The Worldwide Inflation Dilemma – Miller on the Money

Inflation is increasing prices and a fall in the purchasing value of money. Banks and governments make inflation sound complicated as it serves their interest. It’s a hidden tax. Government-created inflation weakens the value of the currency, our money buys less.

Anyone shopping goods, services, airline tickets, an automobile, clothing, and particularly medical care is seeing significant price increases. While the government wants to reassure us things are under control, we know better when we pay the bills.

As evidenced by the recent debt ceiling farce, politicians have no interest in fiscal sanity or balancing the budget. While many predict the demise of the dollar, and much of the world is assisting in the erosion of the USD as the world currency, there are other factors.

Friend Chuck Butler explains inflation as when the currency becomes the “hot potato”; everybody tries to dump it and grab currency from a different country. As currencies trade in pairs, investors hope to gain better, more stable, purchasing power in the trade.

Urs Vrijhof-Droese is the Managing Partner of WHVP, international asset managers. Urs, an expert in international banking is based in Zurich. I’m a WHVP client. His recent article, The Swiss View – Cash is King got my attention. He shares some interesting graphs:

“Core inflation” is the change in costs of goods and services, excluding food and energy costs. We don’t eat, drive or flip a light switch?

Currently, the European Union (EU) has bigger inflation challenges than the US. It’s time to check in with Urs for a global perspective.

DENNIS: Urs, thanks for taking your time for the benefit of our readers. While the fiscal insanity of the US government is quickly eroding the value of the dollar, the EU, Japan and others are following suit. Switzerland, true to form, has shown great restraint as compared to much of the world.

Many world banks are following the US trend and raising interest rates, maintaining some currency parity in the world market.

The US government believes others will always lend us money to support their spending folly. One credit agency recently “slightly downgraded” the US credit rating.

Are you seeing any real spending restraint in the EU or elsewhere? Where do you see this going internationally?

URS: I don’t see any real restraint in the EU. Like the US, they have spent more than their tax revenue and borrowed, or created money to make up the difference.

Switzerland is different as we have a debt break that is taken seriously. Once government spending approaches the “debt ceiling” our politicians must come up with a solution to reduce government spending instead of discussing how to raise the debt ceiling.

The worldwide government spending programs, initiated during Corona, pushed inflation even higher is taking a toll. People couldn’t support their standard of living, leading to more government spending programs. This is a vicious cycle.

In the long run, I believe the EU and US government spending behavior will have a severe impact on their credibility, affecting the value of their currencies.

Accordingly, to protect their competitiveness, they might be forced at some point to look for alternative currencies that reveal more stability. Central banks are buying huge amounts of gold and may force a return to the gold standard.

DENNIS: When you select investments for your clients, what are the currencies you are currently favoring?

URS: Last year, we significantly increased our exposure to the Swiss franc. We saw the strength of the Swiss economy and the flexibility we could obtain, as well as the comparatively very low inflation rates.

Next, we favor the Australian dollar. Keeping in mind the international pressure towards the energy transition, many minerals are needed. These minerals also rise in price with world inflation.

For example, Australia is one of the world’s largest lithium suppliers.

Gold is another example. As you can see, they are well ahead of much of the world.

We’re monitoring the Mexican Peso. Mexico is well-positioned to benefit from the reshoring of American companies. If the Mexican government plays its cards well, there is a chance for many new investments to be made in Mexico, bringing them more education and prosperity.

DENNIS: Your “cash is king” reference makes the point for both investors and companies that continue to pay dividends.

Generally, US common stocks are not paying inflation-beating dividends. Fortunately, there are businesses like Master Limited Partnerships (MLP), Real Estate Investment Trusts (REIT) and Business Development Companies (BDC) that pass through the bulk of their profits to investors. As a result, if you can find good, safe companies, your dividend income can keep up with inflation.

Are there similar investments in other parts of the world? Where do you do most of your “safe, inflation-beating shopping?”

URS: Your point comes up regularly when I’m speaking with clients. However, beating inflation is not a one-year project. Instead, beating inflation is part of your overall investment strategy defined over a more extended period.

Nevertheless, dividends play a significant role in our investment strategy. However, some companies pay dividends, others buy back shares, and others again work with a combination. So, you need the whole picture. We like to focus on solid companies, producing ample cash and paying dividends, not having to rely heavily on special tax treatment or structures.

Over the last year, many companies in the commodity industry not only outperformed the markets but also paid dividends that beat inflation.

From an international perspective, the currencies also play an important role.

For example, for some clients, we bought a very high-quality, fixed-income investment denominated in the Mexican peso. Bond prices continually fluctuate; however, the Mexican peso appreciated against the U.S. dollar between 10 and 20 percent. We are seeing the profit in the interest payments and again when the bond matures.

DENNIS: Since 2008, I’ve felt central banks are coordinating their efforts, the major governments of the world are spending money they don’t have. Historically politicians are forced to revert back to gold when the currency fails.

Do you see any movement in the world of returning to the gold standard?

