Video Update: The Best Assets to Own Even if the Inflation Game Changes

We just got another bombshell inflation surprise last week.

Even by a new metric the Fed is using, it looks like inflation has been steadily inching higher over the past few months… and is on pace to continue doing so – potentially for years.

In today’s video, Chief Analyst Adam Galas will share the best assets to own for long-term elevated inflation.

History shows these assets can outperform the markets and even beat inflation… And we own plenty of these natural inflation hedges within our Fortress Portfolio.

Click below to watch this week’s video. And keep sending in your reader questions.

Happy SWAN (sleep well at night) investing,

Brad ThomasEditor, Fortress Portfolio

Welcome, Fortress Portfolio members, to another weekly video update. Today we're talking about why the inflation game might have changed for good.

Now, a quick update about what happened last week.

It was another bombshell inflation surprise with the release of the Core PCE (personal consumption expenditures) Inflation report, the Fed's official inflation metric. It came in at 4.7%, which is higher than expected.

Most concerning, however, was that month over month it came in at +0.6%, which is an annualized rate of 7.4%.

Now, the Fed has mentioned it has a new inflation metric called “supercore.” According to CNN, it “refers to prices that rise when workers get paid more for their services” and excludes housing. In contrast to the Core PCE, supercore came in at 4.6%, also +0.6% month over month. Also, 7.4% annualized.

Now, this is concerning because for the last three consecutive months, supercore inflation has been rising.

So basically, what the Fed is saying is that since the economy is 70% services (excluding housing) and the prices of those services are coming down, they're looking at supercore to estimate what inflation is doing at any given time.

So the problem is that if you look at the year over year supercore or core PCE, the Fed's official inflation metric, they're both stuck for the last three months at 4% to 5%. And the Cleveland Fed's real-time inflation model estimates next month will also be 4.7% on both inflation metrics.

So what might this mean for inflation going forward?

Well, the one-year inflation expectation, according to surveys, is 4%, twice the Fed's official guidelines and target.

For the next 10 years, it's predicted to be 2.9%, about 1% higher than what the Fed is targeting.

Now, why might inflation potentially stay higher at 4% to 5% for years or even the next decade?

We’ve had a reversal of the last decade, which is fiscal policy.

Basically, governments are spending roughly 5% of GDP per year for a stimulus. That's thanks to things like infrastructure spending.

Now, there is some talk of austerity with the debt ceiling negotiations.

But for now, it's spend, spend, spend. And of course, that's helping to drive inflation higher.

I’ll give you an idea of how behind the curve the Fed might be, according to Bloomberg.

The famous Taylor rule, which is a systematic formula for how high interest rates should be based on economic conditions, says that right now the Fed funds rate should be 10%.

Well, the Fed is working its way towards 5%. 

So something’s gotta give.

But today, I don’t want to spend too much time on interest rates or what this might have to do with the stock market.

We've talked about that a lot in recent weeks.

I want to explain today how your Fortress Portfolio can potentially protect you from a decade of elevated inflation.

Historically, the best things to own when inflation is high is real assets. Things like real estate, pipelines, infrastructure, things that are, of course, real and generate cash flow.

Now, Fortress is 58% real hard assets. So let me give you an example of just how these things are natural inflation hedges.

Our energy stocks, our pipelines, midstreams, etc. are energy utilities, and they are mostly regulated by the U.S. and Canadian governments.

When inflation is high, the prices they're allowed to charge for those pipelines naturally goes up. For example, last year, the Federal Energy Regulatory Commission (FERC) approved about 7% increases in those pipelines.

They also have long-term contracts ranging from 10 to 50 years. And those contracts also have inflation hedges built in.

Now, we have another 35% of the portfolio that’s in the financial sector, such as insurance companies.

And last week, we explained how those benefit from high inflation.

Why?

Because interest rates will naturally be higher. And the cost of funding for insurance companies is between zero to slightly negative.

Remember that they're using their insurance float to buy portfolios of bonds. And if interest rates are higher, so are bond yields, meaning the higher interest income will drop straight to the bottom line.

So that's how Fortress can protect you in a high-inflation environment.

But as they say, the proof is in the pudding.

So let's take a look at what happened in 2022. Inflation last year was 8%.

It was a great year for dividend investors. The S&P's dividends were up 11%, dividend blue chip stocks up 14%, and high yield blue chips up 18%. Well, guess what Fortress did last year. 42% income growth.

Now, before you get too excited, this was a blockbuster year, largely created by our managed futures, specifically the PIMCO TRENDS Managed Futures Strategy Fund (PQTAX).

Managed futures, of course, had one of their best years in history because they were short things like the stock market, bonds, and long on the dollar. Pretty much the perfect trades for it last year.

And since managed futures pay out all gains as dividends at the end of the year, that's why we had such a blockbuster year.

But the point is, in the year with the worst inflation in 42 years and the worst year for the 60/40 retirement portfolio in U.S. history, when inflation was red hot, we delivered where it counts.

And not just with a peak decline of just 15%, which was half that of the market, but with income growth that was truly out of this world.

Just like we built this portfolio to do.

So thank you for joining us for another Fortress Portfolio video update.

I want to remind you to please send in your questions and comments so I can respond to them in these videos and in the monthly issues, which come out on the third Tuesday of each month.

Just remember, I cannot legally give personalized investment advice.

So please keep that in mind when generating your questions.

Thank you for joining us for another video, and I look forward to speaking with you again next week.

Wishing you safe and happy investing.

This is Adam Galas, signing off.