Toward the end of 2012, Elliott Management’s Paul Singer made a speech at the Archstone Partnership annual meeting. He stated that, “The thing that scares me the most is significant inflation, which could destroy our society.” About a year later in an interview with Wall Street Journal’s “Heard on the Street” program he explained that this could come about with small changes in perception of inflation risk: “The first whiffs of either commodity inflation or wage inflation … may cause a self-reinforcing set of market events … which may include a sharp fall in bond prices, … fall in stock prices, rapid increase in commodities…”
If Singer was a bit early to worry about inflation (so was I), the circumstances he described in his “Heard on the Street” interview closely resemble the conditions we can observe in the markets today. Since the beginning of 2016 we have seen the prices of many commodities make very strong gains, stock markets begin to correct and interest rates trend higher.
One of the most worrisome elements in the current economic landscape is the unusual tightness in the labor market. In addition to the rising Employment Cost Index (ECI) and upward trending Hourly Earnings in the U.S. economy, anecdotal reports of labor tightness have been increasingly prominent in news reports, particularly in the mining, transportation, construction and food processing industries. A recent Barron’s article titled, “The Great Labor Crunch” projects that “the labor crunch is about to get much worse.” It cites U.S. Census Bureau projections which stipulate that the U.S. economy is facing a shortage of 8.2 million workers over the next 10 years, the largest such shortfall in at least 50 years. Already today the signs of this shortage are notable. Writes Barron’s: “Oil and gas stay in the ground because there aren’t enough workers to extract it; homes aren’t built because builders can’t find enough laborers. In Maine this winter, the state couldn’t find enough people to drive snowplows.”
In the recent weeks we saw numerous reports of business owners who’ve seen a number of boom-bust cycles report that they’ve never faced so much trouble finding and retaining good employees. Most recently, the National Federation of Independent Business reported that, “this is the first time in 35 years where the fewest number of small business owners have told us that taxes are their number one business problem.” Instead, the shortage of quality labour is now the main problem. The National Association of Homebuilders found last year that 82% of builders saw the availability and cost of labor as their main challenge, up from 13% six years ago. Similar challenges are plaguing the transportation industry which has already led to a double digit rise in transportation costs and the resulting pricing pressures in the retailing industry.
These conditions – coupled with the rising commodity prices and interest rates – are likely to continue fuelling inflation in the U.S. economy. Given that inflation is far and away the greatest and most destructive of macroeconomic risks facing investors, retirees and those nearing retirement, taking active measures to preserve their savings’ purchasing power should be an important consideration today and in the near future. For retail investors, these measures should include acquiring some gold and silver bullion and farmland if possible. A smaller allocation into cryptocurrencies like Bitcoin or Iota might also prove to be a good idea for those who can digest the learning curve. For institutions and more well-to-do investors, exposure to commodity futures is by far the best known inflation hedge.
Alex Krainer is an author, commodities trader and hedge fund manager based in Monaco. He manages the Altana Inflation Trends Fund and has authored two books: in 2016 he published the book “Mastering Uncertainty in Commodities Trading.” Most recently he also published “Grand Deception: The Browder Hoax”