Inflation Is Not Transitory

The market continues to be extremely volatile. This week was marked by stocks up in the morning, down in the afternoon and right back up by the close. Anything tied to commodities has been extra volatile. Microcaps were killed.

One word from the Fed will send commodities soaring or plummeting. The market has gotten to be extremely interest rate driven. When there is so much debt in the system, combined with ultralow rates, any small change in discount rates will lead to large valuation changes.

The inflation is transitory narrative is completely off base. A large increase in the quantity of money combined with massive debt loads does not end in a transitory inflationary period. Inflation will destroy capital markets, and all will have to rebuild.

The Fed’s narrative of “transitory” is talking terms to calm investors. The all-mighty dollar’s value is based on the confidence citizens have in the purchasing power. The dollar has no real intrinsic value. It is not backed by gold. It is not backed by a digital piece of code. All it is backed by is the government’s word that the dollar can be used to transact for goods and services. Once this faith in the dollar falls apart (and it will) inflationary pressures will be felt.

Eventually interest rates will rise and valuations will come way down. Discount rates will move up and real cash flows will be impacted. My thought is interest rates move up as inflation impacts fixed income investors. If real inflation is >5% why would anyone buy bonds that yield 1-2%? It makes zero sense to me. The bond market may be the most overvalued market right now. A manipulated and overvalued market.

Inflation is not transitory. When prices go up they typically don’t go back down. Your haircut that used to cost $20 bucks now costs $25. And it is here to stay. Inflation is not transitory. It is permanent.

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What I am buying

I continued to buy coal companies this week (subscribers can find my favorite coal stock here). I have become even more bullish on coal. The price of coal continues to move up, yet valuations have barely budged. Coal names are well positioned to generate a significant amount of free cash flow over the next 12-18 months. There are also a few catalysts over the next few months that should re-rate a few coal companies I am closely following. A much needed update will be going out to subscribers next week.

I have also continued to add to the new company I highlighted this week to subscribers. The stock is very illiquid and takes forever to buy. But this illiquidity gives retail investors an advantage. Big institutional investors will not be able to touch this stock in any manner. I plan to continue to buy and have made this company a major position in my portfolio. I think it is almost a no brainer and should provide a strong internal rate of return should my analysis be correct.

My favorite movie theatre stock continues to fall on zero news this month (no, this is not AMC). I haven’t seen any business or industry specific news regarding theaters this month so not sure what is going on here. However, all theater stocks have sold off and are starting to look pretty attractive again. I may start nibbling again on my favorite movie theater play as I think it has incredible assets combined with a strong management team. Movies are also back in a big way with F9 posting record box office numbers and Black Widow beating F9’s previous pandemic highs. I’m expecting the box office to continue to improve over the course of the summer, benefiting all theater stocks. Side note: I have been using my friends at vigtec to watch the options flow on this movie theater. Download their free app to see in-depth data on options.

Snippets

  • Flying cars from Tesla called a likely long-term scenario by Morgan Stanley: Morgan Stanley says flying cars are a matter of if not when. "We have run a range of scenarios flexing market share and EBITDA margin assumptions based on our global eVTOL/UAM model (a $9tn TAM by 2050… yes...2050). Discounted back to the present on a per-share basis, we’re coming up with potential preliminary outcomes on the order of $100 per Tesla share on the low-end to approximately $1,000 per Tesla share (or more) on the high end."

    My Take: Predicting what cash flows, let alone what a business will look like, 30 years from now, is utterly useless. There is no analyst on the face of this planet that will be able to predict accurately a business transformation like this. 30 years is a long time. 30 years ago the internet did not exist, let alone all of the FANG stocks. 30 years from now the business environment will be totally different with a new set of “high growth” FANG type stocks that we probably can’t even imagine. Throwing a price target on a speculative piece of pie in the sky growth target is disingenuous.

  • Macerich upgraded to Hold at Jefferies on improving quality portfolio: A Jefferies analyst upgraded Macerich to a “hold” from a previous “underperform” rating. During Q2 Macerich recast its credit facility, sold assets and raised equity, the analyst stated.

    My Take: I have been “speculatively” bullish on Macerich for the past couple of months. I love the “dying” mall story Wall Streets tells and the beaten down share price. The stock is highly levered but a lot of the leverage is non-recourse to the corporation. Take a look at the long-term price chart and you can clearly see a potential “massive” reversion to the mean scenario taking place. In addition, in 2015 Simon Property Group offered to buyout Macerich for $95/share as these are extremely valuable assets. I have not done a deep dive into Macerich as the market cap is bigger than I typically deal with. I don’t have a position in Macerich but may consider taking a “toe-hold” position in the coming weeks to take potential of mean reversion.

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