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A Storm Is Heading Our Way

There was a time when a plate of calamari at one of my favourite steak houses in Singapore would be enough for two people, if not three, to share. Not anymore.

These days, there are more gaps than food on the fancy black tile that the eatery now uses to present the food. They think I won’t notice. But I do.

Whether we like it or not, inflationary pressures are eating into many industries. Restaurants, for example, have to make ends meet by passing on extra operating costs to consumers.

So rather than raising prices, they might shrink portion sizes instead. But that is just inflation by another name.

Inflation is the buying power of the dollar in your pocket. So you either pay more or you get less. It boils down to the same thing.

What went wrong?

When central banks around the world embarked on their money-printing experiment – and it is just that, an experiment – many observers, including me, believed that it would be inflationary.

It just isn’t possible to print billions upon billions of dollars, yens, euros and pounds, and not get inflation. That just can’t happen.

But something went very badly wrong with the experiment. It didn’t quite work the way that they intended.

Rather than driving up consumer prices, which would have created more demand, we ended up with asset-price inflation instead.

Unaffordable housing

However, while asset prices were rising sharply, wages were not keeping pace with it.

In many countries, property prices climbed to eye-watering levels.

In China, property prices are still rising in its top-tier cities. In the UK, house prices are almost unaffordable. In Hong Kong, high property prices are causing social unrest.

Thank goodness Singapore acted swiftly and decisively to nip the problem in the bud. We want a home-owning society. We don’t want a debt-ridden society.

But rising debt in other parts of global economies has been one of the unintended consequences of easy money.

The bond bubble

Investors have been falling over themselves to lend money. And borrowers have been quite happy to play along.

In the beginning it was just a way for investors to earn a better return on their money. That is understandable.

But the desire for a decent return has turned into outright greed. As bond prices started to rise, lenders were even willing to forgo a proper return in the hope that they could sell on their IOUs for a higher price later on.

In some instances, there was no yield to speak of. Some investors were prepared to pay, rather than charge, to lend money. Crazy!

Some say it will end in tears. It is starting to happen.

As the Federal Reserve starts to raise interest rates, bond prices could fall. Anyone speculating on bonds could get their fingers burnt.

What the Fed knows

The Fed knows better than anyone that a rate-hike could be destabilising. It is trying its best to make it as painless as possible.

It could be detrimental for banks that are holding US Treasuries. It could be bad for insurances companies and pension companies too.

Fed chair, Janet Yellen, knows that a rate hike could rattle bond markets. But she is also aware that the Fed cannot avoid raising interest rates, either.

So it appears ready to fudge a solution.

How much is too much

Higher inflation will help erode America’s US$19 trillion debt mountain in real terms. That is the beauty of inflation. It shrinks debt.

But consumers might need to put their skates on. Price rises could mean that today’s lavish steak dinner could turn into tomorrow’s modest hot-dog supper.

That could be good news for manufacturers, suppliers and shopkeepers, as rising inflation drives demand that in turn drives inflation, and so on.

But to keep up with inflation we, investors, need to invest in inflation-beating assets.

Pricing power

Many of our recommendations at our advisory service have the ability to pass on price increases, without damaging their businesses.

I am very comfortable that our stock selections could weather the squall that is heading our way. It is going to be quite a storm. So hang on to your hats. I have my sou’wester ready.

A version of this article first appeared in Take Stock Singapore. Click here now  for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.