Next Step? - Social Unrest?

“In the last day of the US Constitutional Convention, right after adoption, A woman asked Benjamin Franklin whether the nation would be a monarchy or a republic, he answered “a Republic, if you can keep it.”

The constitution was built on two principles. First, the founders feared government because governments tended to accumulate power and become tyrannies. Second, they did not trust the people, because people – in pursuing their private interests – might divert the government from the common good.

Both had to be restrained in such a way that the machinery of government limited their ability to accumulate power”. – “The Storm Before the Calm.” Geo Freedman.

The cartoon lacks humor because the wealthy gain the most from inflation. All others must reduce their living standard to cover the escalating costs of essentials. It has been said that inflation cures itself because eventually, consumer cannot afford the higher prices. The saying neglects the pain of the journey.

The rate of inflation will subside when the supply lines open. It’s possible an oversupply of goods could develop causing prices to decline for a while. Hopefully, this will play out. The problem is that governments are addicted to spending, printing money, borrowing, and raising taxes. Inflation will continue to thrive if it continues to be fueled by these policies.

I suspect Ben Franklin would observe that these policies are indeed a diversion from the common good.

Among other factors, inflation is caused and accelerates for two reasons:
 1. Expansion of the money supply. (20 trillion since last October).
 2. Low inventories. (Now the lowest in years.)

For over 300 years, it has been proven that inflation follows three phases:

1. Asset values appreciate (stocks, real estate, art). – everything at all-time highs.
2. General prices throughout the economy escalate. – Underway now.
3. Wages increase, but at a slower rate than inflation. – Beginning.

The final phase is social unrest and change of government.

The worldwide expansion of the money supply was increased by $20 Trillion over the past 20 months. This rate of monetary expansion is historic and was accompanied by deficits and borrowing at a faster rate than the growth of GDP.
Since 2008, the world has borrowed $150 Trillion. It did not work because it bought only $46 Trillion of GDP growth. It is impossible to borrow your way to prosperity.

“Expert” observers were worried about deflation in mid-2020 because they were misled by doctored economic reports issued by the government stating that inflation would remain under 2%. At the time, the true cost of a basket of essentials was well above 2%. Everybody knew it but…..

Biden’s $Trillions of spending will add to inflationary pressures but the official commentary argues it will reduce it. Such nonsense. Canada’s leadership continues to throw money around with promises to balance the budget in 15 or 20 years.

Inflation is likely to accelerate and not be “transient.”

Inventories are at the lowest level in years. The energy sector is in particularly bad shape.  If there is a cold winter the cost of fuel, electricity and heat will expand at an alarming rate, so let’s pray for a moderate winter.
Due to the high cost of natural gas, the price of fertilizer is up 180% since last year. Fertilizer accounts for 40% of the cost of growing food. The outlook for the cost of food is not good and it will flow through to the cost of raising beef etc., prolonging inflationary pressures.

This is a limited observation about conditions that feed inflation. I have not mentioned used car prices, housing costs and rental rates that are all escalating at double digit rates.

Energy supplies are very tight and current policy in North America is to attack the domestic source of supply and buy from the middle east. Europe is very short of fuel and Germany has halted licensing of the pipeline from Russia because of aggressive threats toward Ukraine. Russia has recently restricted delivery of fuels to Europe for political leverage, proving Russia is an unreliable supply.

You will be interested to learn that Canada’s pollution ranks 97^th out of 106 countries. The source is heating and energy which account for 45%. Not unreasonable for a northern climate. The only way Canada’s leadership can reduce that 45% is to deliberately shrink the economy. Alberta’s oil industry used to account for 20% of GDP. It is now down to about 10%. Thousands of jobs have been lost and the insanity continues.

If this winter is very cold the shortage of energy will be serious, and prices will increase rapidly.

How can investors cope with escalating inflation? The best policy would be to take advantage of it and invest in companies that prosper from inflation and avoid those that do not.

Regulated Utilities should be avoided because it takes considerable time before they can pass on the higher costs.

Governments are promising to keep interest rates relatively low. With inflation at 6% and interest rates at 2%, investors are losing 4% in real terms. Money is invested to conserve purchasing power. To lose 4%/year is unacceptable. It destroys pension funds, the value of insurance and other funds important to financial security.

Current investment conditions are becoming more difficult. Give me a call if you need help.

This note may seem negative, but my intent is to discuss what the actual data is saying.

The observations are data driven and not a forecast.

Sincerely,

Bruce Sansom
Global Wealth Builders ltd.