Stagflation Back in the Headlines

Google Trends: Stagflation

Stagflation is growing in popularity lately. You'll note that the popularity began about the point I started my blog back in August of last year. I assume that you're telling two friends, they're telling two friends, and so on, and so on. You know, because the universe revolves around me, this blog, and what not. As much as I'd like to think that, unfortunately I think it is more likely that the country really is in trouble and I'm just one of the many meager ants pointing out the massive magnifying glass over our ant hill. Of course, the bullish contrarians would argue that since everyone has finally begun to notice, the danger has passed and it is time to invest in flammables.

Melvin: Patience Is Key During Stagflation

So what do we do in this type of environment? Let s look at the last time we had stagflation. The obvious play is commodities, but they have had such a run, that I am too much of a chicken to buy them. A lot of people got rich in the commodities markets the last time we had stagflation. A lot of them went broke, as well. If I want to lose that much money that fast, I will get married again! Warren Buffett and a lot of other value investors got very rich back then by being patient and buying stocks at ridiculous prices compared to their asset values. I think we will get the same chance again.

I thought I had the chicken market cornered. It seems I am not alone though. The obvious plays tend not to work so well long-term. I can say with utmost certainty that it did not feel like a sure thing when I bought commodities in 2004. I was scared to buy and scared not to buy. I felt the same way when I sold in 2006.

Markets are constantly in a state of uncertainty and flux and money is make by discounting the obvious and betting on the unexpected. - George Soros

Toilet paper and canned goods I'm tellin' ya. Both are still cheap historically. Further, even if you are wrong you can flush them down the drain and/or eat your losses. No big deal. It seems the obvious play when you expect stubborn inflation, slowing growth, and raw commodities have already had such a run. Barring that and/or assuming you have billions of dollars just lying around waiting for better than toilet paper opportunities like so many others these days it seems, well, good luck! Come to think of it, maybe billions of dollars just lying around waiting for opportunities is part of the problem. There sure seems like a lot of money in the hands of people who don't give much thought to $4 gasoline. It isn't like a billionaire puts 3% of his income in his gas tank each year. Fortunately, he doesn't put 3% of his income directly into toilet paper and canned goods purchases either (that's why they are relatively cheap still).

Of course, if you think the recent meteoric rise in commodities (oil doubling in the last year) might actually lead to a bit of headline CPI inflation in the future (stranger things have happened), there's always TIPS. I'm just saying that the last time we had stagflation real interest rates (after inflation) of all durations turned negative. You could not earn money off of money (after inflation, much less taxes). Since TIPS do best with falling real interest rates, well... I've probably already said too much.

Further, if you think headline CPI inflation is baked-in even if commodity prices remain level, then TIPS would capture that inflation. That is and has been my thinking anyway.

This is not investment advice. I'm simply saying what I have done, as a chicken and a hoarder of frozen chickens (birds of a feather flock together). It seems we are long past the no harm, no foul salad days and well into the more harm, more fowl hoarding days. It wouldn't be the first time.

Salad Days (1971)