Chris Bloomstran of Semper Augustus Investments Group delivered a keynote on investing through deflation, inflation and hyperinflation at Latticework 2022.
Summary:
Chris argued in December 2022 that too much debt, mostly government debt, would shape investing for decades. Total US credit market debt was 158% of GDP in 1981 and 250% by 2000, when $25 trillion of debt sat on a $10 trillion economy. Debt doubled to $50 trillion by 2007 while GDP rose 40%, then grew to over $90 trillion, holding the ratio near 350%. Working it down toward 250% or 200% means some form of “-flation.”
The US once ran federal debt mainly to finance wars, Chris noted, yet federal debt to GDP had topped its World War II peak after pandemic deficits of $3 trillion and $3.1 trillion. The Fed balance sheet grew from $750 billion before the financial crisis to $9 trillion; shrinking it from $4.5 trillion to $3.7 trillion triggered the 2019 repo crisis. Japan, which invented QE and negative rates, had not grown nominally in a third of a century.
Chris saw the 1970s as a possible roadmap. The Dow fell from almost 1,000 in 1966 to under 800 by 1982; S&P 500 investors earned about 2% a year nominal but lost 5% a year to inflation. Profit margins fell from over 7% to 4%, stocks bottomed at 8x earnings and 32% of sales, and household stock ownership dropped from 50% to 10%. In his view the Fed, from Burns to Volcker, was activist and reactive, mostly keeping rates ahead of inflation.
With debt at 350% of GDP versus 150% to 180% in the 1960s, Chris argued, the Fed could not push rates to 8% or 9% without interest swallowing corporate profits. He envisioned a flat market for 15 to 20 years, more QE, and 4% to 5% inflation with money rates at half that, shrinking debt but killing the saver. With T-bills lagging inflation since 2000 and bonds hurt by rising rates, active stock pickers would win, as Warren Buffett did in the 1970s.
Chris put the odds of either severe deflation or hyperinflation at 10% to 20%, with hyperinflation likelier since politicians and central bankers shun austerity. Argentina’s MERVAL rose from 250 to over 160,000 amid 66% inflation; locals in such countries kept some wealth in stocks. Semper Augustus held over 20% in energy and commodity chemicals, plus Newmont (US: NEM) and Kinross (US: KGC), gold miners Chris called as cheap relative to gold as he had seen, at mid-to-high single digits of midcycle profit.
Disclaimer
Latticework 2022 was held on December 13, 2022, at the Yale Club of New York City. The content of this website is not an offer to sell or the solicitation of an offer to buy any security. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this website. BeyondProxy’s officers, directors, employees, and/or contributing authors may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated herein.
