Inflation Nation: Investing When Prices Soar
Ernest Hemingway wrote: “The first panacea for a mismanaged nation is inflation of the currency; the second is war.”
Right now, we’re afflicted by both inflation and war. The latest consumer price index (CPI) data came in hot. This inflation is being exacerbated by the Russia-Ukraine war.
On Tuesday, the U.S. Bureau of Labor Statistics reported that headline CPI jumped 8.5% in the year through March, the fastest inflation rate since 1981, driven by the soaring costs of energy and food. The indices for energy and food rose 32% and 8.8%, respectively, on a year-over-year basis.
The major culprit for these higher prices is the war in Eastern Europe. According to the Food and Agriculture Organization of the United Nations (FAO), Ukraine and Russia are major producers of wheat, barley and maize, accounting for an average combined share of 27%, 23%, and 15% of global exports between 2016 and 2020, respectively (see chart).
The United Nations World Food Programme recently warned that the Russia-Ukraine war is causing a food crisis “beyond anything we’ve seen since World War II.“ Ukraine is often referred to as the bread basket to the world, but those fertile fields are now part of a war zone.
Global food prices jumped to an all-time high in March, according to the FAO Food Price Index. The index, consisting of the average of five commodity group price indices, spiked to 159.3 points in March, representing a nearly 60% increase in food prices compared to the 2014-2016 base period.
However, in pre-market futures contracts Tuesday, U.S. stocks were trading in the green, as analysts bet that inflation is peaking. Investors are forward looking, which means that sometimes on Wall Street, bad news is interpreted (rightly or wrongly) as good news.
The benchmark 10-year Treasury yield currently hovers at 2.71%, a fresh three-year high. Growth and tech stocks, which led the market when they were shored up by historically low interest rates, have lost momentum since late March on indications from the Federal Reserve that it will boost rates more aggressively to rein in surging inflation.
Some analysts are warning that “stagflation” awaits around the corner. To break stagflation’s back during Ronald Reagan’s first term, famous Fed Chair Paul Volcker hiked interest rates to unprecedented levels. In 1981 the federal funds rate peaked at 20% and the prime rate rose to 21.5%.
I think we’re unlikely to see such a scenario again. The consensus among objective economists is that inflation will start to cool off in the latter part of 2022.
That said, the Fed historically has been slow to pull the trigger on increasing interest rates, contributing to the formation of bubbles in the economy. Last week, St. Louis Fed President James Bullard stated that the Fed is “behind the curve” when it comes to interest rates.
The primary policy tool at the Fed’s disposal for addressing inflationary pressures is interest rates, a lever the central bank is now aggressively wielding. As the Fed gets more hawkish, your portfolio needs protection.
Hedging your bets…
Make sure your portfolio’s hedges sleeve contains hard assets, such as gold. As the Fed beats a hasty retreat from quantitative easing thanks to hotter inflation, you should look to gold as a safe haven.
The value of gold tends to increase as the purchasing power of the dollar declines. My preferred way to profit from increases in gold prices is through small-cap miners that put corporate operating leverage to work.
Our investment team has just pinpointed a junior gold mining stock that’s poised for exponential gains. If you act now, this small-cap company could hand you exponential gains. It’s an unbeatable combination: outsized growth plus inflation protection. For details on this under-the-radar gold stock, click here.
John Persinos is the editorial director of Investing Daily.