'Unexpected Inflation' Is the Real Danger to the Economy

The most destructive fire in Colorado history... Four-plus decades of climate warming... How weather shocks rattle the market... A mind-boggling amount of capital... 'Unexpected inflation' is the real danger to the economy... Extreme Value's recently published inflation-beating special report...

On December 30, 2021, an entire subdivision in Boulder County, Colorado was incinerated...

A sudden, powerful blaze ‒ the most destructive wildfire in Colorado history ‒ was the culprit... It has become known as the Marshall Fire.

At a news conference during the catastrophe, Boulder County Sheriff Joe Pelle estimated that the fire was engulfing "football field lengths of land in seconds"... The Sagamore subdivision of 171 homes in the town of Superior (about 25 miles northwest of Denver) was completely destroyed.

In all, some 1,100 homes across Boulder County were turned to ash... including 9% of Superior's housing stock.

Climate Adaptation Center CEO Robert Bunting, a longtime resident of the area, points to climate change as a key contributor.

For starters, Bunting says that the extended drought gripping the western United States "has [had] no parallel in the past 500 years"... setting up unusually dry, tinderbox-like conditions.

When a downed power line ignited the blaze in late December, he notes that the jet stream was also tracking farther north than usual, another consequence of extended warm and dry conditions...

Ultimately, Bunting says this created the opportunity for dry, westerly winds known as "chinooks" to sweep down off nearby mountains at speeds of 100 miles per hour and rapidly consume the parched landscape...

The Marshall Fire happened so quickly that many residents left their homes with very few possessions, narrowly escaping death.

This was one of 20 weather-related catastrophes in the U.S. last year in which losses exceeded $1 billion...

To put that in perspective, consider that since 1980, the annual average has been 7.4 weather-related catastrophes of $1 billion or more in losses... This means that 2021's disaster toll was almost three times higher than the long-term average.

After analyzing federal disaster declarations, the Washington Post estimated that more than four in 10 Americans live in a county hit by an extreme weather event.

More ominous, 2021 also marked the 45th consecutive year of global temperatures rising above the 20th-century average... And the period between 2013 and 2021 also ranks among the 10 warmest on record.

In short, over the past several decades, Mother Earth has continued to heat up, this warming trend is accelerating, and the result will be more extreme weather events like Boulder's Marshall Fire...

While these statistics are devastating for those who were displaced by wildfires, I (Mike Barrett) am here to report on how this growing number of natural disasters could wreak havoc on the economy, on everyday life, and on your investments...

It's imperative that we as investors start considering the implications of climate warming on our portfolios...

Last year, the Federal Reserve Bank of Richmond published a working paper titled "Extreme Weather and the Macroeconomy"... The purpose of the research was to evaluate how extreme weather shocks like the Marshall Fire play out in the broader U.S. economy...

The authors concluded that extreme weather can indeed cause "persistent damage" to economic growth and disrupt price stability (i.e., cause inflation)... and that these factors can persist up to 20 months.

Some 1,100 families are now temporarily homeless... Before the fire the typical timeline for building a new home in the area was about 10 months, already extended due to COVID-19-related supply-chain issues. Surely this timeline will now lengthen...

Meanwhile, all the new fire-related housing demand is likely to push already-soaring construction costs even higher... Ken Simonson, chief economist for the Associated General Contractors of America, believes the cost to rebuild will exceed the insurable value of many of the destroyed homes.

So product shortages and high prices are likely to be the unfortunate reality for Boulder residents well into 2023... And that's assuming there are no additional weather shocks, something the good folks of Louisiana know a great deal about.

After being hit by four hurricanes in 2020, last year, Hurricane Ida, one of the worst ever to make landfall, slammed the state, causing an estimated $75 billion in damage...

Months later, George Swift, CEO of the Southwest Louisiana Economic Development Alliance in Lake Charles, said the result was "amplified supply-chain problems [that have] impacted the delivery and price of everything."

Remember what I reported earlier, that roughly 40% of the U.S. population live in a county hit by extreme weather... That includes about 130 million Americans.

If the climate-warming trend continues – and there's no reason to expect it won't – then it's not inconceivable that there will be years when 50% or more of us live in weather-inflicted areas and will experience the kind of inflation that these disasters bring.

In the wake of Hurricane Ida, Dr. Mark Zappi, dean of engineering and executive director of the Energy Institute at the University of Louisiana at Lafayette, noted...

I'm surprised at how sensitive our supply chain ended up being...

I think about that when I'm walking the aisles at my local grocery store...

I see more empty shelves than on my previous visit, while the price of what is there keeps going up... I'm inclined to believe that America's collective supply chains are ultimately a lot more fragile than any of us previously imagined.

The problems that the COVID-19 pandemic exposed will now be exacerbated by climate warming... And ultimately, all of this is inflationary.

Let's also not forget the enormous capital spending that's still ahead to mitigate global warming.

This too raises the prospects for inflation... Dozens of governments and corporations around the world have accepted the conclusions of climate experts who say the only way to limit further climate risks is to reduce additional greenhouse-gas emissions into the atmosphere to "net zero"...

Global consulting firm McKinsey & Co. estimates the capital spending required worldwide over the next 30 years to bring this to fruition would be $275 trillion... or roughly $9.2 trillion per year.

That works out to a spending increase of $3.5 trillion from current levels, or, says McKinsey...

[H]alf of global corporate profits, one-quarter of total tax revenue, and 7% of household spending.

In short, a mind-boggling amount of capital...

And much of that is devoted to building a world that runs on electricity generated by renewable sources, like solar and wind...

One likely result is much higher monthly electric bills... McKinsey estimates the cost to generate electricity could rise about 25% from 2020 until 2040.

