By: Dividend Sensei
In part one of this series, we examined why Bank of America and Moody’s think stocks could deliver virtually zero or even negative returns for the next decade.
Rising interest rates are the biggest risk that might make such grim forecasts into reality.
So now let’s take a look at the two most important facts of all about a potential lost decade, what might cause rates to rise more than expected, and which stocks are most likely to soar, and which you should ignore if they do.
Fact 3: Inflation Is Back And It Might Be Permanent
The Fed warned us that as the economy reopens from the pandemic, pent-up consumer demand combined with $3.5 trillion in excess savings, as well as pandemic supply chain bottlenecks could lead to significant transitory inflation.
Well, we’ve certainly gotten high inflation in recent months, with producer prices soaring over 8% YOY, and consumer prices surging to the highest level in 30 years.
The supply chain disruptions that were expected to peak in Q3 2021, and then gradually fade into 2022 and be gone by 2023, are proving more persistent thanks to several factors.
In China, more delta surges, have resulted in ongoing rolling lockdowns.
China is also facing an energy crisis created by historically low gas and coal reserves ahead of winter. This is causing rolling blackouts that is forcing many factories to shut just as US demand for holiday goods is at its peak.
Europe is also facing a historic energy crisis at the moment, with natural gas prices surging 500% and it’s not even winter yet.
Oil prices have soared from -$38 in April 2020 to $81 and climbing, and some analysts, such as BAC and Goldman, think $100 crude could be coming this year.
Morgan Stanley estimates that above $80 oil starts to drag on the US economy.
US producers, suffering from the worst decade for energy in history, are being extremely conservative with drilling spending and growth capex. Investors are tired of cumulative shale losses that the Wall Street Journal estimates at over $300 billion.
Add to this an increased focus on ESG, with European oil companies vowing to reduce production voluntarily in the coming years, and you can see why many analysts think that higher energy prices might stick around for many years.
On top of this there are several catalysts that are expected to be permanent, and potentially increase inflation far above the 1.6% we averaged during the 2010s, the lowest interest rate period in human history.
The first is the global supply chain, which we spent 30 years offshoring and perfecting for “just in time” delivery, proved to be incredibly fragile during the pandemic.
Now many companies are planning to diversify their supply chains, including some re-shoring of US production for the most mission-critical of parts and components.
This is likely to permanently increase production costs, which will be passed onto end consumers.
And finally, we can’t forget about the flip side of rising wages.
The labor shortage created by the pandemic, might not fix itself for many years.
For one thing, many Americans, flush with stimulus cash, are taking stock of their lives and choosing to be pickier about what jobs they except.
Rather than just take the first available job, even if it pays little and has very poor working conditions and future career prospects, as occurred after the Great Recession, workers are now taking the time to hunt for the best working conditions, benefits, and pay.
Ultimately that should benefit the economy, with richer, happier, and more productive workers. But it could take several years for the labor shortage to work itself out.
What’s more, approximately 2 million extra Americans retired during the pandemic according to the Congressional Budget Office, partially because a red hot stock market and soaring home prices, allowed them to afford to.
Some of these skilled workers might return to the labor force, at least part-time. But many are gone for good, meaning the companies might struggle to fill positions with qualified workers for far longer than initially expected.
Wage growth was 4.6% YOY in September according to the Bureau of Labor statistics. That’s some of the strongest wage growth we’ve seen in over a decade. But companies will pass on most of those labor costs in the form of higher prices.
Does that mean hyper-inflation that perma-bears have been predicting for over a decade is here? That it’s time to sell all your stocks and buy gold?
Actually Gold is down 15% as inflation hits 30-year highs. How on earth can that be? Because gold is actually most highly correlated to inflation-adjusted interest rates, or “real interest rates”.
Because interest rates are rising slower than inflation, gold is one of the worst assets in 2021, a red hot year when almost everything is making money.
Or to put it another way, Gold only tends to do well if inflation is higher than the Fed thinks is likely, BUT not too high. That’s not something the goldbugs told you about over the last decade, was it?
Unlike gold, these blue-chip companies are run by skilled and adaptable management teams, that can not only adapt to supply chain snarls and rising input costs but any other challenges that appear, in the short or long-term.
And this brings me to the final fact about what investors need to know about a potential lost decade for stocks.