Inflation - Transitory or Permanent?

For the early years of past 10 years, inflation was not my biggest concern. Starting from late 2021, the inflation was going to be main concern - 2 digits figure is very likely. It is most likely to be caused by wage sprial and supply shortage. The key question, whether it is transitory or permanent, is the most discussed one. I would like to blend the latter answer with time perspective.

Depending on the monetary policy making on the global level, I feel that it will take minimum 1 full year to resolve the supply shortage first before the new 'equilibrium' can be established in the labour market. In this sense, it is more of short run permanent inflation.

As mentioned in my previous blog post, I re-read BRK annual letter 1980 and Fortune 1977 article, both being written by Warren Bufett. I do appreciate that inflation is a invisible tax that affect everybody. This cannot be circumvented by incurring real tax deduction expenses/activities (that works well for the real tax that is billed by the tax authority).

At that time, Warren Buffett took his precious writing time to tell us the following:

High rates of inflation create a tax on capital that makes much corporate investment unwise - at least if measured by the criterion of a positive real investment return to owners.  This “hurdle rate” the return on equity that must be achieved by a corporation in order to produce any real return for its individual owners - has increased dramatically in recent years.  The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil.

To combat the inflation rate, the solution for any company is to increase the business earnings in proportion to the increase in the price level without any need for the business to add to capital. I emphasise this wording from Warren Buffett. That bring us, the long term thinking equity investors, to the next question - what company can do this. In 1986 and 1988, BRK invested in ABC, Inc and Coca-Cola respectively.

As for myself, I am thinking that the compounders, very few can do it for a long time, can do this. If you do know one, please let me know so that I can study the company closely.

Inflation seems so bad that it is affecting many lives financially, especially through energy/electricity bills on the global scale. Renewable energy solutions aren't easing that pain due to supply issues and technology limitation. The saving grace is that most investment firms are making impact investing into renewable energy firms/projects. I suspect that, through different variants of power purchase agreement being done early, they would see 'lower' real return if there is such claues that the price per use follows in line with the national nominal tariff at discount. If not for this tariff, the real return is likely to be higher if the price is not capped.

In the event that the equity investors cannot find such ideal company(ies) to invest in, we should then ask ourselves this question - What is needed to relieve the supply shortage in the goods market and slow down the wage growth in the labour market for how long?

The harmony of the relationship between the upcoming robots and the humans, being re-wired by COVID-19 work practices, is required in order to achieve well made products within reasonable time. I am not able to conclude how long the humans can work properly with robots. I am more inclinded to believe the next 2 generation of people, after my generation, is more capable to do so. However I believe there are more different answers from anyone to that question 2.

To close off, I thought I should pen these down as this will affect our next 5 - 10 yeears investment choices from now. Going by Chinese calendar, tomorrow will be the Chinese New Year. I wish the readers to be more resilient this year and get ready for better in 2023.