The Weekend Edition is pulled from the daily Stansberry Digest. Prepare for a New Source of Inflation By Mike Barrett, editor, 10x Investor On December 30, 2021, an entire subdivision in Boulder County, Colorado was incinerated... What we now know as the Marshall Fire ‒ the most destructive wildfire in Colorado history ‒ was the culprit. At a news conference during the catastrophe, Boulder County Sheriff Joe Pelle estimated that the fire was engulfing "football field lengths of land in seconds"... The Sagamore subdivision of 171 homes in the town of Superior (about 25 miles northwest of Denver) was completely destroyed. In all, 1,100-plus homes across Boulder County were turned to ash, including 9% of Superior's housing stock. Climate Adaptation Center CEO Robert Bunting, a longtime resident of the area, says there were two catalysts. First, the extended drought gripping the western U.S. "has [had] no parallel in the past 500 years"... setting up unusually dry, tinderbox-like conditions. This created the opportunity for dry, westerly winds known as "chinooks" – the second catalyst – to sweep down off nearby mountains at speeds of 100 miles per hour and rapidly consume the parched landscape... This was one of 20 weather-related catastrophes in the U.S. last year in which losses exceeded $1 billion. To put that in perspective, consider that since 1980, the annual average has been 7.4 weather-related catastrophes of $1 billion or more in losses... This means that 2021's disaster toll was almost three times higher than the long-term average. So in today's essay, I explain how a growing number of natural disasters could wreak havoc on the economy, on everyday life, and on your investments... Last year, the Federal Reserve Bank of Richmond published a working paper titled "Extreme Weather and the Macroeconomy"... The purpose of the research was to evaluate how extreme weather events like the Marshall Fire play out in the broader U.S. economy. The authors concluded that extreme weather can indeed cause "persistent damage" to economic growth and disrupt price stability (i.e., cause inflation)... and that these factors can persist for up to 20 months. Around 1,100 families in Boulder are now temporarily homeless as a result of the Marshall Fire. Unfortunately, persistent COVID-19-related supply-chain issues and new fire-related housing demand is pushing up construction costs... and home prices as well. Around 40% of the U.S. population live in a county hit by extreme weather... That's about 130 million Americans. If weather-related disasters continue to trend above-average, then it's not inconceivable that there will be years when 50% or more of us live in weather-inflicted areas and will experience the kind of inflation that these disasters bring. In the wake of Hurricane Ida, Dr. Mark Zappi, dean of engineering and executive director of the Energy Institute at the University of Louisiana at Lafayette, noted... I'm surprised at how sensitive our supply chain ended up being... I think about that quote when I'm at my local grocery store... The shelves seem to get emptier with each visit, while the price of what is stocked keeps going up. I'm inclined to believe that America's collective supply chains are a lot more fragile than any of us previously imagined... The problems that the pandemic exposed will now be exacerbated by climate warming... And ultimately, all of this is inflationary. Let's also not forget the enormous capital spending that's still ahead to mitigate global warming, whatever your opinion of it may be. This too raises the prospects for inflation... Climate experts say the only way to limit further climate risks is to reduce additional greenhouse-gas emissions into the atmosphere to "net zero." And governments and corporations worldwide have accepted this... and are acting on it. Global consulting firm McKinsey & Company estimates the capital spending required worldwide over the next 30 years to manifest this net-zero future would be $275 trillion... or roughly $9.2 trillion per year. That works out to a spending increase of $3.5 trillion from current levels, or as McKinsey says... Half of global corporate profits, one-quarter of total tax revenue, and 7% of household spending. That's a mind-boggling amount of capital... And much of that is devoted to building a world that runs on electricity generated by renewable sources, like solar and wind power. However, this shift would create higher monthly electric bills... McKinsey estimates the cost to generate electricity could rise about 25% from 2020 until 2040. Jeremy Grantham, co-founder of Boston-based asset manager GMO, thinks the "Goldilocks" period of the past 25 years is now coming to an end... and that we should begin preparing for a future of inflation fueled by a warming climate. As Grantham put it... Climate change is coming with heavy floods, serious