06 Oct Dave’s Rebuttal to Gord’s Commentary and thoughts on where to invest during the Pandemic (Sept 1 2020)
I agree with almost everything here. Personally, I’m struggling coming to terms on what’s happening in the public markets. I know I am not supposed to say that but I have to admit it. I’m a business-guy and I’m entirely focused on trying to build a good return on capital. Borrow for X and try and make X+P. And that P I guess is the issue. What do you do with the P if your business is shrinking and can’t achieve the X anymore? Or what if you are holding your own and each P invested at diminishing yields erode your future P potential. Your capital is slowly eroding. Or is it? CPI was reported as 0.7% in April 2020 and 0.1% in May 2020. US Annualized Inflation has registered 0.1%, 0.6% and 1.0% for April, May and June. On that basis, perhaps your hard-earned capital is not being eroded. But do you feel like costs haven’t jumped since the pandemic? To me, I look around, and costs are higher for the items you now want to purchase. Do you not notice the price increases for takeout food? What about rent/housing costs? The jump in real estate values if you have a solid job or the sudden price drops in rent if you have also suffered some job insecurity – do you feel richer? Are costs for all manner of food quite a bit higher than 1.0% over the past few months? It’s laughable. I would argue we have seen something like a 6% increase in the cost of our key spend items.
In fact, I would recommend looking beyond the “official” numbers the agencies share and take a look around. I would postulate that others thing the same way. Others might have concluded that inflation is much more rampant than they let on. And if it is, does that explain some of what we are seeing? A strong bid in Gold. A sharp drop in the US currency. A flight to “hard assets” such as real estate, commodities.
Are we likely to see some inflation, finally? Pandemic spending by the government is not temporary – it’s going to be permanent. At least some element of it – permanent. In Canada, I expect a new floor on minimum incomes. What’s that do for wage rates? What’s the do for the cost of the items we all want? Thanks to Government “emergency spending” (NOTE: I am NOT criticizing the Government for the spending – don’t hate the player as I always say), personal incomes have actually increased during this COVID-19 “Recession”. We know that there are supply shortages in all the things we want in this post-covid world. Personal incomes are strong. Wages are being supplanted. Is it much of a stretch that we will see a wave of spending and at the same time constraints in supply, including labour?
So, in a scenario where annual yields are less than 1%, and unofficial inflation is running at over 5%, you are scrambling for growth and looking for any assets which structurally offer substantial leverage (real estate offers tremendous financial leverage, commodities offer substantial operational leverage). Perhaps you throw everything into ETFs which are weighted towards the winners (Facebook, Amazon, Netflix, Google, etc). In the scenario where your X is actually X+Inflation, you have to be aggressive.
The story is complex. I’m investing in real estate. I’m investing in businesses with modest leverage and who’ve got strong demand. I’m looking for businesses which can increase prices as inflation increases and costs follow. That’s the game right now. I’m happy I bought Doral (TSX DII.B) – people want bikes and office home-office furniture, right? Just annoyed I didn’t buy more. Stay tuned – no matter what happens, it’ll be interesting.