How To Flip The Script And Use Inflation To Drive Portfolio Results
Inside today’s Daily Journal…
Essay: Don’t Believe The CPI – Believe The Stamps
Oil recession indicator flashes
Oil prices push inflation higher
A White House AI pow-wow
Chart Of The Day… Texas Pacific Land (TPL)
Today’s Mailbag
This summer, the price of a Forever stamp will go to 82 cents.
When the Forever stamp was introduced in 2007, it cost 41 cents. That’s a 100% increase.
Over the same period, the government’s official inflation measure – the consumer price index (“CPI”) – rose 55%.
Read that again. The cost of mailing a letter doubled. The government says prices only went up by half. Someone is lying. And it’s not the U.S. Post Office.
The Forever stamp was sold as a hedge – buy now, mail forever, never worry about price hikes again. But, of course, inflation continues to push prices in the real economy higher. There have been more than a dozen hikes to the price of a stamp since 2007.
The things you actually have to buy – postage, insurance, healthcare, utilities, rent, food – are rising at rates that bear no resemblance to the tidy 2% to 3% the Federal Reserve claims. The CPI is political fiction. It uses “hedonic adjustments” and substitution effects to sand down the rough edges of what’s actually happening to your cost of living. (That happens mainly with a made-up number called “owner-equivalent rent” that makes up 40% of the index value.)
Real life isn’t adjusted. Neither is the cost of delivering the mail. And those costs have doubled in 19 years. So have yours, I’d bet. And I’m just as sure that the interest on your savings and increases to wages won’t protect you.
The government is stealing from you. Slowly. Legally. Every single year.
And, if you’re an investor, it gets worse. Because the tools professionals use to protect investors don’t work anymore.
In 2022, the S&P 500 dropped 18.2%.
That’s bad. But it’s not the important part. The important part is what happened to bonds that year. The Bloomberg U.S. Aggregate Bond Index fell 13% – the worst annual loss since 1976. The Vanguard Total Bond Market Index Fund posted its worst year in its entire history.
Bonds are not supposed to do that. The whole point of owning bonds is to protect you when stocks fall. That’s the promise of the 60/40 portfolio – 60% stocks for growth, 40% bonds for safety. But, in 2022, both sides of the portfolio bled at the same time!
The Vanguard Balanced Index Fund (VBIAX) – one of the most popular 60/40 funds in the world – lost 16.9% in 2022. That was its worst calendar year in 30 years of existence. Morningstar reported that 2022 was the only year – ever – where a 60/40 portfolio lost more than an all-stock portfolio in a bear market.
That isn’t just bad luck. Or a bad year. That’s a regime change in process.
Ray Dalio’s All Weather strategy at Bridgewater Associates – the gold standard of “risk parity” investing, the approach built by the world’s largest hedge fund to perform in any economic environment – lost 21.6% during the 2022 bear market. And it took All Weather nearly four years to recover!
Why did everything fail at once? One word: inflation.
For 40 years – from 1982 to 2020 – bonds cushioned stock crashes because we lived in a world of declining interest rates. The 10-year Treasury yield fell from over 15% in 1981 to under 1% in 2020. Every recession, the Fed cut rates. Bond prices rose. The “safe” half of your portfolio caught you when you fell.
But that was a historical condition. Not a law of nature.
Here’s the dirty secret that Wall Street still won’t tell you: bond-equity non-correlation is interest rate regime dependent. It only works when rates are falling. It worked for 40 years because rates fell for 40 years. But that is over. And it is not coming back, not with the government running trillion-dollar deficits and printing money to cover them. Don’t believe the CPI. Believe the stamps.
So if you can’t trust bonds as a safe haven, how can you build a resilient portfolio?
In 1952, 25-year-old University of Chicago PhD student Harry Markowitz published a 14-page paper called “Portfolio Selection” in the Journal of Finance. He proved mathematically that combining assets that don’t move together reduces risk without reducing returns.
That insight won him the Nobel Prize in 1990. And I believe it’s the most important idea in investing today. It’s the only way to protect your portfolio in a world of rising inflation.
