The Weekend Edition is pulled from the daily Stansberry Digest.
I would never want to be the CEO of a public company...
Sure, in most cases, the paychecks are incredible. And I'd get to call all of the shots.
But much of a CEO's time is spent as the public face of the firm. He or she needs to keep a bunch of different folks happy all at once – employees, customers, investors, and analysts.
It's a juggling act through a broad range of interests. These people don't always want the same thing. And that's especially true when inflation is rising, like we're seeing right now...
These days, a CEO must try to tell two stories that simply can't both be true.
On one hand, he or she wants to tell investors that, yes, input prices are on the rise. But as investors, you don't need to worry about that... The company can simply raise the prices of its products, pass the costs on to the customers, and keep its margins healthy and growing.
But of course... the CEOs can't tell that same story to the customers!
As customers see input prices rising, the CEO must try to ensure them that they shouldn't worry, either... The company will continue to keep its prices low, absorb rising costs of materials, and make sure that the folks buying the products remain happy.
In today's essay, I want to discuss how these titans of industry try to strike a delicate balance, sending the right signals to investors without riling up customers.
I also want to cover the latest expectations for inflation – and whether it's "transitory" or not. And finally, I'll touch on what you can do to get ready for whatever the future holds.
Let's first go back to those CEOs and the magic of corporate jargon...
To be a successful CEO of a public company, you must learn to say different things to different people – while everyone is listening at the same time. And in the end, it's all about winning over the folks with the money...
A CEO can't just say that the company will raise its prices to satisfy its investors. But he or she can get pretty close by using coded language in earnings calls.
And right now, with input prices going up in many sectors, we're seeing a lot of it...
For instance, on June 9, Campbell Soup (CPB) CEO Mark Clouse told analysts that the consumer-goods company expects to "benefit from pricing actions we have put in place across our portfolio."
Translation: Don't worry, getting the soup eaters to pay more will keep our margins up.
Farmers should look out, too... In late May, heavy-machinery maker Deere (DE) credited its healthy earnings for the second quarter of 2021 to the fact that "price realization in the quarter was positive by nearly nine points."
Home-improvement chain Lowe's (LOW) recently got in on the act as well... Last month, the company's top executives noted a successful quarter as it "leverage enhanced pricing tools to improve margin across the array of products that we sell."
And do-it-all retailer Walmart (WMT) often notes that it focuses on "price gaps." By that, the company means that it wants to keep its prices lower than competitors' prices. But something else is implicit in that strategy... When others raise prices, Walmart can as well.
Pricing actions... price realization... pricing tools... price gaps.
You can see what I'm talking about when it comes to corporate jargon.
Sometimes, you just want someone to tell it to you like it is...
For example, Costco Wholesale (COST), the membership-only retailer that's always a straightshooter with its customers, recently did just that. On its May 27 earnings call, the company actually used the "I-word" instead of any jargon...
Knowing investors were champing at the bit for details about rising prices, Costco Executive Vice President Richard Galanti got right to the point by saying, "Some inflationary sound bites, if you will." Then, he rattled off a number of categories in which prices have jumped...
Suppliers are paying up to double the old rates for shipping, so items sent "across the ocean" are seeing price increases... Pulp and paper goods' prices rose 4% to 8%... Plastic costs are up, so everything from cups to plates to trash bags cost more... Costs of metals, aluminum foil, and soda cans are up "mid-single digits"... And the list went on from there.
Frankly, it doesn't really matter how the CEOs and top executives try to spin the rising input costs. Whether they try to use corporate jargon like the examples I mentioned earlier or whether they cut to the chase like Costco's leadership, the underlying takeaway is clear...
Prices are rising.
And that means "prices" for other assets – like bonds – are responding to inflation signals.
This becomes clearer when we look at some key data points...
By looking at the prices of certain bonds, you can see what investors expect inflation to be over the next five years. You can do this by comparing the yields on certain inflation-protected bonds to those with no protection from inflation.
And as you can tell by the spike in the next chart, people see it coming...
And official inflation numbers show us that these expectations are coming true... We can see it in the Consumer Price Index ("CPI"), a measure of the average change in prices for goods over time. The latest reading announced earlier this month came in at a shocking 5% year over year. As you can see, that's the highest CPI reading in 13 years...
In the end, inflation is a social phenomenon... When prices rise, people expect prices to rise – so they spend accordingly and push prices higher.
And then, when it all comes down to it, we're faced with the million-dollar question...
Will this bout of inflation be "transitory" or not?
Similar to the CEOs using corporate jargon to spin the higher prices we're seeing, the Federal Reserve and other inflation doves like to use the word "transitory" when talking about this round of inflation.
By that, they mean we're still working through some disruptions due to the COVID-19 pandemic. And within a few months, these officials expect that everything will settle down.
Those folks point to the fact that much of the increase in the CPI came from things recovering from the pandemic – like hotels, sporting events, and restaurants. It's OK to consider that transitory... because once the post-lockdown travel boom cools, these industries will return to normal levels.
In part, they're right... We'll see some official numbers that look crazy because the data from last year were particularly strange due to the shutdowns across the country. (Economists call this occurrence a "base effect.")
Oil dropped to about $20 per barrel when the economy shut down. (We even had one wild day when prices went negative.) And price changes today based on those anomalous lows might look like inflation... but they're really just a return to normal. Eventually, that effect will fade away.
That won't be the case with everything, though...
Underlying those transitory effects, a real and powerful inflation trend is shaping up...
Inflation-deniers also claim that the high prices of semiconductors and housing today are transitory as well. My team and I aren't so sure about those cases...
A lot of people did decide to move after being stuck inside for a year – and that demand may cool. But as regular readers know, a serious mismatch exists between the demand for homes and the available supply. We'll build more houses, of course... But it won't just happen overnight. It's going to take more than a few months for supply to catch up.
There's also a logistical problem in producing enough semiconductors... And this situation doesn't look transitory to us.
Building new manufacturing facilities takes years. In the meantime, semiconductor prices – and those of things they go into, like automobiles – will remain elevated.
Most of all, we've long had accommodative monetary policy (think the Fed)... And it's now joined by a boom in fiscal policy (think Congress), all while the economy looks to be heating up.
In the end, by the time CEOs are sending coded messages to investors – like they're doing in many cases today – it means inflation has already taken on a life of its own. But you shouldn't just throw in the towel...
It's critical that you're always preparing for what's next...
We've gone through an incredible three-decade run with almost no threat of rising prices. But as investors, you simply must realize... that won't always be the case.
My point is, everything in the world doesn't just move along a one-way street. We'll go through times of inflation, times of recession, and times of booming economies and low prices.
An inflationary environment like what we're seeing today means asset prices can behave very differently than what we've seen for the past 30 years.
You may not be able to predict what the future holds... but you do need to be prepared for it. We want you to be ready.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: This past Wednesday, Doc and his senior analyst Matt Weinschenk went on air to expose what could be the greatest retirement crisis in modern history, and shared how to protect yourself from it... including how to battle the threat of inflation. Their discussion covers invaluable information for anyone over the age of 50 (or anyone hoping to retire). If you're worried about your retirement future, make sure you view Doc's message here.
