Yesterday longtime PBRG friend (and brilliant stock picker) Chris Mayer explained how to invest in a deflationary environment. Today he shares how to invest in the inflationary world that will follow…
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From Chris Mayer, chief analyst, Bonner & Partners: The late Barton Biggs—author, hedge fund manager, and former Morgan Stanley analyst—described inflation and deflation as “Fire and Ice.”
Federal policy and the size of fiscal deficits will set off temperature changes. The market adjusts to these changes through periods of Fire and Ice. Economies can spend months or decades in either phase.
Once firms work off the excess debt and slack capacity of Ice, the stage is set for Fire.
“Fire” means rising interest rates, rising wages, and rising prices. Fire means prices for oil and other commodities are trending up… along with commodity shortages. Fire means the dollar is falling in value. And so are bond prices.
So how do you invest for Fire?
You don’t want to own bonds. They’ll get killed. Cash won’t help either.
But commodities will be good bets. Gold should also respond well. In fact, in the 1970s—a sustained period of Fire—real assets of all kinds did well:
As for stocks, Biggs outlined the playbook for the 1990s, a period of Fire:
If this Fire scenario comes true, an equity portfolio that owns… non-Japan Asia, certain other emerging markets (Russia, India, and Brazil), and the right cyclical sectors in the U.S. and Europe should do okay.
Biggs, writing in 1997, was spot on. Over the decade following his call, Russia, India, Brazil, and cyclical stocks in oil and mining were on fire.
A return of Fire today would mean a revival of the investing playbook that did so well in the first decade of the new century: Canadian and Australian mining shares would run. Oil stocks would run, too.
Real estate could also do well, especially properties that can lock in low-cost financing and raise rental rates.
There isn’t much danger of Fire right now. Instead, the cold wind of deflation blows. But the markets have their seasons… and Fire will return.
Reeves’ Note: Chris delivered an average return of 28.8% on his recommendations over a decade… and beat the S&P 500 3-to-1. Now he’s revealing his outperforming methodology in a can’t-miss free video training series. To sign up for the training—click here now.