Wall Street took Markowitz’s insight and turned it into the 60/40 portfolio. Stocks and bonds. Two asset classes. But that all relies on one big (false) assumption – that rates will always decline in recessions.
The problem with 60/40 is that the “non-correlation” between stocks and bonds isn’t structural. It’s accidental. It depends on the inflation regime. When inflation is low and stable, stocks and bonds move in opposite directions. When inflation is high and volatile, they move together.
But you know what is structurally uncorrelated? Businesses that operate in completely different economic universes.
A specialty insurer writing policies on construction cranes in hurricane zones has nothing to do with a gold royalty company collecting checks from Nevada mines. A defense contractor building F-35s has nothing to do with a pharmaceutical company treating diabetes. A tobacco company selling nicotine pouches in 95 countries has nothing to do with an aerospace parts monopoly.
These businesses are uncorrelated because their economics are fundamentally different, not because of a temporary interest rate regime that lasted 40 years and is now over.
If bonds can’t protect you, and index funds just multiply the same risk 500 times over, what do you actually buy?
You buy businesses that pass three tests:
You invest in businesses the government can’t kill and the economy can’t touch. Insurance companies that collect premiums today and invest the float at higher yields when rates rise. They don’t just survive inflation. They profit from it. When rates go up, the yield on their investment portfolio goes up. When the world gets more dangerous, premiums go up. Insurance is the only major industry that is negatively correlated to higher interest rates. The very thing that destroys your bond portfolio makes insurance companies more money.
You buy businesses driven by forces that have nothing to do with GDP. Sectors like defense contractors don’t care about consumer confidence. Their revenue is set by geopolitical necessity and multi-year government contracts – many with built-in inflation adjustments. Or pharmaceutical companies that sell drugs that patients need regardless of the economy. People don’t stop taking cancer medication because housing starts are down. These businesses are uncorrelated to the economic cycle because their demand drivers exist in a completely different universe.
You own businesses with real pricing power in an inflationary world. Materials and royalty companies (like gold and silver streamers) own claims on physical assets whose prices rise with inflation. Capital efficient businesses – like McDonald’s (MCD), Coke (KO), and Hershey (HSY) – that have decades of proven pricing power. Picks and shovels providers that are embedded and mission critical, like Deere & Co. (DE) or Taiwan Semiconductor Manufacturing (TSM) – they will always be able to increase prices faster than inflation.
Combine these – insurance, defense, pharma, materials, dominant tool providers – in a single portfolio, and you get something remarkable. Average pairwise correlations below 0.30. Some pairs as low as 0.05 – essentially zero. That is the Markowitz free lunch, applied correctly. Not stocks-and-bonds non-correlation that depends on the Fed. This can reduce your portfolio’s overall volatility even more than holding 40% in bonds, but will allow you to profit from inflation, not become its victim.
The government is going broke. Our currency is going to collapse. Bonds won’t save you. But owning great businesses will.
Tell me what you think of today’s Journal: [email protected]
Good investing,
Porter Stansberry
Stevenson, Maryland
3 Things To Know Before We Go…
1. An every-time oil-recession indicator just triggered. Every time crude-oil prices surge more than 50% above their long-run trend, a U.S. recession follows. The track record is six for six going back to 1970 – and Brent crude just crossed that threshold. But here’s the part the spot prices don’t yet reflect: the physical oil market is far more stressed than the headline price implies. Strait of Hormuz disruptions have knocked an estimated 11.4 million barrels per day off global commercial supply. Which means… the recession signal may actually be understating the energy shock transmission risk into the real economy.
2. Inflation surges on higher energy prices. This morning, the Bureau of Labor Statistics (“BLS”) reported the consumer price index (“CPI”) jumped 0.9% month-over-month (“MOM”) in March, pushing the annual rate to 3.3% – up sharply from 2.4% in February. The rise was largely driven by a 10.9% surge in energy prices fueled by the war in Iran, with gasoline alone spiking 21.2%, the most on record since 1967. Core CPI – which excludes food and energy prices – held steady at 0.2% MOM and 2.6% year-over-year. But that distinction likely won’t matter much to the Fed, which has little room to cut rates while headline inflation runs above 3%. Economists almost unanimously expect the Fed to stay on the sidelines at its April 29 meeting, and hopes for any 2026 cuts are fading fast.
