Our Thelma & Louise Economy

It’s Time to Look at Solid, Income Investments

Suddenly, I’m sensing a Thelma & Louise vibe.

Or maybe a better entertainment reference is That ’70s Show.

Actually, a mashup of both is probably the best way to think about where the economy is headed.

Let me explain…

For more than a year, I’ve been writing to you about a new era of high inflation and what that would mean for the economy. To recap:

• Inflation was never gonna be transitory (despite what the Federal Reserve and mainstream media were telling us).
• All the debt the West has racked up over the last few decades (and particularly post-COVID) is going to be problematic.
• The interest rate hikes that are now happening are going to lead us to a cliff.

Toss all those ingredients into the Vita-Mix 3000 and what you end up with is a stagflation smoothie. (Stagflation means a stagnating economy that’s suffering from high inflation.)

That is pretty much what the World Bank just announced this week, though in a more earnest tone. David Malpass, president of the World Bank, picks up our story:

Just over two years after COVID-19 caused the deepest global recession since World War II, the world economy is again in danger. This time it is facing high inflation and slow growth at the same time. Even if a global recession is averted, the pain of stagflation could persist for several years—unless major supply increases are set in motion.

Amid the war in Ukraine, surging inflation, and rising interest rates, global economic growth is expected to slump in 2022. Several years of above-average inflation and below-average growth are now likely, with potentially destabilizing consequences for low- and middle-income economies. It’s a phenomenon—stagflation—that the world has not seen since the 1970s.

Like I said: Thelma & Louise, going over the cliff, in That ’70s Show.

Mr. Malpass went on to describe the coming recession as potentially “the sharpest slowdown in 80 years.”

Granted, this all might not happen…

Global central bankers might engineer a soft-landing through some magical money voodoo. Or maybe Russia realizes its Ukraine gambit was ignorant from the get-go and politely backs away, allowing food crops like wheat to return to normal, thereby alleviating some of the global inflation pressures.

Then again, neither of those outcomes is likely.

Stagflation is the far more likely outcome, which means a weakening jobs market alongside higher prices. Which means the consumer will get hit…hard.

Now, yes, this is a dark column. Nothing I can do really to change that. As they say, “it is what it is,” and pretending it’s anything it’s not won’t do anybody any good.

Rather, it’s important we face what’s coming, so that we can prepare.

There are investments that can help you weather the days ahead…

I last thought about consumer pain from an investment/portfolio perspective in 2008, amid the Great Recession. I spent a bit of time rooting around for a company that was likely to do well as consumers shifted their budgets to meet tighter spending demands.

I found what I was looking for in a Canadian company called A&W Revenue Royalties Income Fund. It’s a company that does nothing but license the A&W name to burger joints in Canada, and then collect royalties right off the top of every consumer bill. Those royalties, in turn, flow back to shareholders as monthly dividend checks.

My thesis was simple: People gotta eat no matter the economy, and they’re going to spend more on low-cost fast food.

And, bingo. It played out just as expected. A&W is up about 4x since my purchase in 2008, and I’ve accumulated dividends 1.5x my initial cost.

Since consumers are getting hit hard again, just like in 2008, I’ve found a new company that’s very likely to pull an A&W for its investors, and I’ve made it the subject of this month’s Global Intelligence Letter. It’s a company that I believe will do well as this era of high inflation continues.

Of course, there is another option for the economy besides a stagflation-induced recession…

Let’s say we never approach the cliff. Let’s say the Federal Reserve realizes the economy cannot handle all these interest rate hikes, and amid a recessionary scare it returns to the only playbook it knows: Dumping free money into the economy!

What then?

Well, more inflation, since that’s more free money chasing a generally limited amount of goods and services. And stagflation won’t magically disappear.

However, we do have some good news.

In the upside-down world of Wall Street, bad news is great news for stocks. A recession leading the Fed to pump free money into the economy also means the Fed reverses course and cuts interest rates (which is what I expect by this fall)…which means that stocks prices race higher…crypto races higher…the bond market races higher.

And the dollar slumps, which will be a boost to blue-chip foreign stocks.

So that’s the world we face right now. Either we get:

1. The worst recession in 80 years.
2. A bout of stagflation we’ve not seen since the 1970s.
3. The Fed suddenly reversing course to save the economy from a painful slump.

Which option will it be?

More to come as summer progresses and the cliff draws nearer…