Ask Chuck: Is runaway inflation coming to America?

Dear Chuck,

Do you think we are heading towards runaway inflation? If so, how should I prepare financially? 

Inflation Fears

Dear Inflation Fears, 

Any commentary on the state of the economy is like commenting on the water level in a river— it is an ever-changing dynamic. So, whatever is said is likely to be wrong within minutes, hours, or, certainly, days. In spite of this, general trends and specific directional observations may prove helpful.

Since inflation is on everyone’s mind, allow me to paraphrase Shakespeare’s character, Hamlet: “Inflation or No Inflation? That is the question.”

While economists and central bankers prefer a low level of controlled inflation, it is a very difficult scenario to achieve. Needed to create economic growth, inflation can negatively impact other areas, like the federal debt. Managing inflation requires the precision of a brain surgeon operating aboard a ship that is rocking back and forth in a stormy sea.

One thing I have learned about investing in public securities (stocks and bonds) is how emotion drives value from one day to another. Stocks drop with fear and danger, rise with optimism, and rotate with foreseeable trends. Investors shift in anticipation of economic winds. As Wayne Gretzky famously said, they are attempting to “skate to where the puck will be.”

The best way to answer your question is to give you the three prevailing viewpoints from very capable, professional investors. Here is the general spectrum on the topic of inflation: Yes, it is coming and fast; No, it is under control by the Fed; and It could go either way. 

Inflation and/or Hyperinflation is Coming

Dr. Michael J. Burry – Investor, Hedge Fund Manager, Physician; featured in The Big Short

A recent article explains that Dr. Michael Burry, in his recent tweets, spoke of current modern monetary theory policies with a quickly growing debt-to-GDP ratio along with more stimulus and the re-opening of the economy. He said, “...employee and supply chain costs (will) skyrocket.” He expects a market crash within months.

Warren Buffet – CEO of Berkshire Hathaway; considered one of the most successful investors in the world 

In a current YouTube video, Buffet says, “The best businesses that will perform the best are the ones that require little capital investment to facilitate inflationary growth and that have strong positions that allow them to increase prices with inflation.”

Ray Dalio – Founder and Co-CIO of Bridgewater Associates; one of the top investment managers in the world 

Dalio spoke at the opening panel of the Future Investment Initiative, saying, “We will see a rebound in growth and a rebound in inflation.” 

Larry Fink – Chairman and CEO of BlackRock, the largest investment fund in the world 

“I think we are going to have a huge amount of job creation, but all these elements are highly potentially inflationary,” Fink predicted. “It is fair to assume we are going back into an era of growing inflation.”

Inflation is Not Coming

While businesses are already raising prices and seeing inflationary headwinds, the Fed disagrees. A recent Washington Post article says, “The Fed’s view is that the long-term forces keeping inflation low for the past decade and more are still at work, while the economy still has a way to go before completing its pandemic recovery.”

Middle of the Road — Maybe, Maybe Not

John Mauldin – Widely Recognized Financial Writer, Publisher, and Best-Selling Author

Mauldin says that the current bull market is a perfect cash-flow storm because of the following:

• New investors are using stimulus money for whatever makes them feel good.
• Bored gamblers are looking for action.
• Large institutions are brimming with Fed liquidity.
• Investors are chasing momentum.

In a different, not-so-bullish article, Mauldin explains that he thinks we will see both inflation and deflation. He adds, “If we get even a modest recovery in the COVID numbers, we clearly could see some short-term ‘inflation’ in annual data… It won’t last… The debt burden will cap growth enough to keep the inflation mild.”

What to Do Now

While difficult to predict, due to a number of factors, the majority of high-profile investors seem to think that inflation is imminent. As one article summarizes: “Increasing inflation can be caused by increases in the supply of money, increased access to credit, or demand that outstrips supply. In reality, inflation is usually caused by all or a combination of these factors.” Only time will tell.

To be prepared, be sure you are following these timeless investment principles:  

Diversify – This means having investments in asset classes that can benefit from inflation, such as commodities and hard assets like real estate and precious metals, etc. 

Get Debt Free –Your flexibility to adapt to a changing economy is improved when you are no longer shackled with debt, especially consumer debt like credit cards, automobile loans, and student loans. 

Increase Financial Margin – If you spend less than you earn each month and increase your savings, you will reduce your stress, be in a position to navigate rising costs, and be able to take advantage of new opportunities. 

Don’t Try to Predict the Future – The Bible makes it clear that no one knows the future. Many investors try to convince us that they do. Follow God’s financial principles, and stay the course.  

“Steady plodding brings prosperity; hasty speculation brings poverty.” (Proverbs 21:5 TLB)