3. Powerful new AI tools raise alarms about security risks. Treasury Secretary Scott Bessent and Fed Chair Jerome Powell assembled a group of bank CEOs this week to warn them of the risks raised by Anthropic’s new Mythos AI model. Mythos is a more powerful system that the AI firm has said. It is capable of identifying and then exploiting vulnerabilities in every major operating system and web browser. Regulators foresee AI enabling a new breed of cyberattack and the Mythos model as both one of those threats and a great defender against them.
Chart Of The Day… A Wild Ride In Texas Pacific Land
Shares of Complete Investor recommendation Texas Pacific Land (TPL) surged over 90% to start the year as one of the top-performing stocks in the S&P 500 – before falling 24% over the past few weeks, exacerbated by news of the death of board member Murray Stahl on Thursday, whose firm Horizon Kinetics is TPL’s largest shareholder. Despite the volatility, shares are up 46% year-to-date – and nothing about Texas Pacific’s irreplaceable Permian Basin acreage, growing water business, or emerging AI infrastructure pipeline has changed.
Mailbag
“Men And Women Are Not The Same”
Diane M:
I read yesterday’s Daily Journal, and I admit it annoyed me. Yes, men and women are very different, but to suggest that women should stay at home and just be homemakers and bring up kids is definitely a man’s perspective on life.
To suggest that working women are a modern phenomenon is also wrong. Maybe in the U.S. it is different, but in the UK, women have worked in industry for hundreds of years. In fact, the industrial revolution would not have happened without women working in the mills (yes, children were also employed) and of course there was no child care except by the family, grandparent etc.
During World War II the UK would have ground to a halt without women, as here they worked in every part of industry, from agriculture to ammunition factories, even the late Queen worked as a mechanic during the war. I was born in the 1950s and my mother worked full-time as a teacher once her youngest child was old enough to attend school. There were no after-school clubs or anything – so as kids, whoever was first home lit the fire (mum laid it before leaving for work) and helped get tea (supper) ready. My dad was in the merchant navy so never at home. Without work, my mum was isolated and alone… working helped her enormously. My husband’s mum also worked six days a week again once her children were old enough to attend school. Both managed to maintain their marriages and brought up well-adjusted children (well we think so).
There are many reasons couples separate and divorce, but women are now more financially independent, so are able to walk away from a bad marriage where in the past they did not have that luxury.
The trouble with the article is it promotes the idea that women should look after men and are second-class citizens at a time when attitudes and violence against women are getting worse, although I know that is not your intention.
Shannon Comment: Thank you for writing in! You’re absolutely right that women worked in the mills during the Industrial Revolution. Women powered British industry during both world wars. These are facts. But consider what you’re actually describing.
The women in those Lancashire cotton mills in the 1830s were working 14-hour days in conditions that killed them. Children as young as five were employed alongside them. Life expectancy in industrial Manchester was 17 years for laborers. That wasn’t liberation. That was survival-level poverty, forcing every member of the household into wage labor because the family couldn’t eat otherwise.
The same is true of World War II. Women entered factories and farms because 3 million British men were deployed overseas. It was a national emergency – not an economic model anyone would have chosen. And what happened immediately after the war? The vast majority of women returned to the home. Not because they were forced. Because when the emergency ended, families reverted to the arrangement that made them most productive.
Your own family story actually illustrates the specialization model beautifully, even though you may not see it that way. Your mother waited until her youngest was in school before she went back to work. She didn’t abandon the household specialist role during the critical early-childhood years. She sequenced it. And you describe a household where the older children lit the fire, helped with supper, and shared domestic responsibilities. That’s not a household with no specialist – that’s a household where the specialist trained the next generation before she re-entered the labor market. The fact that your family was well-adjusted is evidence for the argument, not against it.
