Author Topic: Best stocks/sectors for higher inflation  (Read 4739 times)

DTEJD1997

  • Hero Member
  • *****
  • Posts: 1731
Re: Best stocks/sectors for higher inflation
« Reply #20 on: April 07, 2019, 10:23:01 AM »
Hey all:

One very important factor is how MUCH inflation, and how fast it comes about.

If we go from 2% inflation to 6% inflation in say a 3 year period, the banks may not do well at all.

If I recall correctly, banks and thrifts did not do well at all in the late 70's early 80's.

They had duration mismatch.  That is, they had 20-30 loans on houses made for 5% or 6% that they funded with MMA and short duration CD's.  It got to the point where they had a NEGATIVE credit spread.  They were borrowing money at rates HIGHER than what they lent out.  That was largely due to an unanticipated spike in the rate of inflation.

If inflation is relatively small and comes about slowly, then banks will probably be OK...but not if it is sudden & large.


scorpioncapital

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 1724
    • scorpion capital
Re: Best stocks/sectors for higher inflation
« Reply #21 on: April 07, 2019, 12:05:09 PM »
Regarding this, insurance companies follow the same dynamic. If inflation comes on strong, they can have duration mismatch with their liabilities, but if it comes slowly they can re-invest bonds running off at higher rates. There was a study paper on insurance companies where it was shown that under deflation, no-flation, or inflation insurance companies do ok, but only under 'unexpected' large changes in inflation they can be caught by the inability to move fast enough. Probably similar situation with banks as mentioned. However I'm not quite sure why insurance companies can't just stuff the entirety of their fixed income portfolio with TIPS which would adjust with inflation.

SharperDingaan

  • Lifetime Member
  • Hero Member
  • *****
  • Posts: 3210
Re: Best stocks/sectors for higher inflation
« Reply #22 on: April 07, 2019, 03:47:52 PM »
Look at the vehicle leasing companies.
To make money in the business you must deliberatly miss-match the asset profile, and fund the bulk of the leases with rolling short-term debt; a portion of which must be refinanced every month. For the most part in any given month; lease run-off + insurance receipts (vehicles crashed) will fund the current month additions - but the debt roll-over is entirely exposed.

The wise lessors know how to handle this, the not so wise - not so much.
And that wise lessor typicallly also knows how to use it to bleed a competitor white, prior to making an offer they cannot refuse  ;D

SD
 

elliott

  • Newbie
  • *
  • Posts: 15
Re: Best stocks/sectors for higher inflation
« Reply #23 on: July 13, 2019, 03:58:25 PM »
Yes, for banks it actually depends on the maturities they have in both sides of the balance sheet.
I do not know of US banks, but I have read bankd reports where maturies are specified, and even better the sensitivity to interest rates (what happens if rates go up, what happens if they go down).