Navigating Inflation

Intro: On Todays segment of navigating inflation, our team is pleased to introduce Greg Zaffiro, partner at Electron Capital partners. Electron is a utilities equity long short strategy in which returns are driven by a global portfolio of fundamentally researched long and short investments that are affected by structural change in the utility sector including electric, water, gas and waste companies. Please enjoy our brief discussion with Greg as he discussed inflation and how it affects their portfolio as a whole.

Greg Zaffiro: I think for your clients in particular, I'd make just the following statement. The single most important question in investing this year is whether or not inflation is going to be temporary in the moment, or it's going to be more permanent. And so the factors that are influencing the, that particular statement and sort of the conclusion of it will dictate a lot of at investors doing their portfolios, right? That's sort of number one, that the highest level of the analysis is whether this relatively rampant inflation more presently is going to be temporary, or is it gonna be more permanent? So that's number one in terms of where we're framing our, um, sort of thoughts around inflation, because as you drill into it, you know, a logical inclusion is to say that tangible assets like property or commodities, which we just spoke about a moment ago should do well, um, as the value of their sort of assets rise.

Greg Zaffiro: But the key is to understand that there's really, um, a significant amount. Um, the way I would describe is the, is a significant amount of trade offs. When you're thinking about a solution to protect against inflation. Like there's no single silver bullet. And I think when clients hear inflation, I often get that question. Well, maybe we buy gold, right? Or maybe we just buy commodities or maybe we go long value stocks. Now there's some truth in each one of those things, but as I'm identifying few, there are, if it can trade offs and in large measure, those trade offs are often mitigated by having some sort of active manager help navigate what otherwise becomes choppy waters. So that's sort of one thing, you know, thinking about where we stand today, is it permanent? Um, or is it more of a temporary situation? Number two is how do you solve for the problem?

Greg Zaffiro: Right? Well, first you have to, at least in our estimation is if you're thinking about inflation, you have to identify the sources of the problem. And this is where the present environment creates a bit of a tricky situation because it isn't always that it's just a, a question of the monetary phenomenon associated with printing too much money, right? Sort of that classic textbook example that you have too much money facing too few goods while that is absolutely part of the problem today. It's more than just that. Um, first and foremost, you have labor shortages and the cost of materials and low inventory. Uh, that's actually three different things to think about on the labor side, um, labor shortages, and then you have wage inflation, you have low inventories and just materials, right? Everything from, um, tiles for a bathroom to windows in your home, right.

Greg Zaffiro: That comes down to a fundamental glitch in the supply chain. So we I'm identifying the problems around inflation. It's just not enough to point your finger to the fed and say, you have this easy monetary policy for all these years. You've been printing press, you know, full speed, um, and just shut it off, right? Because there are more things that are affecting the reason why your dollar is losing value today than just that I've identified three things to think about. Um, second consideration in terms of problems is you have high demand from consumer spending, which hasn't debated. And as a matter of fact, it's gotten a bit more robust because savings has been more robust as well as, uh, some government support as a result of, uh, stimulus checks. So now you sort of look at, okay, the one side of the equation, then you go to the consumer side and you're thinking about the causes of inflation.

Greg Zaffiro: And you're also looking at how the consumer's reacting and you're saying they have a lot of savings. Um, and they've socked away that savings. And they've been given support by government and that's giving them some additional fuel and when are they and what are they deploying that fuel on? And so that's sort of the second consideration when you're thinking about holistically, uh, this problem of inflation. And there's no question that right now, we are absolutely in a heightened inflation environment. I mean, people are feeling it because they can see it quite obviously when they go and pump their gas or they go and buy coffee or any host of good goods or services. Um, the numbers that came out in September of course, were pretty eye popping. Um, you know, talking about 5.4%, uh, compared to September of 2020. And that rate is, you know, it's been fairly consistent 5, 5, 5 every month that it gets reported.

Greg Zaffiro: Remember when the reporting it's versus last year's month, right? Which when you look at last year's month, it's in the single digits, nobody really recognizes virtually, you know, non-existent, it doesn't make its way into those pernicious effects, uh, that you see or could see crop up. So now you look at what's the solution. And so I mentioned consumer spending is surging a lot surging obviously fueled by savings, government stimulus, rising wages. Um, but when you look at the typical solution that governments deploy, particularly the fed, their hands are slightly tied here because, um, if they taper, even if they get it right, right. And they taper some of their stimulus on an appropriate level and appropriate plan, the tool that's outside of their abilities is the untangling of the global supply chain. So this is, are the rubber meets the road in some of the analysis of when.

Greg Zaffiro: And if all of this comes to nice, a nice, smooth type of landing, right? We want to get some sort of 2% targeted inflation, but the questions around how much is in the power of the federal reserve is actually hindered by going back to my first statement, the problems around the current environment of what's causing the inflation. It's not just simply dialing up the money supply, dialing down the money supply. You have some structural issues which will unwind themselves, but structural issues in the global supply chain, which is causing a lot of the STR you know, sort of stress.

DISCLOSURE

The foregoing is not and is under no circumstances to be construed as an offer to sell or buy any securities. Investing in securities is speculative and entails risk, including the potential loss of principal. The opinions of the authors expressed herein are subject to change without notice and do not necessarily reflect those of the Firm. Oppenheimer does not warrant the accuracy, adequacy or completeness of the information and materials contained in this video, which may change without notice, and expressly disclaims liability for errors or omissions. Additional information is available upon request. Neither Oppenheimer & Co. Inc., nor any of its employees or affiliates, does not prove legal or tax advice. However, your Oppenheimer Financial Advisor will work with clients, their attorneys and their tax professionals to help ensure all of their needs are met and properly executed.