Tag Archives: inflation

Inflation: What is Normal?

Posted By |
Outcome Metric Asset Management public domain CC0

By Noah Solomon

Special to the Financial Independence Hub

Just as beauty is in the eye of the beholder, what one considers normal depends on their perspective. One of the single largest contributors to booms and busts is the tendency of investors to suffer periodic bouts of long-term memory loss. During such episodes, people view recent market dynamics as being normal, regardless of whether such behavior is an aberration from a long-term historical perspective.

We cannot understate the degree to which the economic and investment climate that has prevailed since the global financial crisis of 2008 has deviated from its long-term historical norm. It is challenging to identify any other time in history when financial markets have been as influenced by ultra-low interest rates and vast amounts of fiscal stimulus.

Given the unprecedentedly powerful “wind” of governments and central banks at their back, it is no surprise that the best strategies for investors have been:
• Buy almost anything – stocks, bonds, real estate, cryptocurrencies, art, etc. (take your pick, it’s all good!).
• Buy even more during dips, which consistently proved to be good buying opportunities.
• Use maximum leverage to turbocharge buying power and returns.
It is fair to say that there by the grace of the authorities have gone corporate profits, asset prices, and investor portfolios!

The Phillips Curve has been sleeping, but it’s not Dead

The Phillips curve is an economic concept developed by A. W. Phillips, which describes the relationship between inflation and unemployment. The theory holds that there is an inverse tradeoff between the two variables. All else being equal, lower unemployment leads to higher inflation, while higher unemployment is associated with lower inflation.

Phillip’s theory proved largely resilient for most of the postwar era. Until recently, the one notable exception occurred in the early 1970s, when OPEC issued an embargo against Western countries, resulting in stagflation (both high inflation and high unemployment).

The second aberration covers the time between the global financial crisis of 2008 and mid-2021. Until rearing its head several months ago, the inflation genie has been dormant. It has calmly remained in its bottle in the face of monetary and fiscal conditions that in times past would have caused it to bust out full of fire and brimstone!

The combination of low unemployment and tame inflation provided a goldilocks backdrop for corporate profits and asset prices. But, to steal the tagline from Jaws 2, “Just when you thought it was safe to go back in the water,” inflation has returned, prompting central banks to slam on the brakes. This has changed the landscape in ways that have and likely will continue to have far reaching implications for investors’ portfolios.

The Kazillion Dollar Question

The laws of supply and demand can vary in terms of timing, but they cannot be eradicated. You can either eat your entire cake all at once or piece by piece over time. You can’t do both. The free money, one-way asset prices, all-you-can-eat risk party that has been raging since the global financial crisis of 2008 has given way to today’s hangover of rising inflation, higher interest rates, falling stock prices, and risk-aversion.

The kazillion dollar question is whether the current market malaise is merely a garden variety hangover involving Advil (i.e., a mild and short-lived bear market), or a case of alcohol poisoning that will entail a trip to the emergency room (a severe and long-lasting bear market).

Japan’s Addiction

Without a doubt, there are vast structural, economic, demographic, and political differences between Western economies and that of Japan. Nonetheless, the Japanese experience serves as a small “w” warning of the potential consequences when extreme levels of monetary stimulus are applied for an extended period. Continue Reading…

Recession or Stagflation?

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Many economists and market experts are suggesting that the outcome for 2022 and into 2023 might be that we experience a recession or stagflation. That’s not a good choice we might think. And of the two ‘options’, we might prefer a recession. A recession might do enough to quell inflation. And we do have to stomp out inflation hard the first time. That is, central bankers have to raise rates aggressively enough to hurt the consumer enough to reduce demand and get inflation well under control. If they let inflation fester, it may resurface and cause even more trouble as it did in the 1970’s stagflation era. Recession or stagflation, who knows what we will get. The idea is to be aware and prepared.

Recession or stagflation?

In the Globe & Mail (paywall) Ian McGugen asked the question: What comes next: stagflation or recession?

