The Telltale Sign That Inflation Is Here

The juggling act of a CEO... Finding a delicate balance through the magic of corporate jargon... The telltale sign that inflation is here... The underlying takeaway is clear... 'Transitory' or not?... Don't miss this 'wake-up call'...

Editor's note: We're roughly 16 hours away from this week's big event...

As we noted yesterday, our colleague and Retirement Millionaire editor Dr. David "Doc" Eifrig is hosting a "wake-up call" tomorrow, June 23, at 10 a.m. Eastern time for anyone thinking about retirement. If you haven't already saved your spot, you can do so right here.

In the meantime, we wanted to give Digest readers a preview of what to expect...

Today, Doc is joining us with a timely essay about "doublespeak" from CEOs of public companies. As you'll see, it can tell us a lot about the current economic environment...

I (Doc Eifrig) would never want to be the CEO of a public company...

Sure, in most cases, the paychecks are incredible. And they get to call all of the shots.

But much of a CEO's time is spent as the public face of the firm. He or she needs to keep a bunch of different folks happy all at once – employees, customers, investors, and analysts.

It's a juggling act through a broad range of interests. These people don't always want the same thing. And that's especially true when inflation is rising, like we're seeing right now...

These days, a CEO must try to tell two stories that simply can't both be true.

On one hand, he or she wants to tell investors that, yes, input prices are on the rise. But as investors, you don't need to worry about that... The company can simply raise the prices of its products, pass the costs on to the customers, and keep its margins healthy and growing.

But of course... the CEOs can't tell that same story to the customers!

At the same time, as customers see input prices rising, the CEO must try to ensure them that they shouldn't worry, either... The company will continue to keep its prices low, absorb rising costs of materials, and make sure that the folks buying the products remain happy.

In today's Digest, I want to discuss how these titans of industry try to strike a delicate balance, sending the right signals to investors without riling up customers.

I also want to cover the latest expectations for inflation – and whether it's "transitory" or not. And finally, I'll touch on what you can do to get ready for whatever the future holds.

Let's first go back to those CEOs and the magic of corporate jargon...

Essentially, to be a successful CEO of a public company, you must learn to say different things to different people – while everyone is listening at the same time. And in the end, it's all about winning over the folks with the money...

A CEO can't simply say that the company will raise its prices for customers to satisfy its investors. But he or she can get pretty close by using coded language in earnings calls.

And right now, with input prices going up in many sectors, we're seeing a lot of it...

For instance, on June 9, Campbell Soup (CPB) CEO Mark Clouse told analysts that the consumer-goods company "expect[s] the benefit from pricing actions we have put in place across our portfolio."

Translation: Don't worry, getting the soup eaters to pay more will keep our margins up.

Farmers should look out, too... In late May, heavy-machinery maker Deere (DE) credited its healthy earnings for the second quarter of 2021 to the fact that "price realization in the quarter was positive by nearly nine points."

Home-improvement chain Lowe's (LOW) recently got in on the act as well... Last month, the company's top executives noted a successful quarter as it "leverage[s] enhanced pricing tools to improve margin across the array of products that we sell."

And do-it-all retailer Walmart (WMT) often notes that it focuses on "price gaps." By that, the company means that it wants to keep its prices lower than competitors' prices. But something else is implicit in that strategy... When others raise prices, Walmart can as well.

Pricing actions... price realization... pricing tools... price gaps.

You can see what I'm talking about when it comes to corporate jargon.

Sometimes, you just want someone to tell it to you like it is...

My colleague and Digest editor Corey McLaughlin touched on this point earlier this month...

Costco Wholesale (COST), the membership-only retailer that's always a straightshooter with its customers, provided the best insights of any corporate earnings in recent weeks. On its May 27 earnings call, the company actually used the "I-word" instead of any jargon...

Knowing investors were champing at the bit for details about rising prices, Costco Executive Vice President Richard Galanti got right to the point by saying, "Some inflationary sound bites, if you will." Then, he rattled off a number of categories in which prices have jumped...

Suppliers are paying up to double the old rates for shipping, so items sent "across the ocean" are seeing price increases... Pulp and paper goods' prices rose 4% to 8%... Plastic costs are up, so everything from cups to plates to trash bags cost more... Costs of metals, aluminum foil, and soda cans are up "mid-single digits"... And the list went on from there.

Frankly, it doesn't really matter how the CEOs and top executives try to spin the rising input costs. Whether they try to use corporate jargon like the examples I mentioned earlier or whether they cut to the chase like Costco's leadership, the underlying takeaway is clear...

Prices are rising.

And that means "prices" for other assets – like bonds – are responding to inflation signals.

This becomes clearer when we look at some key data points...

