To The Moon

Last month marked the highest level of inflation in 40 years as the Consumer Price Index (CPI), which is a broad measure of everyday goods and services soared 9.1% from a year ago. In economic terms, inflation refers to the general increase in the prices of goods and services in an economy. While a small but positive inflation rate is a good sign that an economy is growing, a high inflation rate is bad for consumers, businesses and investors as it erodes purchasing power and gross margins. As an investor, recognising the effects of inflation on the economy is key to my investment strategy and choosing which assets to invest in.

After watching the steady rise in inflation over the last couple of months, I began to realise that the macroeconomic environment has changed drastically from what we have been experiencing for the last twenty years. Ever since the dot com bubble, the Fed has adopted an ultra-loose monetary policy to stimulate demand and help the US economy recover from three financial crises (’00 dotcom crisis, ’08 housing crisis and ’20 Covid-19 pandemic). However, up until 2022, the Fed had not experienced a scenario where inflation has skyrocketed to such high levels driven by demand-supply dislocation in the markets. The last time inflation was this high was during the 1970s, during which a combination of high budget deficits, low interest rates, oil embargos and the collapse of managed currency rates were among the main causes of stagflation. Going forward, I believe that it will be extremely difficult for the Fed to curb without creating a huge dent on the US economy. Paul Volcker had to raise interest rates over 20%, causing a recession from 1980-1982 before interest rates in the US finally tumbled down.

As investors it is important to recognise changes in patterns and robustly adapt to challenges. I believe that inflation is likely to remain stubborn and therefore require the Fed to continue to raise interest rates in their attempts to curb inflation. Therefore, it would be sensible to invest in value over growth as companies with strong cash flows and profits are likely to be able to survive a recession compared to those without.

Historically commodities and real assets also tend to perform well and increase in value over time during periods of high inflation. On the contrary, financial assets such as equities and bonds tend to perform poorly after accounting for inflation. Therefore, I will be looking for opportunities to invest in real assets as a hedge against rising inflation.

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