Given that it may be the very unfortunate war in Ukraine that pushes us over the edge I suggested that a Russcession is coming. From Ian …

As anyone who has read a bear-market headline has gathered by now, the economic outlook is turning ugly. The question that lingers is just what form of ugliness it will take.

In one scenario, soaring interest rates and climbing oil prices clobber the economy, leading to a painful but short recession that stamps out today’s roaring inflation.

In another scenario, a recession may be averted, but inflation isn’t. The economy stumbles along in a stagflationary funk as rising prices continue to ransack consumers’ wallets.

Of course, we don’t know what we’re going to get. We can also add a soft (economic) landing in the mix. The central bankers raise rates and make enough noise to spook the consumer enough to bring down inflation while not creating a recession. Or perhaps we get a soft and quick recesssion? Who knows? Nobody knows.

That’s why we prepare for the the unknown, for a future that we do not know.

A must read: the new balanced portfolio.

The history of bears and corrections

Here is a post that looks at the history of stock market corrections and bear markets (a correction of 20% or more). As of this writing (originally in mid June) U.S. stocks recently tipped into bear market territory. Canadian stocks are now in correction mode (down 10% or more).

It is important to be aware of the potential for portfolio decline, and also to know how long you might have to grin and bear it as you buy stocks on the way down.

And yes, if you’re in the accumulation stage, you’re a buyer. Building wealth can be and should be super easy, but it can be emotionally taxing. Maybe a better way to frame it is that building wealth is super easy, keeping that wealth is not so easy.

Stock market corrections and bear markets are wealth building turning points. We need to hang on to our past gains (don’t sell). Corrections and lower stock prices are wonderful long-term wealth building opportunities. Some of the best buying opportunites are offered during corrections and bear markets.

Not cheap, yet?

And sure, U.S. stocks are not that cheap. From Scott Barlow, citing a Goldman Sach’s report: Despite the 18% YTD S&P 500 decline, equity valuations remain far from depressed. The median S&P 500 constituent’s P/E ratio of 18x ranks in the 87th percentile since 1976. For context, in March 2020 the median stock’s P/E was 14x .

Translation: at current valuations, U.S. stocks were still more expensive only 13% of the time, from 1976. That said, it is near impossible to time the markets. The dollar cost averager will find very good value along the way. The dollar cost averager will be buying at the market bottoms and will be lowering their average cost per share.

And recently I offered that Canadian stocks are looking good with respect to valuations.

And how about international markets?

Keep buying.

The upside of rising rates

Our savings account rates and bond yieds will increase. They are increasing. At EQ Bank many GICs are now above 3% and even 4%.

Stocks are looking better but there may be more pain to come. Continue Reading…

How Inflation-fighting ETFs have fared

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Last Summer, Rob Carrick at the Globe and Mail asked a few major ETF providers to offer up some inflation protection. In a recent post Rob delivered the inflation-fighting ETF scorecard. There are a couple of obvious winners and a few head-scratching ETFs offered up as inflation-fighters. Here’s the inflation-fighting scorecard, plus the Sunday Reads.

Here’s the post (paywall) on the Globe & Mail.

And let’s get straight to the goods. It is no suprise that oil and gas stocks led the way. That is the only sector that provides consistent inflation coverage. Also, base metals are doing their thing. Gold is solid. Vanguard offered up a balanced portfolio (insert WTF emoji face) as an inflation fighter. And they do that after ignoring their own research on inflation and assets.

Drum roll … and the results Continue Reading…

Identifying Opportunities through Infrastructure

Posted By |
Image Franklin Templeton/iStock

By Shane Hurst

Managing Director, Portfolio Manager,

ClearBridge Investments, part of Franklin Templeton

(Sponsor Content)

Last month, I wrote in Financial Independence Hub about infrastructure as an asset class and the opportunities it can provide for both retail and institutional investors.

I would like to follow up on this by explaining the process we use at ClearBridge Investments, and specifically the approach we take with the Franklin ClearBridge Sustainable Global Infrastructure Income strategy.