That sounds bad, but it could ultimately be way too low of an estimate considering what's happened in the U.K... In a recent Wall Street Journal op-ed, Bjorn Lomborg, president of the Copenhagen Consensus Center and a visiting fellow at Stanford University's Hoover Institution, notes that U.K. real electricity prices have doubled since 2003 in conjunction with heavy annual climate-policy spending.

Jeremy Grantham, co-founder of Boston-based asset manager GMO, thinks the "Goldilocks" period of the past 25 years is now coming to an end... and that we should begin preparing for a future of inflation fueled by a warming climate.

As Grantham put it...

Climate change is coming with heavy floods, serious droughts, and higher temperatures ‒ none of these make farming easier. So, we're going to live in a world of bottlenecks and shortages and price spikes everywhere.

I'm inclined to agree, which is why I believe climate warming is the mega-force that will steer inflation higher over the next decade...

So, what should you do about it?

For starters, watch this excellent interview my colleague Dan Ferris just did with editor-at-large Daniela Cambone on the topic of inflation... Like me, Dan thinks it gets a lot worse from here.

Dan says...

The safe bet – the rational bet – is for significant inflation for a long time. And I'd much rather expect that and be wrong than the other way around.

To help you prepare for ongoing inflation, Dan has published an all-new special report... In it, you'll learn about the carefully crafted 10-stock portfolio designed to perform through inflationary times and multiply the gains of ordinary defensive ideas.

You should also consider what Aswath Damodaran, a prominent professor of finance at New York University's Stern School of Business, is teaching his students about inflation.

Professor Damodaran believes there is a very important distinction between "expected" and "unexpected" inflation...

For instance, even if inflation is high but generally predictable ‒ that is, expected ‒ investors can account for this by demanding higher returns and interest rates... And certain businesses can simply raise prices...

Key point... even when inflation is high, if this is the expectation, the reaction to it can be orderly.

The bigger problem is unexpected inflation...

Unexpected inflation catches investors and business owners off guard.

This is what Dan and I believe investors should be preparing for... Damodaran explains it this way...

Unexpected inflation... leads to a reassessment of pricing (for all financial assets) and an uneven impact across businesses, leaving those with pricing power in a better position than those without that power.

In other words, when inflation is unexpected, the reaction can be abrupt... Investors are not pricing it in... The sudden surge in bond yields and implosion of high-flying tech stocks last month perfectly illustrate this.

Nobody can ever know for sure how bad unexpected inflation will get...

The point is to be prepared for it in advance, long before other investors price it into their expectations...

One way to do that is to own gold... According to Damodaran's research, gold has delivered exceptional returns when inflation is greater than expected.

Specifically, he estimates that it has earned 46% annually since 1970 during periods when unexpected inflation was highest...

Dan's inflation-beating portfolio includes gold, but it goes way beyond just owning physical bullion... One recommendation is a royalty on several million ounces of precious metals.

Unlike physical gold, this business gushes free cash flow and pays a regular dividend, giving it the kind of downside protection gold bullion can't...

At the same time, it has dramatic upside potential when gold prices are rising ‒ and should vastly outperform gold if unexpected inflation soars...

The portfolio also includes two bullion-like recommendations that track precious metals pricing, though you'll never need to take possession of any physical metals... You can buy and sell them both with just a few clicks.

Damodaran also believes you should own businesses with pricing power...

We agree ‒ particularly if you think unexpected inflation could become a problem... which is why Dan's "10-Stock Inflation Protection Portfolio" is stuffed with these stocks as well.

I'd like to highlight one of them, which is particularly well positioned for a world of accelerated climate warming... It's a kind of royalty on insurance premiums that doesn't take on direct risk exposure.

Earlier, I noted the Marshall Fire was the most destructive catastrophe in Colorado history... To give you a better perspective, the insurance-industry, credit-rating group AM Best estimates the losses from this single event will account for roughly 15% of all direct property premiums paid statewide last year...

There's no doubt that property insurance premiums will be on the rise across Colorado as a result of the Marshall Fire devastation... If weather shocks occur in higher numbers in the years ahead, this is a story that will continue to play itself out ‒ and likely in other parts of the country too, not just Colorado.

And as premiums go higher, so will this elite company's revenue, which has compounded growth at a 13% rate over the past 28 years... It's an ideal stock for the climate-induced, inflation era that is coming.

In summary, if you think inflation in general and unexpected inflation in particular is poised to rise in the years ahead... like I do... then it's time to take action.

The best returns will be earned by investors who get in now, before others push the prices of the best inflation-beating investments much higher.

To learn more, click here now to watch Dan's interview about "The 10-Stock Inflation Protection Portfolio" now...

New 52-week highs (as of 2/11/22): Alcoa (AA), Altius Minerals (ALS.TO), Altius Renewable Royalties (ARR.TO), Bunge (BG), Continental Resources (CLR), Innoviva (INVA), Lockheed Martin (LMT), Cheniere Energy (LNG), Mosaic (MOS), VanEck Vectors Oil Services Fund (OIH), Telekomunikasi Indonesia (TLK), United States Commodity Index Fund (USCI), Virtu Financial (VIRT), Viper Energy Partners (VNOM), Westlake Chemical Partners (WLKP), and SPDR S&P Oil & Gas Exploration & Production Fund (XOP).

In today's mailbag, thoughts about our Stansberry Research Investor Platform, coming to StansberryResearch.com on Wednesday...

"I'm a long-time subscriber of Stansberry Research, and I have appreciated the fact that I had access to all these letters. This new format sounds exciting. I'm looking forward for it." – Paid-up subscriber Jack K.

Good investing,

Mike Barrett
Orlando, Florida
February 14, 2022