By Jim Puplava
President, Financial Sense® Wealth Management
April 17, 2024
Every trip to the store, every pump of gas, every bill—the rise in prices is relentless. From groceries to healthcare, inflation is squeezing our wallets. Brace yourselves consumers and investors, this inflation wave may last the decade, fueled by structurally embedded government spending.
What’s worse is that the impact of inflation’s return is cumulative. The Wall Street Journal recently did a story on “How Far $100 Goes at the Grocery Store After Five Years of Food Inflation.” The following is a partial list of the toll of rising food prices:
- Beef: + 51%
- Fruit Snacks: + 77%
- Mayonnaise: + 50%
- Applesauce: + 51%
On an annual basis, bacon, eggs, and milk have seen the highest annual increase of 8.1%, 7.4%, and 6.5% respectively.
While the officially reported inflation rate currently stands at 3.5%, considering the figures above, there are concerns regarding the accuracy of the official number as it falls well short of the day-to-day, higher inflation reality that many Americans experience.
In the world of economics, reality is a matter of what you measure using statistics and data modeling. For example, according to John Williams at Shadow Stats, if you apply the same inflation methodology used by the US government in the 1980s, official inflation currently measures closer to 12%.
As Ronald Coase, the renowned British-American economist, famously stated: “If you torture the data long enough, it will confess [to anything];” and “Existing economics is a theoretical system which floats in the air and bears little relation to what happens in the real world.”
Perhaps the disconnect is just with groceries and food prices, the skeptic in you may be thinking? Well, unfortunately, inflation is up across the board for nearly every item. The latest CPI release for March was particularly disheartening given the big jump in a large number of items:
- Car insurance: + 22.2%
- Repair of household items: + 18%
- Car repair: + 11.6%
- Baby Formula: + 9.9%
- Veterinarian services: + 9.6%
- Rent: + 5.9%
- Electricity: + 5%
Two major factors for the return of inflation, I believe, have been massive fiscal spending by the US government and monetary expansion by the US central bank, which have grown tremendously since 2010.
The massive spending and fiscal deficits of the US government have put the US government into ‘fiscal dominance’. Fiscal dominance describes a situation where a government’s debt and deficits become so high that they impair the ability of a central bank to control inflation through monetary policy. Currently, fiscal and monetary policy are in conflict. The Fed is trying to control inflation through rate hikes and shrinkage of its balance sheet while the government is creating inflation through massive spending programs from entitlements, military spending, to student debt forgiveness. In the end, the Fed will have to choose between defending the State or inflation and, I believe, the Fed will eventually have no choice but to protect the US government through monetizing the debt, which will precipitate a devaluation of the dollar.
For a more complete understanding of our debt and fiscal situation please see Chris Puplava’s quarterly newsletter, “Financial D-Day and the Rise of the Gold Vigilantes.”
I want to focus on how we are planning to protect you from the ravages of inflation on your pocketbook and your portfolio. We are addressing inflationary concerns in three ways through a focus on dividend aristocrats, companies that have a long history of increasing their dividends every year and on inflationary assets such as gold, silver, oil and commodities, and by short-term maturity bonds that rise with interest rates as they mature and roll over.
Let me begin with dividends, as it is one of the surest ways that I know of when dealing with rising prices. Since I began my income portfolio, annual dividends have increased between 9-11% annually. Last year they were up 9% vs 2022 when they rose 11%. The reason for the slight decline last year was base metals and precious metals stocks, which omitted their special dividends due to falling commodity prices. So far this year, precious metals and oil prices have rebounded sharply. In 2022, oil companies and many of our metals' stocks paid out special dividends in addition to their regular dividends. A good example is EOG, a major player in the Permian Oil Basin.
Another example of special dividends is Barrick Gold Corp, which currently yields 2.25% after a recent run-up of 28% since reaching a low in mid-February. The following is taken from its recent report regarding its special dividend policy.
- Level I (Net cash less than $0): No additional dividend
- Level II (Net cash between $0 and $0.5 billion): $0.05 per share
- Level III (Net cash between $0.5 and $1 billion): $0.10 per share
- Level IV (Net cash greater than $1 billion): $0.15 per share
The company policy is to reward shareholders with higher dividends when the company’s cash position improves.
Pan American Silver also intends to reward shareholders with special dividends ranging from $0.01 - $0.06 depending on cash improvement when commodity prices rise.
The 11% dividend increases we experienced in the portfolio in 2022 came from special dividends coming from the energy and mining sectors. If commodity prices continue to rise as we expect this year, given current trends, it could be another good year for us when it comes to dividend increases.
It is still too early to report on dividend increases but we will get a better indication shortly as companies begin this month reporting first quarter earnings.
Suffice to say, one of the best ways we think we can help you stay ahead of inflation is to give you an annual pay increase through dividends, allowing you to more than cover the inflation you are experiencing each month when you buy your groceries, fill your car with gas, or pay your medical premiums.
The second way we are planning to help you with paying your bills is through our bond portfolio. For the first time in 15 years, bond yields are competitive with stocks. With an average of 5-6%, bond yields are offering two-thirds of the yield expected from holding stocks long-term (8%1).
Since we expect bond yields to rise throughout this decade, we are keeping our bond maturities short to avoid losses from rising interest rates. As these bonds mature, we get our original capital back and can roll them over into higher paying bonds as rates rise. So, we see higher interest rates this decade which will translate into higher yields on our bond portfolio and more income to help keep you up with inflation.
Finally, the last element of protecting you from rising inflation is by protecting the purchasing power of your money through owning inflationary assets such as oil, precious metals, crypto currencies such as Bitcoin, technology stocks, as well as our dividend aristocrats. Our goal is to provide you with an increasing income stream each year and a portfolio that protects the purchasing power of your assets.
A final note on what we own, and what we are looking at buying in the future. This decade will be all about infrastructure as the US will need to rebuild its roads, electrical grid, airports, and bridges, especially with deglobalization and reshoring. Therefore, we are looking at infrastructure vs consumer spending. In the area of consumer spending, it will be on consumer staples and healthcare vs discretionary spending. I expect consumer spending to decelerate as consumers are hit with rising inflation, wage stagnation, and further automation using robots and AI.
I recently booted Coca-Cola from the portfolio as it failed to meet my dividend criteria of a 10% annual dividend return made up of dividend yield and dividend increases. Coke’s dividend yield is now only 3.3 percent and annual dividend increases have fallen from 7-8% per year to 3-4%. I will be looking for a suitable replacement to keep the portfolio’s income returns closer to 4% and competitive with the Treasury market. There are several companies I am looking at in my bullpen but am waiting for a suitable entry point for buying.
In future letters, I will highlight what our research team is looking at when it comes to energy, infrastructure, technology, and elsewhere. By the end of June, I will have a better idea as to what I expect your PAY INCREASE may be for this coming year from rising dividends and rising interest rates.
Lastly, I want to highlight an upcoming article I am writing tracing the parallels of 17th century France under the King Louis XIV whose reign was characterized by constant wars and lavish spending in comparison to where the US finds itself today.
Until then, it is a pleasure to be at your service.
Jim
1Long-term average stock market return of 8% calculated between 1802-2021. See Jeremy Siegel’s Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies
Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management. Past Performance is not indicative of future results. Not all clients in the Income Portfolio will have exposure to the securities mentioned above. Differences in exposure are generally due to pre-existing positions or timing of portfolio implementation. Actual client results will vary.
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