Inflation Escalator

Macro Perspectives: Tue 4 Mar 2021

The inflation evidence continues to appear, with soaring key asset prices (like stocks, real estate, collectibles, commodities). But the strategists, economists and politicians continue to debate it - much of the debate is driven by the Fed's unwillingness to publicly acknowledge it.

With that, we had another hot inflation data point yesterday: The prices paid component of the ISM manufacturing report was the highest since 2008.

As we've discussed, to counter the rising prices, we will have to see higher wages. The government has already created the glide path for it, by subsidising unemployment checks over the past year with Federal money - establishing a new living wage. Depending on which state you live in, that federally subsidised living wage is now between $18 and $27 an hour, significantly above the $7.25 current federal minimum wage.

So wages are going higher and it will be broad based. But will quality of life follow suit (higher)?

For now, people are feeling richer, with bigger paychecks (bigger bank accounts) and rising asset values. But as Warren Buffet said back in his 1980 investor letter, when inflation was running at double-digits, "you may feel richer, but you won't eat richer."

Here's how he described the inflation impact for investors in 1980: "High rates of inflation create a tax on capital that makes much corporate investment unwise - at least if measured by the criterion of a positive real investment return to owners. This 'hurdle rate' the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners - has increased dramatically in recent years. The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil."

What do you do now to win the race against the inflation escalator?

Value ETF’s ($IWD) might prove to be a decent starting point.