There’s a lot of hubris in the air. Despite the fact that the election is a mere one month behind us, it seems as if America is “great again” – or, at least, that is the spirit. The stock market is responding with a bullish advance, headlines such as the Carrier deal are adding fuel to the fire, and Twitter, despite it’s horrific stock action, is the platform du jour by which our president-elect wants to relay tough talk on such things as currency manipulation and unfair trade deals. As a small business owner and investment manager, I’m all for the good vibes and holiday spirit but, at the same time, this “ain’t my first rodeo.” I’m not trying to be a Debbie Downer, but all this greatness will have its side effects.
Let’s speak in generalities.
For decades Chinese manufacturers have been able to send us their products for almost no additional fee other than shipping. Sure, it costs a pretty penny to load a cargo liner but America’s consumer demand for such goods supported the imports. Box stores, like Wal-Mart, created a business out of stocking these low cost products and eventually “American made” became a thing of the past. Many still scratch their heads over this; so, let’s dig even further.
Let’s say you own a chair manufacturing company. Over one hundred years ago searching for a better life in America, your great-grandfather brought his craft from Ireland. He had always made chairs; so, he continued to do so in order to provide for his family. Over the years, the next generation got involved and throughout the next few decades the chair business grew and grew. In the 90’s, however, something changed. All of a sudden, very inexpensive chairs were being manufactured in China and shipped to the US. As successor, you scoffed at such a thing since the quality wasn’t even close to the craftsmanship of your chair. To your surprise, consumers didn’t care. The 40% or even 50% price difference resulted in shrinking sales year after year. At this point, you had to make a decision; shut down or move your manufacturing overseas, to save on labor, and compete with these low cost Asian companies. You chose the later. Boom! Overnight, you were back in business. Sure, the quality wasn’t the same but the brand was still strong and you were able to stay alive. It was either adjust or go out of business. You adjusted.
Now we’re at a crossroads in our country because the above scenario has been repeated to the point where manufacturing jobs in the US are obsolete. Sure, there are the exceptions here and there; but, on the grand scale, it is not even close to where it was just a few decades ago.
So, how does one change that? We don’t just wake up one day and say, “We’re going to make manufacturing great again.” Nope, not at all. In order to bring manufacturing jobs back to the US we have to somehow make the end product competitive with what is coming in from Asia. Let’s go back to our chair example.
If a chair coming in from Asia costs $50.00 and a chair manufactured in the US costs $100.00, do you think that – all of a sudden – the US manufacturer will be able to cut the cost down to $50 in order to compete? Absolutely not because wages are still the same if not higher, healthcare costs are on the rise, raw materials are up and utilities still need to be paid in order to operate the plant. The simple fact is that there is no way the US manufacturer can compete with the Asian producer while the labor price alone is several dollars apart. So, in order for the end product to be the same in price, the trade deal that allows that Asian manufacturer to ship products into the US for no cost will have to be re-evaluated. Not gonna fly? Then, how about a straight tariff or an additional tax?
It’s at this point that the guy behind the microphone talks tough about these ideas and the hubris is flowing so that everyone chants along. Ah-Mer-I-Ca! Ah-Mer-I-Ca!In reality, what you can anticipate are much higher prices coming down the pike. You see, there is only one way for that chair manufacturer to compete and that is if the chair coming into the US is the same price as the one made in the US. This, my friends, is called inflation.
What is coming down the pike at us is one of the clearest pictures I have ever seen. Price elevation, to the point of eroding purchasing power, is the story that no one seems to be talking about.
So, what do you do about it? Well, as the title suggests, there is only one way to keep up with inflation and that is to grow your money accordingly.
Over the years investors have grown accustomed to low inflation, low interest rates and modest returns on our money. This is all going to change. We’re ushering in higher interest rates, much higher inflation and the result will be higher asset prices.
You ask, “What does this mean for the stock market?” Well, certain areas of the market are poised to go higher, much higher. Areas that move with inflation are the areas we see the most opportunity in and where an investor has to be concentrated. Purchasing power will go down, but asset classes will rise. Real estate is “toast” and bonds are going lower. The crowds who have moved into real estate, hoping for consistent steady returns, will be shocked to see their asset levels decline as interest rates and inflation make mortgage payments for home buyers and rental payments for tenants much harder to come by. If you’re a buyer of real estate right now, I ask you to think twice.
Those folks, hiding in bonds, will have a rude awakening as they watch their mutual fund decline; and, those tucked into a passive allocation of index funds will see a modest nominal returns, and negative real returns.
Inflation correlated assets, however…, just as we’ve seen in the last several weeks will be all the rage and will enter their own bubble. Sure, eventually the party will become overcrowded and it will be time to exit, but if this were a 9 inning game, we’re in the bottom of the 1st.
Sure, you can hide out and hope that inflation doesn’t eat into your savings; or, you can wake up, see what’s coming and realize that your best defense in this scenario is making sure you’re attacking with a strong offense. It’s coming. I’m not sure many advisers even know what all this means- much less, know where to add value going forward. We do and I’m honored to be working for you through this unique time.