Inflation is coming. Is your portfolio prepared for it?

Friday, March 15, 2019

Today's Strong Wage Growth is Tomorrow's Inflationary Headache

Inflation is coming. Is your portfolio prepared for it?

Tony Sagami

What passes for journalism is a joke these days. Same goes for most of what qualifies as investment research.

The mainstream financial media regurgitates the headline numbers from press releases, and the Wall Street crowd seldom reads past them.

The problem is, headline numbers are typically the most meaningless.

This is especially true when it comes to jobs numbers. As always, the devil is in the details.

Last week, the Labor Department reported that the official jobless rate dropped from 4% in January to only 3.8% in February. Hooray!

Not so fast.

Poof! Disappearing Jobs: First of all, the U.S. economy only created a paltry 20,000 jobs in February, WAY below the 180,000 job adds Wall Street expected.

Fun With Numbers: That 3.8% number is very misleading. A broader measure of unemployment that includes (a) part-timers who would prefer full-time work and (b) those so discouraged that they've given up looking for work is at 7.3%. Almost double the headline unemployment rate.

Uh-Oh, Wage Inflation: The most important below-the-headline number was the increase in workers' wages. The average hourly earnings increased by 0.4% in February, which translates into a 3.4% year-over-year increase.

This acceleration in wages is really starting to force companies to hire anybody who can fog a mirror. For example, many companies are now waiving basic hiring requirements -- such passing a drug screening or possessing a high school diploma -- to fill openings.

Get this: The unemployment rate for people without high school diplomas has dropped 5.3%. That's the lowest number on record since the Labor Department began tracking that statistic in 1992.

"We've seen a spike in job postings that say, 'No experience necessary' or 'No prior experience required,'" said Julia Pollak, a labor economist at job-search site ZipRecruiter.

This may be good news for fresh high school and college graduates or marginally skilled workers. But the scale of power in now tipping in favor of workers over employers now.

This suggests wages will continue to rise … perhaps too much and too fast.

If your hair is as gray as mine, you may remember President Nixon's 1971 wage and price controls.

On Aug. 15, 1971, in a nationally televised address, Nixon announced, "I am today ordering a freeze on all prices and wages throughout the United States."

Wages were frozen for 90 days, and future wages increases would have to be approved by a "Pay Board."

The unemployment rate was 6% at the time, while inflation was running at 4.3%; hardly numbers to panic over. But my point is that hot wages numbers are the genesis of all sorts of bad consequences, including stupid government decisions.

The rising wages and low unemployment rate of today is the seed of future inflation. And this should scare the heck out of you.

In short, you need to position your portfolio to include a heavy dose of assets that benefit from higher inflation, such as

  • Cash and/or bonds with short maturities.
  • Hard assets, such as precious metals and commodities.
  • Stocks have historically been a productive hedge against inflation because corporate revenues/earnings should grow at the same rate as inflation.

I'm not just talking out of my rear end. My retirement plan is 12% in hard assets, 38% in cash/short-term bonds and 50% in stocks, so I am eating my own cooking.

Plus, this is all in agreement with what my colleague Sean Brodrick is seeing and recommending based on his cycles research.

In three briefings next week, he’s going to reveal the shocking forecast he has based on cycles analysis and lay out his plan to protect himself and profit from what he sees coming -- and how you can too.

I’m waiting with great anticipation to see Sean’s research. This is a briefing no investor, you and I included, should ignore.

If you haven’t done so yet, I strongly urge you to click this link to RSVP for Sean’s urgent briefing next week.

Inflation (and maybe worse) is coming. Is your portfolio prepared for it?

Best wishes,
Tony Sagami

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