droughts, and higher temperatures ‒ none of these make farming easier. So, we're going to live in a world of bottlenecks and shortages and price spikes everywhere. Whether you agree with Grantham or not about climate change being the culprit, the reality is weather-related catastrophes like the Marshall Fire are becoming more costly. Enormous spending to mitigate climate warming is on the way, too. And together, they represent a kind of mega-force that will steer inflation higher over the next decade... So, what should you do about it? In a recent episode of the Stansberry Investor Hour podcast, Extreme Value editor Dan Ferris interviewed editor-at-large Daniela Cambone on the very topic of inflation. Like me, Dan thinks it'll get a lot worse from here. As he said in that podcast episode... The safe bet – the rational bet – is for significant inflation for a long time. And I'd much rather expect that and be wrong than the other way around. To help you prepare for ongoing inflation, Dan has published an all-new special report. In it, you'll learn about the carefully crafted "10-stock Inflation-Protection Portfolio" designed to capitalize on inflationary times... and multiply the gains of ordinary defensive ideas. You should also consider what Aswath Damodaran, a prominent professor of finance at New York University's Stern School of Business, is teaching his students about inflation. He believes there is a very important distinction between "expected" and "unexpected" inflation... For instance, even if inflation is high but generally predictable ‒ that is, expected ‒ investors can account for this by demanding higher returns and interest rates. And certain businesses can simply raise prices. The point is, even when inflation is high, if it's expected, the reaction to it can be orderly. The bigger problem is unexpected inflation... It catches investors and business owners off guard. This is the type of inflation that Dan and I believe investors should be preparing for right now. Damodaran explains it this way... Unexpected inflation... leads to a reassessment of pricing (for all financial assets) and an uneven impact across businesses, leaving those with pricing power in a better position than those without that power. In other words, when inflation is unexpected, the reaction can be abrupt... Investors are not pricing it in. The sudden surge in bond yields and the implosion of high-flying tech stocks last month perfectly illustrate this. Nobody knows for sure how bad unexpected inflation will get... That's why preparing for it in advance – long before other investors price it into their expectations – can be life-changing. One way to do that is by owning gold. According to Damodaran's research, the precious metal has earned 46% annually since 1970 during periods when unexpected inflation was highest... Dan's inflation-protection portfolio includes gold, but it goes way beyond just owning physical bullion. In fact, one recommendation is a royalty on several million ounces of precious metals. Unlike physical gold, this business gushes free cash flow and pays a regular dividend, giving it the kind of downside protection gold bullion can't. At the same time, it has dramatic upside potential when gold prices are rising ‒ and should vastly outperform the metal if unexpected inflation soars... Damodaran also believes you should own businesses with pricing power... We agree ‒ particularly if you think unexpected inflation could become a problem. This is precisely why Dan's Inflation-Protection Portfolio is stuffed with these types of stocks as well. In fact, one holding is well-positioned for the inflation that comes with costly natural disasters... It's a kind of royalty on insurance premiums that doesn't take on direct risk exposure. There's no doubt that property-insurance premiums will be on the rise if weather shocks become more frequent across the U.S. And as insurance premiums rise, so will this elite company's revenue, which has compounded growth at a 13% rate over the past 28 years. It's an ideal stock for the climate-induced inflation era that is coming... So if you think inflation in general – and unexpected inflation in particular – is poised to rise in the years ahead... like I do... then it's time to prepare today. The best returns will be earned by investors who get in now, before others push the prices of the best inflation-beating investments much higher. Good investing, Mike Barrett Editor's note: Dan believes inflation will only get worse from here... That's why he has designed an inflation-beating portfolio to protect your wealth from whatever happens next. And with inflation at historic highs today, these 10 stocks are a must-know. A bear market is coming... so you need to see this "game plan" right now. Learn more here. Tell us what you think of this content
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