Our Global Infrastructure Income team is based In Sydney, Australia and manages funds in the U.S., U.K, Australia, Europe and Canada. Having launched in 2010, the strategy has built assets under management of US$4 billion.1

With inflation at multi-decade highs, war in Ukraine, not to mention the ongoing pandemic, risk management is front of mind for many investors. Adding infrastructure to a balanced portfolio of global equities and fixed income is designed to increase returns while decreasing risk.

Expertise in Infrastructure

Years of experience in the infrastructure space has allowed the ClearBridge team to develop the expertise required to select companies that are best placed to prosper over the long run.

With backgrounds in M&A and unlisted infrastructure, debt and equity financing, buy and sell trading, as well as government and regulation, the team constructs a portfolio of 30–60 listed companies where excess return, yield quality and risk assessment drive position sizing. Given that this is a sustainable fund, ESG integration is another crucial element, as it is for the firm overall: ClearBridge Investments was an early signatory to the UN Principles for Responsible Investment back in 2008.

Companies positioned to Succeed

In building the portfolio, the investment team scans the globe for high-quality, listed companies that are positioned to meet the strategy’s income and growth goals. Nextera Energy is one such firm. The largest renewable energy producer in the U.S., Nextera is made up of the parent company Nextera Inc., which owns a regulated utilities company in Florida, as well as Nextera Energy Partners, a yield-oriented renewables vehicle.

The firm’s renewables deployment is expected to increase by more than 50% over the next three years, so it is well placed to benefit from the move towards net-zero carbon emissions across the global economy. Nextera’s strong market position also provides competitive advantages that are driving equity returns that are well above the cost of capital, while its long-term contracts are supporting attractive dividend yield and dividend growth. As a leader in renewable energy, it’s not surprising that the company scores highly in the ‘E’ part of ESG, but it also excels in social and governance metrics too, with strong employee safety standards and excellent management and succession planning. Continue Reading…

Infrastructure: An alternative solution for inflationary times

Posted By |

By Shane Hurst

Managing Director, Portfolio Manager,

ClearBridge Investments, part of Franklin Templeton

(Sponsor Content)

Inflation has been the major theme dominating the investment world in 2022. Canada’s annual inflation rate reached 6.8% in April, representing a 31-year high. Canada is far from an outlier in this respect, with the U.S., the U.K. and many other western nations also experiencing rapid price growth over the past 12 months. In response, central banks have committed to a series of rate hikes this year, which in turn has raised the prospect of a global recession.

In this uncertain environment, market volatility has been elevated, particularly so in bond markets. Downside protection is front of mind for many investors as a result, but there are options out there to still generate returns for a portfolio without loading on risk.

Infrastructure assets, once the preserve of institutional investors, can now be a useful tool for retail investors and help in limiting risk and providing a stable income stream. Launched in Canada last year, Franklin ClearBridge Sustainable Global Infrastructure Income Fund (available as an ETF through FCII), harnesses the expertise of ClearBridge Investments, one of Franklin Templeton’s specialist investment managers. ClearBridge manages infrastructure income funds in the U.S., U.K., Australia, Europe and Canada, with global AUM of US$4 billion, as of March 31, 2022.

An asset class that makes economies function

Infrastructure as an asset class can be loosely defined as the services and facilities necessary for an economy to function. With the ClearBridge Infrastructure strategy, the portfolio is made up of regulated assets (e.g. electricity infrastructure and sewage pipes) which are characterized by stable cashflows, high income and low GDP exposure, and user-pay assets (e.g. airports, ports, railroads and toll roads) which generally provide lower income but are leveraged to GDP.

The investment team can take on a more defensive posture as circumstances dictate. For example, prior to the extreme sell-off of 2020, the strategy had a higher weighting to lower-risk regulated assets, which served it well during that period when its decline was approximately half that of its benchmark S&P Global Infrastructure Index. Continue Reading…