Inflation Nation: How to Prosper When Prices Rise
American consumers best brace for higher prices. And we’re not talking stock prices. Higher stock prices have become a daily feed to investors’ brokerage accounts.
We’re talking about higher prices for the goods they purchase.
President Trump’s recently signed executive order imposes stiff tariffs on imported washing machines and solar panels. The new ruling fulfills one of Trump’s campaign promises of putting America First.
The new order places a 20% tariff on the first 1.2 million washing machines imported and then jumps to a 50% tariff on units above that level. Imported solar panels are subject to a 30% tariff.
The goal of a tariff is to direct demand to homeland producers of goods. U.S. producers of washing machines have long been complaining that foreign companies have been “dumping” their product in the U.S. They rejoiced over the news.
Whirlpool (NYSE: WHR), who makes roughly five million washing machines per year, is the big winner here. Its stock, which was flat year-to-date before the news, rallied 11% on the tariff.
A Whirlpool representative noted last week, “This case is about enforcing trade laws that ensure fair competition among appliance companies and providing real benefits to consumers. An effective remedy will bring a variety of washer choices at affordable prices.”
But that joy may be short-lived.
Just one day later, South Korean washing machine manufacturer LG sent a letter to customers alerting them of a planned price increase to make up for the tariff.
“As a result of the trade situation, we will be initiating pricing actions, which will be sent under separate cover shortly,” Thomas Yoon, an executive at the South Korean manufacturer, told retailers.
I warned in early January that one of the most critical issues facing the U.S. economy would be higher prices. Higher prices equal inflation and inflation is the enemy of low interest rates.
There is a reason that Americans are enjoying lower prices for many goods. Solar prices are down 70% since 2010. Clothing prices are 3% lower than twenty years ago. The decline in trade barriers and the rise of the internet opened the gates for global trade which allows U.S. companies to buy their wares at lower costs.
Retailers like the Gap and manufacturers like Nike moved the bulk of their production and purchase orders overseas. As competitors switched production to super cheap sources of labor, those left with products “made in the USA” suffered and lost sales to lower-priced goods.
There’s no arguing that more jobs for U.S. citizens aren’t a good thing. However, the domestic economy is booming. Unemployment is at record lows. Wages are rising in response to strong labor demand. It’s unclear how much slack there is in the labor force to fill these new jobs.
If the noted tariffs stick, foreign companies will not be the only ones to suffer. U.S. based solar panel manufacturers are already fighting the tariff. They note that the U.S. makes very few solar panels and the higher price of imported panels will only hurt them.
The option of clearing out your garage and stockpiling washing machines and solar panels before the tariffs take effect is not very practical. Outside of this crazy idea, consumers have few ways avoid the higher prices.
Investors, however, do have some investment choices that might help.
One option is to move downstream. Look for public companies in the supply chain of the tariffed industries for winners and losers. Some speculate that steel may be the next industry seeking tariff relief. If so, U.S. auto manufacturers will see higher prices for the main ingredient in cars.
Another is to bet on the overall rate of inflation. Higher inflation may inspire the Fed to raise interest rates faster than expected. The stock market is chock full of ETFs that help investors bet on the direction of inflation.
Bonds, which move in the opposite direction of interest rates, are one vehicle to bet on or against if you’re trying to protect yourself from inflation. Buying the TBT ETF, which is a bet against the 10-year treasury is one play.
The ETF menu for bond plays is long and complicated. For risk seekers, there’s the TMV, an ETF which is a double bet against the 10-year bond. The chain of thinking goes like this- if the Fed raises interest rates, the value of bonds drops and any ETF betting against the 10-year treasury bond will rise.
Of course, these ETFs don’t track movements in bond prices perfectly, and any instrument that doubles the movement is the underlying security introduces a barrel of risk to your portfolio.
The upside is you won’t have all those washing machines and solar cells filling up your garage while you wait to sell them at higher prices.