By looking at the prices of certain bonds, you can see what investors expect inflation to be over the next five years. You can do this by comparing the yields on certain inflation-protected bonds to those with no protection from inflation.

And as you can tell by the spike in the next chart, people see it coming...

And official inflation numbers show us that these expectations are coming true... The latest Consumer Price Index ("CPI") reading announced earlier this month came in at a whopping 5% year over year. As you can see, that's the highest CPI reading in 13 years...

In the end, inflation is a social phenomenon... When prices rise, people expect prices to rise – so they spend accordingly and push prices higher.

And then, when it all comes down to it, we're faced with the million-dollar question...

Will this bout of inflation be 'transitory' or not?

Similar to the CEOs using corporate jargon to spin the higher prices we're seeing, the Federal Reserve and other inflation doves like to use the word "transitory" when talking about this round of inflation.

By that, they mean we're still working through some disruptions due to the COVID-19 pandemic. And within a few months, these officials expect that everything will settle down.

Those folks who aren't worried about inflation becoming a long-term problem point to the fact that much of the increase in the CPI came from things recovering from the pandemic – like hotels, sporting events, and restaurants. It's OK to consider that transitory... because once the post-lockdown travel boom cools, these industries will return to normal levels.

In part, they're right... We'll see some official numbers that look crazy because the data from last year were particularly strange due to the shutdowns across the country. (Economists call this occurrence a "base effect.")

Oil dropped to about $20 per barrel when the economy shut down. (We even had one wild day when prices went negative.) And price changes today based on those anomalous lows might look like inflation... but they're really just a return to normal. Eventually, that effect will fade away.

That won't be the case with everything, though...

Underlying those transitory effects, a real and powerful inflation trend is shaping up...

Inflation-deniers also claim that the high prices of semiconductors and housing today are transitory as well. My team and I aren't so sure about those cases...

A lot of people did decide to move their living spaces after being stuck inside for a year – and that demand may cool. But as regular Digest readers know, a serious mismatch exists between the demand for homes and the available supply. We'll build more, of course... But it won't just happen overnight. It's going to take more than a few months to catch up.

There's also a logistical problem in producing enough semiconductors... And this situation doesn't look transitory to us.

Building new manufacturing facilities takes years. In the meantime, semiconductor prices – and those of things they go into, like automobiles – will remain elevated.

Most of all, we've long had accommodative monetary policy (think the Fed)... And it's now joined by a boom in fiscal policy (think Congress), all while the economy looks to be heating up.

In the end, by the time CEOs are sending coded messages to investors – like they're doing in many cases today – it means inflation has already taken on a life of its own. But you shouldn't just throw in the towel... It's critical that you're always preparing for what's next.

My research team and I have thought about this entire situation a lot in recent months...

We've gone through an incredible three-decade run with almost no threat of rising prices. But as investors, you simply must realize... That won't always be the case.

My point is... Everything in the world doesn't just move along a one-way street.

We'll go through times of inflation, times of recession, and times of booming economies and low prices. You may not be able to predict them all, but you do need to prepare for them all.

An inflationary environment like what we're seeing today means asset prices can behave very differently than what we've seen for the past 30 years. And we want you to be ready...

That's why I'm holding an urgent wake-up call tomorrow morning.

We could be facing the greatest retirement crisis in modern history... And your money may already be in jeopardy. But my senior analyst Matt Weinschenk and I want to make sure you're not blindsided... We want to help you develop a plan for the next reckoning.

While every Stansberry Research reader over age 50 should hear this message, I encourage anyone who wants to retire one day to join us. It won't cost anything except a couple hours of your time.

Plus, when you register for the event, you'll immediately receive a free sign-up bonus...

This eight-part special report, called "How to Protect Your Income From Big Banks, Big Pharma, Big Everything," will help you get ready for the big event. You'll learn quick steps to defend your financial privacy and security... little-known ways to make big institutions that want your money pay you instead... and much more.

The action will start promptly at 10 a.m. Eastern time tomorrow. Save your seat right here.

New 52-week highs (as of 6/21/21): Asana (ASAN), CBOE Global Markets (CBOE), Colony Capital (CLNY), Freehold Royalties (FRU.TO), Intuit (INTU), KraneShares SSE STAR Market 50 Index Fund (KSTR), Microsoft (MSFT), Invesco S&P 500 BuyWrite Fund (PBP), and Smith & Wesson Brands (SWBI).

In today's mailbag, feedback on Jeff Havenstein's Monday Digest. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"We've always been idiots and greedy. Money just displays us on screens big enough for others to see.

"Wisdom is already an extinct species. Just look at any public or social media source available to validate this depressing sentiment." – Paid-up subscriber John C.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig
June 22, 2021