, this business gushes free cash flow and pays a regular dividend, giving it the kind of downside protection gold bullion can’t…
At the same time, it has dramatic upside potential when gold prices are rising ‒ and should vastly outperform gold if unexpected inflation soars…
The portfolio also includes two bullion-like recommendations that track precious metals pricing, though you’ll never need to take possession of any physical metals… You can buy and sell them both with just a few clicks.
Damodaran also believes you should own businesses with pricing power…
We agree ‒ particularly if you think unexpected inflation could become a problem… which is why Dan’s “10-Stock Inflation Protection Portfolio” is stuffed with these stocks as well.
I’d like to highlight one of them, which is particularly well positioned for a world of accelerated climate warming… It’s a kind of royalty on insurance premiums that doesn’t take on direct risk exposure.
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For some more perspective, the recent Marshall Fire was the most destructive catastrophe in Colorado history… It was one of 20 weather-related catastrophes in the U.S. last year in which losses exceeded $1 billion. The insurance-industry, credit-rating group AM Best estimates the losses from this single event will account for roughly 15% of all direct property premiums paid statewide last year.
There’s no doubt that property insurance premiums will be on the rise across Colorado as a result of the Marshall Fire devastation… If weather shocks occur in higher numbers in the years ahead, this is a story that will continue to play itself out ‒ and likely in other parts of the country too, not just Colorado.
And as premiums go higher, so will this elite company’s revenue, which has compounded growth at a 13% rate over the past 28 years… It’s an ideal stock for the climate-induced inflation era that is coming.
In summary, if you think inflation in general, and unexpected inflation in particular, is poised to rise in the years ahead… like I do… then it’s time to take action.
The best returns will be earned by investors who get in now, before others push the prices of the best inflation-beating investments much higher.
To learn more, click here now to watch Dan’s interview about “The 10-Stock Inflation Protection Portfolio.”
