Inflation : Real or a Head Fake?

May 21, 2021 | Jeremy Goldfarb


At its basest requirement, investing is a means to make sure that the dollar you have today, can buy a dollar’s worth of goods tomorrow. Basically insuring your purchasing power.


The same can be said for stocks that you buy. You are paying for future cash flows with today’s dollars. If those cash flows are reduced by increasing inflation, you may wish to reconsider how much you are willing to pay for them today…..When inflation is on the rise, this equation becomes harder.


So what’s really going on??? Thanks to a PAG macrominute this week, we can have a look


Corn: Near term futures are not much higher than those priced for later in the year. There are a few factors that are combining for the short term rise in prices…..drought in South America, more drivers on the road in the US (ethanol blend contents rising), and a rising demand from China as it replaces a stock of hogs lost prior to the pandemic.


Copper: does not appear shortage driven and spot and futures prices are closely aligned. That said, prices for the metal recently topped the 2011 high so something is happening. Chinese demand is up as they are further ahead on the pandemic recovery curve.


Lumber: Everyone is asking about this one.

Cheap money + helicopter money + supply shortage = EXPENSIVE

Sawmill production during the pandemic dropped significantly and despite the ramp up, we are still 15% short of pre-pandemic levels. This, combined with the other factors above gives you your answer. Maybe put that deck project on hold for now.


Oil and Gas: Prices here may look like they have gone through the roof, but on a relative basis, the cost of a barrel of oil is just shy of the average for the past 2 decades. Nothing to see here.



In a nutshell:

There are some very “transitory elements” to the inflation story, and despite it being difficult to do so, you need to look through the pandemic related impacts on pricing. With that said, I would not argue with anyone who wanted to start building inflation protection into portions of the portfolio. That is simply prudent risk management.