Okay everyone, I know there has been a lot of discussions regarding the bear market that we are in and that it will take forever to get back to ATH and so on, but I still see people writing “Should I sell now for a loss or sit it out?”, so obviously people are still deciding on what this is exactly.
My answer: STAGFLATION
Why stagflation? There are several similarities to 1973 starting with a shortage in energy supply (oil and gas) continuing with inflation (hell yeah, Inflation is here after a looong time) and let’s not forget the falling GDP (GDP is in a straight decline, recession is here) and the rise in interest rates. All this is textbook stagflation. One more similarity is an ongoing war…
For those who are not familiar with stagflation, check out Investopedia: https://www.investopedia.com/terms/s/stagflation.asp
The most renowned stagflation period started 1973 when a shortage in oil supply led to spiking inflation. 1973 the inflation went up to almost 7.5 % and then slowly went back to 2,5% in 1978. So, 5 years before it came back down. It then spiked again and came back down to “normal” levels 1985, so 12 years after it all began. Here is the chart for Germany back then.
Today Germany is hitting inflation numbers unseen since WWII. If we stay course the 1922/23 hyperinflation is the only period which had higher inflation than right now.
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Now let’s look at the MSCI World: from it’s high in 1972 / 1973 it came down almost 60% in two years, finally bottoming in 1975. Today, 1973 would be 2022 and is behaving pretty similar. 1974 would be 2023 and 1975 would be 2024.
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Why I think this is a good comparison? Well now we are talking about earnings this year, while the vast majorities of businesses haven’t even been really hit by demand slowdown. You can read it in all of their earnings presentations: “The company’s margins have suffered as a consequence of increases in the cost of logistics and energy, BUT revenues are up”. Now the companies have raised their prices to get their margins back up. What do you think happens next? Demand starts slowing down and then shit hits the fan. In my opinion, the real damage to the businesses, the real demand drawdown is yet to come.
People are losing their jobs now, but this is just the beginning. A lot of people have to renew their mortgages and that’s when its really going to hurt. And soon companies will start struggling with paying the high interest rates on their short-term debt and paying the higher wages people will want and that will not be possible for many companies. The bankruptcies and the renewing of the mortgages are what really gets the ball rollin’ and that hasn’t even begun yet.
Also, some bond people like Steven van Metre are talking about dollar shortages and a few other problems in the banking system (also see Credit Suisse). I do not understand much of that, but what I do know is that bond people are smart and you should listen to them. If they say there are some more problems with the defaults on car loans or whatever, then there is something going on there.
Okay, so back to stagflation in todays environment: if you look at the MSCI World graph in 1973 and you assume the macroeconomic forces will play out similar in todays environment, then we will likely to have the bottom sometime mid 2023 – beginning of 2024. The stock market will then start rising again in 2024. Inevitably it will start rising sooner or later, I think we can agree on that. I know, I know, we live in different times, we have different companies today, etc. but lets just assume it plays out similar to 1973-74.
Now the questions are: What to do until it bottoms? What to invest in? Where to park the money?
3 years of 7,5% to 5% inflation means almost 20% less value in cash. That doesn’t sound that good, so maybe invest in some good companies? But what companies do good in such an environment.
For that I asked myself, what would I do, if I were to lose my job during this stagflation? (and let’s assume I have no emergency fund). I came up with this and tried to relate that to companies with products for which there will be demand:
Sell stuff that I don’t need in order to get cash, including my portfolio / my car
Second hand dealers might do well during stagflation
Cardealers might do well (at least at some point)
Brokers should make a lot of money in 2022-2023 during the sell-offs
2) Cut all expenses for stuff not needed
No more Amazon Prime? No more overrated insurances?
3) Try to lend money somewhere else
Lending companies might do well
4) Search for a new job / search for a new home (move somewhere cheaper)
Job Portals might do well; real estate agents won’t profit because it was way more lucrative to sell new built home then to do rentals
5) A lot of free time means: Watch Tv
Broadcasting and Streamers might do well during stagflation
6) What else? Well, I would still have to eat and drink. And this is maybe my key point around the stagflation period: I would still have to buy groceries and essentials (like toilet paper, hygiene products, cleaning products, coffee, etc.) as well as communication services, energy and transportation…These are items people can’t do without.
Would I buy more of these products? Most probably not. So, on the one hand these companies will most likely do better than the rest of the companies because demand will stay up, but on the other hand their valuation can still go down from their sky-high PEs. And still because of inflation and pricing power they would profit from higher revenues and maybe better margins.
Some extra thoughts on point 6)
– Are there any plays with higher revenues but not necessarily higher costs? Are there any products out there which do not depend on energy or higher wages?
– Of course, the company has to produce free cash flow. (CASH is king, also check some recent Burry tweets https://www.reddit.com/r/Burryology/comments/xwe97z/_/?utm_source=share&utm_medium=web2x&context=3 and https://www.reddit.com/r/Burryology/comments/xwewlw/_/?utm_source=share&utm_medium=web2x&context=3)
– If a company has debt, especially termed out debt with a fixed yield, I consider this to be a good thing because they have already their yield secured and because they can buy back the bonds at a discount
– Does anyone know where I can get data on which stocks performed well during 1973-1980?
TL;DR in a stagflation period buy companies which offer essential products and services which we need on the day to day basis, with pricing power, good free cash flow, termed out debt and are as least as possible depending on energy prices.
So, all of this being said, I have one final questions for you: What is YOUR stagflation bear market buy?
One possible answer, but not my favourite one, could be: Put the money in I-Bonds (https://www.treasurydirect.gov/savings-bonds/i-bonds)
Put $10K ($20K for married couples). Automatic 9.62% return for the next 6 months, followed by a 6.5% return for the following 6 months, amounting to around 8% return for the first year. You have to hold it there for a year. Minus 3 months interest if you withdraw before 5 years.
ALL OF THIS IS NOT FINANCIAL ADVICE. DO YOUR OWN THINKING.
