The sleeping giant, inflation, is awake.
Post-pandemic pent-up consumer demand has sparked a spending spree that businesses are scrambling to satisfy. A shortage of workers adds to their headaches, leading to supply chain bottlenecks, higher wages, and inevitably, higher prices up and down the supply line. The Consumer Price Index now sits at its highest point in three decades.
Experts from economists to the White House are predicting the inflationary environment will hamstring the holiday shopping season and will last well into 2022. Now is the time for investors to rebalance their portfolios with inflation-protecting instruments.
TheStreet has you covered. We've assembled an all-star team of experts to help you navigate the inflationary era. The FREE webinar: How to Play the Inflation Trade is brought to you by our partners at VanEck.
Our roundtable discussion, hosted by Susan McGinnis includes:
- David Schassler, Portfolio Manager of the Inflation Allocation ETF, RAAX, at VanEck
- Bob Lang, Action Alerts Portfolio Manager
- Nancy Davis, CIO, Quadratic Capital Management
Watch Webinar: 'How to Play the Inflation Trade'
Webinar Highlights| How to Play the Inflation Trade
- 00:06:30 Can the Federal Reserve stop inflation?
- 00:11:20 Stocks to benefit in an inflationary environment
- 00:12:30 Key moves to inflation-proof your portfolio
- 00:21:30 What history tells investors about inflation
- 00:31:30 Why investors should consider the energy sector
Key moves to inflation-proof your portfolio
00:12:30: "When you get higher inflation, commodity prices immediately respond to the supply and demand imbalances. We saw that already. Natural resource equities are the companies that benefit directly from higher commodity prices. They outperform. Both of that's already happened,” said Schassler.
"Gold historically outperforms on the second half of the commodity of the inflation cycles. People realize now – it takes a while to realize you have an inflation problem. We've had an inflation problem for a year. But now inflation expectations are starting to rise.
"If you look at the previous inflation cycles, gold responds in the second half because people wake up to the idea that they have an inflation problem. They've got to do something about it." Schassler points out, "Gold's starting to catch a bit."
VanEck's Inflation Allocation ETF, (RAAX) - Get VanEck Inflation Allocation ETF Report incorporates gold along with nearly two dozen other inflation hedging holdings into one investment product. Other components include natural resource equities, infrastructure investments, REITs, and some yield plays.
One commodity with no historical precedent, cryptocurrency, is getting attention in inflation-fighting circles. Schassler says a new generation of investors views crypto as an alternative to gold.“On a calendar year basis, cryptocurrencies have outperformed gold almost every year since they launched, specifically talking about Bitcoin.”
Stocks to benefit in an inflationary environment
00:11:20 Bob Lang, Action Alerts PLUS co-portfolio manager says that long with precious metals, there are inflation-hedging equities that have good, strong yields. “Consumer durables, names like a Coca-Cola (KO), Procter and Gamble Company (PG). You know they’re boring, they’re old, but they do offer safety and they offer a yield and protection.”
Lang is watching the cargo containers languishing offshore at ports around the nation and says he sees opportunity “One group that I think is going to benefit, certainly in the short term and the long term, are the rails. I think this group can raise prices because deliveries need to happen.” Lang suggests companies including CSX Corporation ( (CSX) - Get CSX Corporation Report), Norfolk Southern Corporation ( (NSC) - Get Norfolk Southern Corporation Report), and Kansas City Southern ( (KSU) - Get Kansas City Southern Report) “Also I see banks and financials having the same sort of advantage.”
What history tells investors about inflation
00:21:30 Nancy Davis, CIO at Quadratic Capital Management says, “To me, it’s history repeating itself with different underlying problems, which is cheap labor and supply shortages, which I think could lead to higher prices but lower growth.” Stagflation, Davis says, could lead to a selloff in both stocks and bonds. She recommends playing the interest rate markets as the best place to hedge against rising prices and volatility, including recommending TIPS, which are treasuries with inflation protection, and says diversification is a must for all portfolios.
“Look at many different things to give you a diversified portfolio, whether it’s inflation, deflation, stagflation, nobody really should be taking a bet because this is an unknown territory where we are.”
Can the Federal Reserve stop inflation?
00:06:30 "The Fed, I think, is stuck", says Schassler. "And that puts us in a pretty vulnerable situation where I think that we've got to tolerate higher inflation for longer because the alternative is directly fighting inflation. And when you directly fight inflation through raising interest rates, that's going to make us vulnerable towards a recession. I think we have to get comfortable with the idea that inflation may be higher for a longer (time)."
Schassler says, "Inflation's here. It's ugly. The good news is that people can do something about it."
Why investors should consider the energy sector
00:31:30 "When you look at EVs versus traditional vehicles, they take around five times as much metals to make them. So you have this big transition where we're underinvesting in traditional energy. And to get there we've got to have more demand for metals," says Schassler.
"So we're in the middle of this major, massive transformation that's going to take an extended period of time to get there. And it's causing mismatches in supply and demand. So we think that these add to the inflationary fires, and they're only going to do so for an extended period of time."
TheStreet Recommends: 8 Assets to Inflation-Proof Your Portfolio
'How to Play the Inflation Trade'
WATCH: How to Play the Inflation Trade, a FREE webinar, hosted by Susan McGinnis, to find out much more about inflation’s direction and how to mitigate the effects and profit, you can also watch it on TheStreet's YouTube channel.
Editor’s note. The webinar was recorded on October 28, 2021.