URS: Yes, I am. From 1990 until 2010, central banks have been net sellers of gold. Last year we saw the second-highest year of central banks’ net purchases since 1950, reversing course. There is a reason they are buying.

The political class has indeed become undisciplined with spending. Despite historical tax revenues, the U.S. government increased its debt level, instead of finding solutions to cut its spending and reduce debt.

An eventual return to a gold standard is still being determined. However, the world has become more fragmented again. I believe the U.S.’s hegemony is at the beginning of its end, which will reduce the relevance of the U.S. dollar.

Due to this insecurity, the war in Ukraine, and the tension in Taiwan, central bankers buy gold, preparing themselves for various scenarios. We also see increasing interests from Americans who draw the same conclusion, trying to protect themselves and their families for an uncertain future.

Holding assets, including gold in an offshore account, adds another level of safety.

DENNIS: One final question. The world saw the recent riots in France when the government tried to move the retirement age beyond 60. In the US you can’t collect your full Social Security benefits until you are 67, and it is likely to be pushed back even further.

With the increased socialized societies, people depending on government money, is it really possible for governments around the world to realistically cut spending? In Argentina they just keep printing away somehow continue to survive.

Much like Greece a few years back, where do you feel the first crack will appear?

URS: Dennis, thanks again for the opportunity to address your readers.

Some time ago the Financial Times projected that roughly half of the world’s largest economies are threatened to be categorized as junk by 2060 due to excessive spending through an aging population.

However, you are right; politicians are reluctant to cut costs on retirees, especially considering the inflation. So, the only option is to take the bull by the horns …. people will have to work longer. Pushing back access to your retirement benefits is the first step towards a world where people must work until they are 70 or even longer.

Where will the first crack appear? One of my favorite quotes goes, “It is difficult to make predictions, especially about the future.”

Joking aside, we have seen the first crack in France. Naturally, people are not happy about what they see. And what they see is having to work longer before they can retire.

Realistically, we are moving back to where everyone was responsible for their well-being throughout their life, including retirement. I would not trust the government’s social system too much. That’s an additional significant reason to diversify, meaning to build different pots where you can draw from once you need it.

Dennis here. Throughout history, politicians robbing from workers to give free stuff to others, creates inflation and never ends well. Any real budget cuts draw violent opposition from those who depend on the status quo.

It’s all Kabuki Theatre, debt will continue to skyrocket and the curtain will eventually come crashing down.

Political upheaval is to be expected.

As Urs said, in the end everyone is responsible for their own well-being. Got gold?

On The Lighter Side

We have enjoyed Chamber of Commerce-type weather here in the Midwest. Jo and I have been taking evening golf cart rides through our little community. Lots of folks outside watering plants, sitting outside, with plenty of time to stop and chat.

We are not in a golfing community, but golf cart cruising appears to be a major part of socializing. Every walker, passing car, person in their yard, you name it – smiles and offers a friendly wave. Jo and I quickly became comfortable stopping and talking to perfect strangers, and within a few days stopping for a moment and chatting has become the norm.

Right after moving in, the neighbor lady came over and introduced herself. Jo mentioned she was from New Harmony, and the lady lit up, “I just love New Harmony.” Jo asked her if she had ever eaten at the Yellow Tavern. She loves the place. Then Jo mentioned, “My cousin owns it.” The neighbor grinned and replied, “So does mine.” Their cousins are married to one another.

There are several folks in our little community that are from Jo’s hometown or have connections there.

Sorry to wax on, but nice midwestern summers in a comfortable place is good for the soul.

Quote Of The Week

“But once you realize you’re not going to be around forever, I think that’s what makes life so magical. One day you’ll eat your last meal, smell your last flower, hug your friend for the very last time. You might not know it’s the last time, so that’s why you should do everything you love with passion, you know? Treasure the few years you’ve got because… that’s all there is.” — Ricky Gervais as Tony in the Netflix Series After Life

And Finally…

Friend Phil C. shares some good, old-fashioned homeschooling:

Homeschooling – Phil C.

MY PARENTS TAUGHT ME…

TO APPRECIATE A JOB WELL DONE

“If you’re going to kill each other, do it outside. I just finished cleaning.”

RELIGION

“You better pray that will come out of the carpet.”

ABOUT TIME TRAVEL

“If you don’t straighten up, I’m going to knock you into the middle of next week!”

LOGIC

“Because I said so, that’s why.”

FORESIGHT

“Make sure you wear clean underwear, in case you’re in an accident.”

IRONY

“Keep crying, and I’ll give you something to cry about.”

OSMOSIS

“Shut your mouth and eat your supper.”

CONTORTIONISM

“Just you look at that dirt on the back of your neck!”

STAMINA

“You’ll sit there until all that spinach is gone.”

WEATHER

“Your room looks like a tornado went through it.”

ANTICIPATION

“Just wait until we get home.”

HUMOR

“When that lawn mower cuts off your toes, don’t come running to me.”

ROOTS

“Shut the door, do you think you were born in a barn?”

And my favorite:

JUSTICE

“One day you’ll have kids, and I hope they turn out just like you!”

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken

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