Session # 7 My Biases–The Kort Party Line, Or How I See the Investment Landscape

BillAgain, I digress from the main point of this blog, calling the media and punditry on misleading, late to the table commentary and general fear mongering.  I thought it might be helpful for you to see where I am coming from and why I lean toward investing in stocks on a long term basis.

Deficits, easy Fed policy and government dysfunction are big problems.  The continued deficit spending and printing of money should be inflationary, and it will be very hard to take the punch bowl away as the economy continues to recover.  When you begin to withdraw liquidity, it will spook the market.  The dreaded “R” word (Recession) will get thrown around and, based on past experience, resolve to tackle the problem will weaken.  Politicians can’t stand the public’s pain.

Assuming nirvana and we had the resolve to do the tough cutting, there are other sources of inflation that I think may be coming our way that we cannot control.  I will list a few.

  • The rise of China and India:  We have been shipping Jobs to Asia for decades so we could buy cheap goods at Walmart with a secondary benefit of keeping pressure on wages in this country.  That ploy looks like it about ready to bite us in the rear end and this may already have started.   To wit, Chinese labor has been demanding and getting double digit wage increases, ergo those cheap goods at Walmart are getting more expensive.  As a benefit manufacturing jobs are beginning to return the U.S., which eventually should tighten our labor market making way for greater wage demands.
  • Asia Part II, the demand sid:  The middle classes in China and India are exploding and they want to live the good life just like you and me.  That means that they need lots of  steel, aluminum, copper and oil.  Remember there are about 320 million of us here in the good old USA.  There about 1.2 billion people in China.  Their middle class may be in excess of our total population and that does not even begin to contemplate India or the growth in both countries’ middle classes.  So there is huge and growing demand for goods that in the past the Western world had a lock on.  Again you have witnessed the rise in the price of oil and agricultural commodities over the past few years.  That is what the buying power of Asia looks like and it would appear that it is by no means over.
  • Finally a significant portion of the rest of the world is following in our footsteps and adopting more expansive monetary policies, which should also equate to inflationary pressure down the road

In the United States if you are a family of four earning $50,000 a year, you have already felt the pinch in higher food, energy and healthcare prices.  Inflation is real to you.

The important question here is what do you do, besides hunker down in the family bunker with your hoard of provisions and survival gear waiting for the revolution?

I believe the answer is that you have to own assets which will benefit from inflation/ debasing of the currency over time… farmland, commercial and residential real estate, commodities, collectibles and stocks.  I am agnostic to which of the above you use or in what mix you use them, but you need to own assets.

The corollary here is that it is not a time to lend money, as you will be paid back in a cheapened version of that which you lent.  It is a good time to borrow money  because, over time, you will be able to pay it back with cheaper dollars.  This is not to mention the fact that rates are extremely attractive and not likely to go much lower (i.e. a great time to buy a house on a 30 year fixed mortgage).   Finally, it is the case with all of these “to do” items that most people, over the last few years, have been scared away from them.  If you act along these lines many will tell you that you have “lost it”.  The fact is you will not have lost it,  you will have become a contrarian.

One caveat to my inflation bluster is if the government gets serious about our problems.  That, I would say, in the long run this might be taken as a pretty good positive by the markets. Frankly, I just don’t see the backbone or the ethics for these guys to stand up against the special interests and do the right thing.  As it pertains to their constituents they have made no real call for “shared sacrifice” and again probably don’t have the courage to ask those constituents to take a little pain for the greater good.

Lastly, you may ask “when?” on the inflation question.  To answer I will share a story.  At the Kort House, when I was growing up, our dinner conversations were not about sports, but rather current events, politics, the economy and stocks.  My dad, you see was a restaurateur/ stock trader who eventual became a stockbroker.  He had the “bug”.

I can vividly recall conversations about the Kennedy Administration’s proposal to cut taxes to stimulate the economy of the early 1960’s.  Dad felt it would not work, and would worsen our national debt problems (eventually leading to inflation).  Later in the decade as our involvement in Vietnam blossomed and The “Great Society” programs enacted after President Kennedy’s assassination went into effect, similar conversations occurred (re. how the “Guns and Butter” economy was going to drive us to inflation).   The inflation finally came in the early 70’s and did not start to abate for about ten years. For example houses purchased in the mid 60’s for $25,000 with 5 ¾% mortgages were selling for $50,000 in the mid 70’s; and baby boomers like me were buying them, financing them with 9 ½ % mortgages.

So, when and if inflation comes, some sort of equity asset position would seem prudent.  If you still can’t stomach the volatility (which really lessens if you adopt a longer term strategy), keep your debt maturities short.  If inflation rears its ugly head you will be amply rewarded for not chasing yield in longer-term or lower quality debt.  Personally I have a tough time reconciling owning any long duration debt when you can easily get 2%, 3%, 4% in high quality stocks where you have the potential for increasing price and dividends over time.

As I have stated before, these are my reasoned opinions based on a lifetime of experience, but they are not divinely guided.  This is food for thought in a 24/7 media world that rarely takes a long-term approach…a media world that scares and confuses.   I  hope to add some balance.

Your comments and questions are welcomed.

The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities.  I may,  from time to time, mention certain securities for illustrative purpose, names where I personally hold positions.  These are not meant to be construed as recommendations to BUY or SELL.  All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.

 

5 Responses

  1. Donna
    Donna February 17, 2013 at 3:23 pm | | Reply

    I love reading your blog! Keep them coming.

    1. wkort2
      wkort2 February 17, 2013 at 3:47 pm | | Reply

      Thanks for your comments and encouragement. This blog was created for people like yourself who had other things to do in life besides focus on the markets. I will continue to post because there is an unlimited amount of material out there to work with. Please share wit friends if you think appropriate.

  2. Tom
    Tom February 26, 2013 at 3:10 am | | Reply

    Re: Beat inflation by owning assets – including stocks. I understand that a share of stock represents a share of the company assets. The problem I see is that the price of the stock does not represent any intrinsic value of the assets but reflects the anticipated return on investment for the purchaser. When inflation rears, purchasers will require a greater return thus driving the stock price down. Can you give example(s) of a type of stock that would retain its value in the face of inflation?

    1. wkort2
      wkort2 February 26, 2013 at 4:09 am | | Reply

      The obvious ones would be commodity stocks. I think you have already witnessed that with oil, copper and ag commodities. REITs,charge higher rents and replacement costs on buildings soar. In a more subtle way inflation by its nature allows for pricing flexibility, which has been hard to come by over the past few years. Pricing (pricing above cost increases)plus organic growth equals higher EPS. Also the book value of many capital assets may actually understate the replacement value of those productive assets. Where you run into trouble with my reasoning is if inflation runs at such a rapid pace that it spikes returns on fixed income alternatives. Clearly 7%CPI inflation and 10% 10 year treasuries would not be good news for stocks. We have a way to go to get to that predicament, and as long as Ben Bernanke is Fed Chair, my belief is they err on side of ease…see kortsessions #9. Thank you for the question, I hope this helps.

    2. wkort2
      wkort2 February 26, 2013 at 5:16 am | | Reply

      You know Tom I reread your question and stocks do have intrinsic value. That is what security analysis tries to get at. Now the intrinsic value of the hard assets,intangibles and discounted earnings and cash flows are open to debate. That is what makes markets. But that piece of paper is backed by what the market at any point in time is willing to pay. The corner drug store has intrinsic value, which may be just as allusive in getting at as a stock. The big difference is you can’t get a quote on the drug store any micro-second that the stock market is opened.

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