Warren Buffett "We are seeing substantial inflation and are raising prices"
Updated: Jun 8
In one sentence Warren Buffett has confirmed what I have been writing about for months. The Oracle of Omaha stated on May 2nd that "We are raising prices. People are raising prices to us, and it's being accepted." Often times it takes a statement from a person like Warren Buffett to make the obvious reality come true.
The quote above from the Berkshire Hathaway Chairman is a powerful one. Berkshire Hathaway is a holding company that owns many household brand names. Kraft Heinz being one of them-- will have a portion of it's business in the inflation storm. The statement above mentions "People are rising prices to us". I believe this statement reflects the situation at Kraft-Heinz. The company owns products that repackages food commodities sold under brands such as Philadelphia cream cheese, Oscar Mayer, Maxwell House, and of course Kraft and Heinz among others.
The important thing to keep in mind is that all these brands are just packaged commodities sold directly to consumers. Maxwell House is in the business of repackaging coffee beans purchased from coffee plantations. Kraft Heinz, who owns Maxwell House, doesn't own the source where these commodities come from-the coffee plantations. These brands can do nothing except raise their own prices to adjust to market forces driving commodity prices higher. As these repackaged goods prices increase-- American's have less income to purchase while shopping at supermarkets.
The misconception is that if prices increase so will wages. The problem is that the largest component of inflation is housing. Housing increases have dramatically outpaced wages. Therefor the thought of wage increases will pay for higher costs of goods at the supermarket doesn't hold water.
At J.A. Lawrence Wealth Management the only company we own in this sector since Q1 2021 is a company we believe can ride out an inflationary environment: Tyson Foods. The reason we believe this company can weather an inflationary environment is because Tyson Foods isn't repackaging commodities. Tyson Foods owns the commodities (livestock) and sells directly to grocery stores and restaurants. Their private label brands like Jimmy Dean have the pricing power to navigate a challenging environment because they aren't at the mercy of third party livestock vendors.
HOW YOUR PORTFOLIO CAN TAKE ADVANTAGE OF THIS SITUATION?
In this environment please understand one thing: The CPI (Consumer Price Index). The consumer price index is a measuring tool the government uses to measure prices. These figures are reported and have an affect on things like the US dollar and commodity prices. If the CPI is higher than expected the market perceives the US dollar is losing its purchasing power. Competing currencies typically gain in value and commodities typically move higher in price.
WOULDN'T IT BE NICE IF WE HAD A CRYSTAL BALL THAT TOLD US WHAT THE CPI WOULD READ?
Well in a sense we kind of do have that crystal ball today. CEO's are trying to prepare the market for sticker shock and announcing price hikes are around the corner. Well these price hikes obviously haven't been factored into previous CPI because the CPI is a backwards looking instrument. CEO's at Coke, Kimberly-Clark, J.M. Smucker, and now Berkshire Hathaway Chairman' Warren Buffett are all now announcing significant price hikes. An investor ought to begin to position themselves to take advantage of the higher CPI in the future.
THE DOOR IS STARTING TO CLOSE TO BEGIN POSITIONING ONES PORTFOLIO
INTERNATIONAL, INTERNATIONAL, and more INTERNATIONAL investments ought to be sought after. In this environment investors are going to want more "currency risk". Accepting dividends in currencies that are strengthening in value will be one of the only options for the retired and soon to be.
Most US investors are in a tunnel thinking only about American stock exchanges like the New York Stock Exchange and The Nasdaq. These stocks are easily purchased through discount discount brokers like Etrade or TD Ameritrade.
However there are 58 other major stock exchanges around the world!
It's important to know that US discount brokers like Etrade and TDAmeritrade don't offer access to these other 58 exchanges around the world. Investors need to be doing everything they can to diversify in this climate--but the US investing infrastructure of discount brokers is pigeon holing Americans into only US stocks. Not to mention being involved in these other exchanges offers a plethora of stocks to choose from with attractive evaluations.
Its unfortunate to watch Americans think they are diversified when they have an enormous amount of currency risk by not seeking international investments. Wouldn't it be nice to know your portfolio is drawing dividends from a variety of stable currencies around the world?
In today's challenging environment it only makes sense to play defense by protecting your purchasing power and play offense by expanding your investment search in search of attractive valuations.
Keep an emergency fund. Have enough cash on hand to run your household. Invest abroad and dump the US dollar. Don't own assets that are increasing in supply.
John Lawrence is a financial advisor and owner/founder of J.A. Lawrence Wealth Management.