We might not like it, but INFLATION gives us an easy trade
As bad as it is for the consumers, inflation benefits the bottom line of companies with pricing power
Allow me a side comment before I share the inflation trade idea. Two days ago I got asked in my WhatsApp group why had I not shared my view on the “war issue” aka the Ukraine escalation. In response I posted a link to an earlier Substack missive from January where I had called out the risk of proxy conflict (focused on Kazakhstan at the time) as a possible scenario brought forward by the US Administration. As a reminder, this newsletter is not pretending to make “predictions” about the future - I just wargame scenarios and share my decision-making process in regards to capital allocation in the public markets. For reference the old article is linked here.
Yahoo’s Morning Brief caught on the implications of inflation in today’s post:
Key to understanding our current moment is that inflation, as dicey as it can be for the average citizen, can work to the benefit of big companies with sufficient pricing power that adds to their bottom line.
This is something the market has not yet priced in, while keeping busy chasing Fed and war headlines (Covid-19 seems to be less of an issue these days, cough-cough).
They actually spell it out pretty accurately:
What we see is across sectors — across companies, CEOs are just crowing about how they can raise prices on consumers all while bringing in record profits <…>
We know that inventories buildup in Q4 ‘21 and early Q1’22 are met with strong consumer demand. So those companies with pricing power will pass on the higher manufacturing and operating costs (energy, wages) and unload products to their clients with a net gain in profitability even after inflation is taken into account.
The market might remain distracted long enough until Q2 earnings come in, but in the end it will reward performance. The tiny segment of consumers that happen to be investors will end up adding to their net worth in high inflation conditions due to their capital allocation choices, while the rest will pay a hefty tax on their income and savings. The key phrase behind this trade idea is “companies with pricing power”.
If you find these ideas useful, maybe share the post/email with your friends. About one in fifty new subscribers replies with an interesting comment and sometimes triggers or solidifies a new trade idea I am posting here. Bring enough diverse perspectives and the overall win rate of these improves beyond what any individual retail trader alone can do with his own brainpower, time and capital. Think about it.
this scenario, should it play out, will be a nice outcome given the v over last few weeks. All my suppliers have raised their prices across all lines, and so I must too. It makes up for lost ground over the past 2 years, and that’s ok, but profiteering exists too. Poor old Joe Soap ultimately pays the bill. What’s strange about mr Soap is that he’s prepared to give his money to brokers/banks (pensions/prsa etc) and doesn’t know what these guys do with it. Offer him potential to control his own money and he’ll say no. He’d rather some unknown entity control it. Education system takes that privilege away from him, if he ever had it.