Is Inflation Here To Stay?
Henry: Back in the 1930’s, my father was invited to go to the Opera with his uncle, and they both were not fans, but they were given free tickets. They went in and it was just endless, Götterdämmerung by Richard Wagner, and that Opera goes on for six hours. And if you are not interested, it’s a very long six hours. Somewhere in the middle of it, my father’s uncle turned to him and said in too loud of a voice, “George, isn’t this where we came in?” They just walked out, they just got tired. Well, Linda and I came into the business, we each got our first investment licenses in 1980, and the story, the ONLY story, was inflation. Inflation dominated all of the business headlines. Interest rates at that time were, well you could buy Government bonds yielding 14%
Linda: But nobody wanted to buy them, because they thought rates were only going higher. So you couldn’t even persuade someone to buy a Government bond at 14%.
Henry: And it was shocking to see how used to it we all were. Now, you guys have been raised during a time with very low inflation (between 1%-2%, occasionally it goes up to 3%). We are beginning to see signs that inflation is becoming more of an issue. And the question is, “is it different, is this going to be a more permanent part of the landscape?” And the answer is that we don’t know. You see it in the price of shipping goods from Asia. Container costs have tripled or quintupled. Lumber has begun soaring in price. Natural gas in Europe is soaring in price. Commodities in general are going up. And you’re seeing it in the service sector. So, it’s not just things, it’s people. And you see signs of shortages in labor in various places. There’s an answer to that: either technology or higher wages.
Linda: Or Both
Henry: Or both. So, we are beginning to get a sense that it is not transitory. So as investors, what are some of the tools that we have to offset that, because after all if we are preparing for our client’s retirement, or for their children or grandchildren, for that next generation, what is our task?
Jeff: I think what we’ve done specifically on the fixed income side for our client’s portfolios, we’ve really structured, recently, a lot of our portfolio in a way where the bonds are very short-term in nature. So, if inflation does rear its ugly head, and rates do go up, these short-term bonds will mature fairly soon, and that gives us the optionality to reassess and make a decision based off of whatever the world gives us next.
Josh: In the same way where we talk about clients not having the same needs or goals, inflation affects people differently. During a period of low inflation, education was the highest expense over the course of my life, which inflated at a pretty high rate. People have lived through examples of inflation in isolated areas, and maybe it’s been offset by improvements in technology and others, but people do deal with it all the time, it’s just not such an overwhelming factor, and right now with the supply chain issues coming from the pandemic it seems possible that this could be a period where we do end up with some higher prices long-term, but it’s impossible to know.
Henry: When you see rising prices, it brings to mind our mission, and our mission is to preserve people’s purchasing power. It’s not just a number, it’s to be able to live in the way they want to live. To say, if you are a grandparent, and you’d like to see your grandchildren educated, how do you help provide for that? Or if you are looking at retirement and you want to live in a certain place, or want to travel, how can you continue to have those experiences? Equities (stocks) are tools to help us achieve that.
When we look at the great businesses today, and I’ll give a couple examples, again, not as a recommendation that we buy them today at these prices, although some people obviously will, some of these incredible franchises have the ability to raise prices very slightly, enough to offset any increase in inflation so that we don’t have a drop in our purchasing power. So, if we’re an owner of Apple, and they raise the price slightly on iCloud storage, people are not going to give up all of their photos and videos because the iCloud bill went from $3.99 to $4.59/month. That’s just not going to happen. And the same when you look at businesses like Oracle, or you look at Salesforce. Those subscription models lend themselves to slight increases in price because they are kind of sticky. It’s hard to go from one system to another system. So that’s part of the way a business builds, what Warren Buffet refers to as a moat. It’s a castle, it’s a moat and it’s very difficult to get over.