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How not to lose money, ideally to earn during stagflation. That is, at a time of significant price and unemployment growth at the same time

Inflation is peaking, we will soon hope to slow it down. Even so, we have an extremely difficult time ahead of the economy. Stagflace. Thus, the economic downturn associated with the still significant rise in consumer prices. All this can be read from the latest survey in May among more than three hundred of the world’s leading economists and investors, conducted by Bank of America every month.

According to the experts interviewed, stagflation, defined as economic growth below the level of the inflation trend, on the contrary, is almost “loaded”. 77 percent of them are waiting for it in the coming year. Such a high percentage was last feared of stagflation in August 2008, on the eve of the collapse of the investment bank Lehman Brothers, which launched the most critical phase of the global financial crisis. At the same time, however, according to experts, inflation worldwide is culminating right now, or even has already reached its peak. After all, as is well known, the best cure for inflation is inflation. The sharp rise in prices is destroying demand, as it erodes the purchasing power of people and companies and throws in them the financial distress of the parties of the future.

The decline in global inflation for the coming year is expected by 68 experts, which is the highest figure since December 2008. In April this year, only 40 percent of them expected a decline in inflation. Switzerland’s largest bank, UBS, even says the United States is already at a peak of inflation and that commodity price inflation is now falling sharply hand in hand with shifting consumer demand for services. One of the signs of this new trend is the beginning of a fall in used prices. Goldman Sachs even revised its inflation outlook downwards for clients for the first time since the beginning of last year in its May report.

The slowdown in inflation in the world or even in the USA alone may have a greater effect on reducing inflation in the Czech Republic than further tightening of the Czech National Bank’s monetary policy. A substantial part of domestic inflation, more than more than half, is imported. Even before the end of this year, we can expect a significant easing of inflationary pressures in the Czech Republic, whether the CNB will raise rates further or not. In that case, only one thing would be certain. The leaders of the two now so much disfigured camps, the “doves” and the “hawks,” would take credit. The first ones would say, you see, we said that, further rate increases would only stifle the Czech economy unnecessarily, inflation is slowing even without it. Others, on the other hand, would explain that the bulldog’s resilience in raising rates, with which neither the president nor the new CNB governor, nor many businessmen or politicians, could finally beat inflation.

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But make no mistake, the slowdown in inflation does not mean a return to the inflation target of two percent in the Czech Republic. It seems that it will not occur until 2024 at the earliest. Which means that we have about two years of unpleasant stagflation ahead of us. Inflation will no longer necessarily be double-digit, but the destruction of demand, caused by a decline in purchasing power, rising interest rates and, ultimately, unemployment, will bring the economy into stagnation or recession.

Fortunately, he enters the Bank of America scene again. Its analysts took the job and collected data for all stocks of the most important stock exchange index in the United States, Standard & Poor’s 500, which have been traded continuously since at least 1968. They measured their performance during the stagflation periods that have occurred since the late 1960s. shocks of the 70s. So which companies perform best during stagflation? Which investors best protect against it?

Kroger, the largest retail chain in the USA, is number one in the imaginary ranking of stagflation insurance. According to Bank of America, Kolos, which has an average yield of over 23 percent a year at the time of stagflation, operates more than 2,700 mega-, hyper-, supermarkets and other shops and department stores in the USA under various brands. And also about 1500 gas stations. If the American is hungry, if he needs medicine, if he has to hook up his car, he is quite likely going to one of the Kroger stores. And it will be eaten even in a deep stagflation crisis. She will also refuel with her. People are just as sick, whether there are good or bad economic times. People buy food, fuel or medicine – they have to buy it – even if they don’t have the economy and financially “hey”. The seller can thus relatively easily pass on his stagflation-significantly increased costs to them.

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For example, the medical equipment supplier Teleflex, which achieved a value of almost 20 percent per year, or the confectionery manufacturer Hershey, with a stagflation average of more than 18%, have also managed exceptionally well over the past half-century. The reason is obvious. People are sick or have health problems regardless of the economic cycle and regardless of price fluctuations. And apparently no stagflation is asking them enough to forgive themselves for something sweet, even if they have to dig deeper into their pockets.

And if there is a country that makes a really good living by the fact that people just get sick and at the same time, whatever happens, they like to eat, it’s Switzerland. The Alpine country specializes not only in the export of medicines and chocolate, but also more in general of luxury goods. The prices of pharmaceutical products – which is another advantage in times of stagflation – are currently much less affected by inflation than, for example, prices in engineering or heavy industry, which are far more dependent on inputs in the form of dramatically more expensive raw materials. Therefore, producer price inflation is now about six times weaker in Switzerland than in neighboring Germany.

In addition, luxury goods, the Swiss domain, are relatively resistant to stagflation. Stagflace erodes the purchasing power of the middle classes in particular, who have little power to escape. Wealthy people have their investment advisers, their real estate, wine collections or art, their well-diversified investment portfolios, so that stagflation does not end up with a percentage of their assets as middle-class assets – which is why they will indulge in some new “Rolexes” again this year and next year. .

In short and well, Switzerland itself is a good insurance against stagflation. So logically, its currency also represents it. In fact, investing in the Swiss franc is one of the best and easiest ways Frant Vomáček can insure himself against stagflation. He simply sets up a franc account at his bank. In addition, the Swiss currency is doing well as a safe haven in times of disasters, wars and famines. We have a war, according to the German Minister of Development, because of it, it is imminent – even the largest world famine since World War II.

The mentioned Germany has so much higher production inflation than Switzerland because its economy – like the Czech one – stands and falls with imported raw materials. Stagflation is similar to the well-known “follow money”. If we want to get good insurance against it, let’s go “upstream” in the production chain – only where price inflation begins.

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At the end of the chain is, for example, a poor German or Czech engineering company. Both face dramatically rising production costs and at the same time have little power to pass them on to their end customer. Because their product – the machine – is simply forgiven by the customer if it seems too expensive. Unlike the mentioned foods, drugs, gasoline or diesel. “Upstream” of the production chain, of course, we go to raw materials. It starts with them. Exactly. Raw materials as such represent a historically proven insurance against stagflation, as the growth of their prices is its ultimate source.

Commodities such as oil, gas, copper, nickel, coal or grain can be invested by acquiring relevant futures contracts, buying shares in mining companies (eg B2Gold – gold, Vale – iron ore and nickel, Ovintiv – gas in North America nebo) or by investing money. to the commodity fund. However, as in the case of the Swiss franc, it may be a much easier option to simply acquire the currencies of those countries that export large quantities of raw materials.

When exports thrive, the currency of the exporting country generally strengthens. And when there is stagflation due to expensive commodity prices, the currencies of those countries that export commodities abundantly will prosper. Unfortunately, there are a number of politically unpredictable regimes, led by Russia. Thus, the ruble would not be a safeguard against stagflation, even if it raged today for a purely different reason than the Russian invasion of Ukraine. Currencies such as the Canadian dollar or the Australian dollar usually benefit from rising commodity prices and are not subject to excessive geopolitical risk. In addition to the Swiss franc, they represent another good and easily accessible insurance against stagflation.

Lukáš Kovanda, Ph.D.
Chief Economist, Trinity Bank


TRINITY BANK

Trinity Bank has been operating on the financial market for 25 years and was established through the transformation of the Moravian Monetary Institute – a savings cooperative. It has almost 25,000 clients and its balance sheet total exceeds CZK 18 billion.

Trinity Bank specializes in private and corporate banking, with individuals focusing primarily on deposit and savings products that offer above-standard savings.

More information at: www.trinitybank.cz

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