The Most Important Investment Question to Answer in 2021

As we like to point out here at Bush League Investing, having a longer time horizon in the market covers up all sorts of mistakes and misses and usually makes you look like an investing genius. There are a few times, however, that a crucial decision has to be made and we believe now is a crossroads that requires one. In the next few months, a secular shift could be made to inflation that would change the current investing paradigm.

For years we have had a relatively flat inflationary environment because of huge deflationary pressures where tech and growth have done well and value has lagged far behind. Some of the most obvious deflationary pressures have been:

• Tech/Disruption-ex. Amazon forcing retail prices lower; Uber/Lyft forcing transportation costs lower; automation in factories.
• Labour-For the last 25+ years, labour has moved offshore where it’s a fraction of the cost enabling corporations like Walmart to sell goods at cheap prices.
• Debt-As people take on increased debt loads, they are unable to stimulate the economy through more spending on credit. Additionally, when super debt laden individuals or companies pay off debt, they take credit/currency out of the system slowing down the velocity of money.
• Interest rates-Historically low rates have enabled zombie companies to survive through minimum servicing of debt creating a huge production drain on the economy.

These deflationary pressures along with other more subtle ones have managed to keep inflation low despite the large additions of liquidity into the system through quantitative easing and low interest rates since 2009. The big question we need to answer correctly is could that all change now?

Currently cherry-picking certain commodities like lumber, corn and copper you would jump to the conclusion that we are dangerously close to hyper inflation and the current monetary system will come to an end shortly. There is also a case to be made that inflation has merely moved into asset prices like housing, the stock market and, more recently, cryptocurrency.

What do the experts think?

There are many well known finance names digging in deep on either side. Some notable figures like Eric Townsend, Michael Saylor, and Peter Schiff are convinced this is the beginning of inflation and the next decade will see inflation run wild. There are some notable counters to these arguments from people like Cathie Wood (Ark Investing) who is certain the huge leaps forward in innovation will continue to create enough deflationary pressure that we are just going to go back to a huge bull market in tech and growth.

What do we think?

As in most debates that are polarizing, we find ourselves somewhere in the middle. We trend slightly further into the inflation camp though and do not believe it will just be transitory until the supply issues are sorted out. Our base case will be an approx. 5% yoy change for the near future. Luckily, the market will let us know which way this will unfold.

What to do about it?

We think the better question is what not to do. The worst mistake made in the next few years might be to wait too long to do something. If you are sitting on a large pile of cash waiting for the perfect time to make a move, it could end badly. There are always reasons to be skeptical about the market, economy, and the future but it more often than not ends up positive. The clearest example of the harm of doing nothing comes from the highest inflationary time in Canada’s recent history. If you sat on money in 1973 and then worked up the courage to invest it in 1983, it would have taken almost 2.5 times the same money to get the same goods. There are many parallels in this lesson to today. Using these numbers, if you have $10,000 sitting in your bank and you don’t do anything with it until 2031, you would potentially need $24,600 to buy the same goods you could have bought today. This calculation is based off of CPI which measures a broad basket of goods and the yoy change. There are many analysts that have concluded this metric doesn’t cover the entire story and the true rate of inflation the consumer faces is higher, which makes this argument more potent.

What are we doing about it?

We are positioned to benefit from inflation but have not gone “all in” yet. If we start to see more companies raising prices to offset costs that will be a clear signal. The true telling will be if there is wage growth, or if the labour share of the market starts to have some control and we see unions forming with enough bargaining power to increase wages. These things don’t happen too quickly, so there will be time to react if we are prepared. In the interim, commodities and more stable value names should continue to benefit in increasing inflation.

Keep an eye open for price increases and signs of wage growth!