Nick Hodge,
Publisher
April 14, 2022
Inflation Past, Present & Future
Travel with me, if you will, back to December 2020, when I told you in that month’s issue of Foundational Profits that:
- The stock market is at all time record highs despite seeing multiple quarters of declining earnings growth. That’s inflated value.
- A tulip in 2020 is called a DoorDash, which IPOed this week and quickly fetched a valuation more than four times that of Domino’s. DoorDash lost $667 million delivering food in 2019. Domino’s had a net profit of $400 million delivering pizzas that year.
- You can see inflation in many places.
- It’s why we recently sold utilities, which typically do well in deflations, and bought the energy sector, which is beginning to inflate. We’re up 6.5% in a week on XLE.
- We bought oil stocks, if you remember, when oil was trading close to $40 per barrel and held them for a year until it was closer to $85 per barrel.
We did that first via the Energy Select Sector SPDR Fund (NYSE: XLE) and then with the SPDR Oil & Gas ETF (NYSE: XOP) — owning one or both of them from November 2020 through December 2021, and harnessing the bulk of the inflationary move in energy that most government officials and pundits said was “transitory” until very recently.
That was the initial thrust of inflation.
It was easy to identify, position for, and profit from if you tuned out the mainstream noise or listened to someone who is able to.
The very next month — January 2021 — I told you:
- It’s not just copper and gold that are inflating as the dollar buys less and less.
- The government is about to mail out another round of checks and the plebes are giddy they could get $2,000.
- They don’t understand that unless you trade those dollars for inflating assets you will soon find yourself dollarless. Maybe even homeless. Have you seen the street corners lately?
We realized 15 months ago that inflation was knocking at the door.
Most of the rest of the world didn’t realize it until it barged into their refrigerators and gas tanks.
A few points:
I’ve told you many times that markets are cyclical but people think linearly. We think what just happened and is happening will continue to happen.
So just like no one thought inflation was coming in late 2020… everyone thinks inflation is here to stay now. I want to spend some time on why that might not be the case. 
You might recall me discussing the Cantillon Effect:
- …posited over 200 years ago, it talks about how money is distributed once it comes from the king. It is sort of like honey. It comes down and it goes first to those closest to the king.
- Sound familiar?
- And those furthest away from the king get the least, and not in time to catch up with the inflation that's already manifested in assets.
- Bring that up to the modern-day and you're talking about asset prices going up faster than wages are rising.
- Just like the honey slowly creeps to the edge of the dish… the money's starting to creep out that we've put into the system over the past decade.
By understanding this, we were able to get ahead of inflation and buy assets before they went up in price. This not only softens the blow of inflation when you face it in the form of higher prices, but allows you to profit from it.
I would posit that the peak for this cycle is in or very close — both in terms of inflation and growth.
By understanding this, you can get closer to the king. And that’s partially what’s driving wealth inequality.
We were able to own stocks that went up 400% to 900% in the past two years, like…
This was a preview of the April issue of Foundational Profits. To get the rest of the issue, including three actions to take for the month, follow this link.
Nick Hodge
Publisher, Daily Profit Cycle