“I feel like an oversexed man in a harem. This is the time to start investing.”


Warren Bufffet

I love a bargain.  My wife and I had been visiting Islands in Caribbean for years with designs to eventually find a place where we can vacation, bring our kids, snorkel, dive or enjoy time on the beach.  We wanted the place to be one we loved to visit but also one we could rent when we were away. Last year I knew we had a great opportunity to buy at a good value.

Hardly anyone had been able to visit St. Kitts and Nevis for close to two years.  Knowing the Islands primary source of revenue was tourism, we knew they were in a severe economic slump.  Homeowners had not been able to visit or rent out their places unless they or someone else was willing to quarantine for over a week.  But when the quarantine period dropped to just three days, we hopped on a plane, spent a few days at the Four Seasons and engaged on a whirlwind tour of condos and homes over the rest of the trip.

Jennifer especially loved the unspoiled Island of Nevis with great beaches, resorts, mountain hiking, restaurants, and wildlife.  It is an Island where the monkeys outnumber humans, and it is not uncommon to find wild donkeys roaming the countryside.  We were able to find a great value at an opportune time as many were despondently selling their homes at rock bottom prices.

 

 

Our kids enjoying the Nevis Sunset at Chrishi Beach.

Every few years we encounter a period when panic enters the markets.  It’s in these periods when we know its time to find bargains.  It’s funny how most times when someone finds a bargain, they get excited that they were able to buy something for 75 cents on the dollar.  I can understand how some may grow concerned when they note that their account values have dropped significantly below their all time high.  But I want to be taking advantage of this exceptional opportunity.

Very rarely have we seen investors as despondent as they are currently.  The Association of Individual Investors spread between Bullishness (greed) and Bearishness (fear) is the most negative it has been since 2009.  Three of the last 10 weeks have fallen within the top ten most negative sentiment readings of the last 30 plus years.  Historically this has proven the best time for investors to put money to work.

In addition, we are seeing earnings and dividend yields we have not seen in some time.  Within our Global Income portfolio, we are currently getting dividend yields of over 6 percent.  I cannot remember yields ever reaching these levels previously as we look for not only strong but growing dividends. We have been able to find these yields in energy and mining companies over the last couple of years as inflation has made these businesses more and more attractive.  In fact, energy companies have been the only ones that have made gains over the last six months.

The last six months have been the worst start to the year we have seen for bonds in over 200 years and for equities over the last fifty plus years.  I want to be a buyer when others are willing to give me bargains.  I don’t think we have seen bargains in some areas of the markets close to this level since the Financial Crisis.  Much like the early 2000s, there are still some overvalued pockets we want to avoid, but those who are willing to search for the most valuable easter eggs are likely to find nuggets of gold.

What Does Any of This Have to do with Toilet Paper?

Inflation protection and profiting from appreciation in scarce assets has been a theme of ours for well over a year with our largest concentration in energy companies.  Lately we have paired back our exposure to real estate as rising interest rates have made housing less affordable, but we still believe inflation protection will be extremely valuable over the next few years.  The toilet paper hoarding enabled record profits for companies such as Kimberly Clark and International Paper in the first half of 2020, but the next year’s demand paled by comparison.

Lately we have seen companies hoarding goods and materials all along the supply chain as they struggle to deliver goods in a timely manner as transport times have ballooned and production has stalled.  Many consider just in time inventory strategies to be a relic of the past. This unfortunately leads to both undersupplies sparking inflationary worries and oversupplies as companies may overestimate demand for particular goods. Walmart and Target recently have floated the idea of paying customers NOT to return items as they currently have issues with holding too much inventory.  But if the supply chain issues that caused this hoarding are not resolved, we are likely to continue to see more hoarding and excessive demand sparked by scarcity fears going forward.

Michael Burry, the founder of Scion Asset Management who is well known for shorting the housing market in 2008 and was portrayed by Christian Bale in “The Big Short” has had much to say about this as well.  He believes inflation could persist for years.  He has pointed to the restructuring of the global supply chain as the driving force behind higher prices, delivering his warning in a recent awkwardly phrased tweet.

“Onshoring/blue collar shortages put global supply chain restructuring raise long term inflation’s floor even as bullwhip cycles lower to that end,”    Burry wrote in the tweet.

The Atlanta Fed recently estimated we have already entered a recession. We doubt any current or upcoming recession will dampen our currently elevated levels of inflation for long. When the climate changes so that miners and drillers are confident making infrastructure investments, we may be able to see then end to longer term supply shortages. Until then, existing suppliers are likely to enjoy competitive advantages as very few are willing to compete and make new investments in these spaces.

Some may believe energy and material prices are coming down. Larry McDonald, the author of the “Bear Traps Repot” points to reasons why it may be difficult for prices to moderate for quite some time as lack of infrastructure investments may make it hard for companies to keep up with demand unless we enter a severe recession.  His talking points are below.

High barriers to entry and lack of competition makes for more attractive investments.  Warren Buffet has recognized this as he is loading up on energy companies as well.  We feel we are in good company as we continue to focus our attention on companies that produce scarce assets with high barriers to entry.  If inflation is here to stay for a while, why not take advantage of this?

Joe Franklin, CFP®

President, Wealth AdvisorFranklin Wealth Management, LLC423-870-2140www.Franklin-Wealth.com

 

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