Inflation is Misguided, Growth Will Continue to Lead Markets

1 Peter Chapter 3 verse 15 states, "But in your hearts revere Christ as Lord. Always be prepared to give an answer to everyone who asks you to give the reason for the hope that you have. But do this with gentleness and respect."

As a Christian, it's sometimes difficult to share the gospel. Sometimes I find that there are many fears and misconceptions to be concerned with how someone may react. I like how this verse is a great reminder to always be gentle and respectful when explaining faith through following Jesus Christ. God does not expect me to "convert" someone or "force" them to accept Jesus. But rather, I am asked to be kind, gentle, and patient in explaining why I believe in God, and look to obey His will. What a better way to engage with others.

Keeping this in mind, I'm going to try to express my viewpoints on the inflation topic. I'm going to keep this short, and hopefully respectful, as it is a straightforward expression of how I truly feel regarding investing, and future opportunity. The market has been very schizophrenic of late as inflation concerns have come to the forefront. At the same time, I continue to hear about the "rotation" from growth to value, and the "transition" to non-U.S. companies, all driven by a post-COVID recovery. All these items fit together, stemming from inflation.

Well, let's think about this for a bit. Value plays have begun to outperform growth, as have non-U.S. investments. But I question the sustainability of such rotations over the course of the year. This past week has displayed extreme gyrations in growth exponentially outperforming value and other categories both on Tuesday and Thursday. Inflation concerns, which serve as the core catalyst for rotation into value or non-U.S. investments, are misguided in my opinion, and being used for Wallstreet to do what they do, make a quick buck.

I highly doubt that the U.S. will see inflation greater than 3% with the current administration over the next four years. Of course, I could be wrong, but this would be counter-intuitive to their objectives. Inflation may not be a high probability concern over the mid-term, but rather the duration in 2021 has gotten the market's attention. Let's make no mistake, it was to be expected that inflation in 2021 would serve as an anomaly post-COVID, just as the opposite was the case during COVID in 2020. Simply put, the major declines last year for interest rates, oil, etc., and their respective rebalancing back towards normalization in 2021 is of no surprise.

Another important point to note is that every time growth has sold off strongly, rotation companies and indices have been pulled down with it. Without growth leading, broader markets become much more volatile as well. The real question to be asking is at what point does growth leap frog value and non-U.S. performers later in the year. This past week has displayed clear signs of this as I've seen my portfolio alone up 9% and 7.5% as growth has taken the lead a couple days this past week, as mentioned above.

Another important point to consider is that many of the strongest growth performers will benefit tremendously in the current environment as inflation reverts back towards 2-3% growth. Once this becomes evident and clear, broader growth peers will all rise with the tide because Wallstreet is incapable of picking winners and losers due to greed - the greed of investing in everything that is not yet bankrupt. For active fund managers, this is a dream come true as I don't subscribe to investing in weak companies, solely because a market exists. I choose to use my abilities to pick strong performers over time, and to benefit from investing in their growth - with Cash Flow being the core metric driving the investment thesis.

This is a big reason why a substantial majority of Mutual Funds, ETFs, ETNs, indices, and Hedge Funds broadly have performed so poorly over the past five years or so. It's not just about growth, but who the best winners will be over time. While some investors are looking for so-called safe havens, I remain committed to the strongest performers. Yes, a company like Shopify (SHOP) is fundamentally stronger than companies like Wal-Mart (WMT) and Target (TGT). I would argue that today, the mid-term risks are fairly equal and that investors choosing in the latter will see a major lower return for taking parallel risks.

The other vital point is that there are major consumer and economic transitions occurring that are substantial. In essence, today's opportunities for growth are very similar to the industrial-led technology opportunities in the mid-- to late-1800s from an investment perspective. Every 100-200 years or so, major economic shifts occur that lead to legacy/incumbent businesses losing big time versus the new paradigm shift opportunities. Today's incumbents are too fat with legacy operations, and even if they desired, could not pivot quick enough towards the opportunities. Think banking/insurance, automotive, energy, communications, among many others, pretty much every sector - the investment opportunity of a lifetime is upon us!

So let's think about what history has taught us and what it will likely illustrate moving forward. Growth over time (pretty much three year or longer periods) always outperforms value, and most other alternatives - equities long-term continue to substantially outperform other asset classes. It's never a question of if, but of when, and more importantly, what quality as an extension of select companies within industries, that will lead this paradigm shift forward from a growth perspective.

I think it is more prudent to fundamentally understand risk tolerance, and then to set expectations. Through the portfolio under management, my goal is to generate annualized returns greater than 20%. This will require risk taking in the stock market. Ironically, I view any company invested in as an individual equity holding, carrying substantial risk. There are of course varying degrees, but I would much rather get a equivalent return on my investment for taking such risks.

The biggest farce I see is that in today's world as well as with the potential of the future, there is a desire for Wallstreet and many investors alike, to believe that many companies can be winners, when in reality, there are a limited amount of companies that will win big. The list of big winners is growing and one day in the distant future will begin to transition back towards a larger pool. But make no mistake, today, the fat is extensive due to legacy/incumbent players that will continue to die a slow death.

I think that COVID clearly illustrated who the most fundamentally stable and growing companies are, and the sectors and industries that they reside in, but unfortunately, COVID has also masked who fake winners are, which will lead investors down a dangerous path with much less robust opportunity post-COVID. At the same time, many losers during COVID with high aspirations for strong prospects post-COVID may see a rebalance back towards varying degrees of new-normalcy, but mid-term and long-term will become value traps and poor investment options.

The saying, "you cant' teach an old dog new tricks" is here for a reason. In today's market, there sure are a lot of dogs out there, to the tune of 75-80% of the public company world in the U.S. This is why Peter Thiel is so critical of innovation being dead in the U.S., and is amused with the irony of China stealing what they can, when there's not much left to steal. It is to this point that I concur that investors need to be paying attention to more narrow opportunities, to achieve the best returns.

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