We're Still In The "Early Stages" Of An Inflationary Boom
Harris Kupperman talks about what stocks his fund is invested in and gives his reasoning for putting on "the inflation trade".
This is the latest from Harris Kupperman, founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection. Mr. Kupperman is also the chief adventurer at Adventures in Capitalism, a website that details his investments and travels.
I published recent thoughts from Harris just days ago, in a post outlining his thoughts on why the Fed has backed themselves into a corner they can’t get out of.
Harris is one of my favorite Twitter follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same. I was excited when he offered up his latest investor letter to Fringe Finance, which is published in part below.
Harris On Markets and Macro
I have genuinely been surprised at the vigor with which the Federal Reserve has raised rates in their campaign to quash inflation. For my entire investing career, the Fed has been dovish, standing by and ready to reassure speculators at every market gyration. For the first time in my career, they’re actively targeting the stock market in an effort to create a recession and reduce the “wealth effect” when it comes to consumer spending. This is a terrifying policy change that was unexpected by most market observers—including myself.
At the same time, I feel that they have no real heart for this campaign. As political animals, they’ll be forced to pivot after they succeed in breaking something. Unfortunately, breaking something may lead to scary outcomes in the shorter term and we’ve kept our exposures at reduced levels until it is clear that they’re ready to pivot. When they do pivot, I believe that energy will be the primary beneficiary as both oil and uranium currently exhibit structural deficits that will be difficult to overcome absent substantial increases in capital spending.
In fact, I think that the magnitude of the movements in energy pricing will stun people who are accustomed to gradual changes in commodity price regimes. If anything, the volatility in European energy prices ought to be a wake-up call for all market participants. It would seem that with structural deficits and rapidly growing demand, the rules have adjusted, and many investors are unprepared for the change. To me, this creates opportunity.
Unfortunately for the Fed, higher energy prices will feed into higher structural inflation levels and at some point, the Fed will have to decide if they want to continue fighting inflation (which is likely impossible to quash outside of a global depression that dramatically reduces energy demand) or if they want to adjust their mandate and accept an increased level of inflation. Despite them clinging to their inflation-fighting mandate all year, I believe they have no desire to inflict a depression on voters. They’ll eventually pivot and accept dramatically higher inflation levels, while continuing to subsidize interest rates to avert the depression that they seem fixated on creating. As a result, we have continued to increase our exposure to US housing on this pullback, as that will be a prime beneficiary of this set of macroeconomic outcomes.