Just don't assume that rising prices lead to rising interest rates. All the price hikes of the 40s and 50s were accompanied by record low interest rates. Savers got hosed bigtime. You got zero return while prices of everything shot past you. The only thing worse than shorting bonds was buying them. Meanwhile, the low interest rates meant little competition for stocks.
ttrader.com
So, if you expect the increases in inflation to lead to higher interest rates, don't count on it. As bizarre as it might seem, both buying or shorting bonds was a bad strategy back then. In either strategy you end up holding government liabilities, it's just a matter of whether it's short term or long term. Only way out of that is if you could have had the flexibility to invest the shorted proceeds in something that actually tracked the inflation - commodities directly. That could repeat. Interest rates may fall even as inflation is increasing. Sure, you might pick up a little capital gain on the bonds, but it will be more than lost to inflation. But if the economy weakens from here, even commodities will fall. The only thing that will remain is the lagged effect of the earlier inflation coming through in labor costs.
Exactly how does one profit from rising labor costs, the lagged effect of commodity price increases? Well, unless you're selling labor, you're pretty well hosed. I can't think of any financial investment that you can make that tracks either wage inflation or services inflation. When labor begins taking a bigger chunk of the pie, it pretty much comes at the expense of financial assets in general. I think we're entering a period where getting a positive return on financial assets may be virtually impossible. Real estate prices falling, emerging markets and commodity prices falling due to weakening economic activity, bond yields not keeping up with inflation, and stagnant stock prices due to offsetting pressures from reduced profitability and the inflation-hedge properties of corporate revenue.
If you have bothered to save, you lose. Too bad for us.
My personal hope is that the Fed does actually keep price increases in check, and the unwinding of all the bad debts does lead to a loss of corporate profitability such that stock short sales will be a profitable strategy. However, sector selection is likely to be vital. Shorts against housing, retail, construction capex, financials, and capital intensive industries like semiconductors should do well, while anything else that can be propped up (defensive themes) may actually rise.
BC |