Now, the divorce point. You argue that women leaving bad marriages is a good thing. I agree completely. No one – man or woman – should be trapped in an abusive or destructive relationship. But that’s not what the data shows is happening. The data shows that the mere fact of a woman out earning her husband triples the divorce rate – regardless of whether the marriage is “bad.” Marianne Bertrand at the University of Chicago found that even in otherwise functional marriages, a wife’s higher earnings create measurable dissatisfaction and increase the probability of dissolution. This isn’t about bad marriages getting an escape hatch. This is about good marriages being destabilized by an economic arrangement that conflicts with deeply rooted human psychology.
Finally – and this matters – calling the household specialist a “second-class citizen” reveals the very bias I was writing about. When a company has a CEO and a CFO, is the CFO a second-class citizen? When a law firm has a litigator and a researcher, is the researcher subordinate? Specialization does not imply hierarchy. The household specialist – raising the children, optimizing consumption, building community – was performing the most consequential economic role in the household. Calling that role “second class” is exactly the cultural devaluation that made it possible to dismantle it.
The essay wasn’t written from “a man’s perspective.” It was written from the perspective of three centuries of economic science. You don’t have to like the conclusion. But the data doesn’t care whether it annoys us.
I’m glad your family turned out well. Your mother sounds like a remarkable woman. But one family’s successful adaptation to a non-ideal arrangement doesn’t invalidate the aggregate data on what happens when tens of millions of families abandon the model that built the most prosperous society in human history.
Hawk E. writes:
You are married to a very wise lady. We must remember we have lived in a socialist state for generations. Read the Communist Manifesto, originally called the Socialist Manifesto, by Karl Marx. He outlined three goals for socialists to rule the world:
1. Destroy private property rights
2. Destroy the family
3. Destroy religion
V. Lenin, before he died, laid out a simple plan as follows: First, we will take Eastern Europe, next the masses of Asia. We will surround the last free country, the U.S.A. We will not have to attack. It will fall like overripe fruit into our hands. Karl Marx also said, “The best way to destroy a free state is to destroy the money by inflation.” Read the Communist Manifesto, and pray for the world!
Porter Comment: My wife is a “purple squirrel.” There’s only one like her. She left engineering to pursue a career in modeling. And now she’s retiring from modeling to have our family. I’m very proud of her. Regarding The Communist Manifesto most Americans have no idea that communism is alive and well in America today. Here are the 10 demands of Karl Marx:
Abolish private property in land – apply all rents to public purposes. That’s America. You’ll argue that you “own” your property. No, you don’t. Try not paying taxes and see what happens. You’re renting your property from the government. That’s not to mention eminent domain, zoning laws, etc. You need government permission to use your own property and the government is allowed to regulate the value of your property to zero without paying you anything for the loss of value.
Heavy progressive income tax. Emphatically yes, that’s America. Federal rates up to 37%, plus state taxes pushing combined rates above 50% in some states. In effect since 1913.
Abolish the right of inheritance. Again, you don’t actually own your property. The government does. Federal estate tax takes up to 50% of large estates. Catastrophic outcome for private wealth – and the reason most great families don’t build and maintain large estates anymore.
Confiscate property of emigrants and rebels. That’s America. The “Patriot Act” makes sure you can’t leave with your property and you can’t hide it either. America has exit taxes on wealthy citizens who renounce citizenship. Civil asset forfeiture allows seizure without conviction too.
Central national bank with state monopoly on credit. Check. The Federal Reserve, established in 1913, controls money supply, interest rates, and credit conditions. Fiat currency, fractional reserve banking.
State control of communication and transport. Yep. The FCC regulates communications. DOT, FAA, and TSA control transportation. Amtrak is government-owned. Interstate highways are public.
State ownership of factories and production. Yes – though not directly. Production is overwhelmingly private, but government subsidies, contracts, and regulation exert enormous influence over what gets produced and how.
Equal obligation to labor; industrial armies. No, America doesn’t have forced labor.
Merge agriculture with industry; equalize town and country. No, but this just doesn’t apply anymore because agriculture was 90% of the economy back then. Today it’s less than 10%.
Free public “education.” America has tax-funded, public K-12 indoctrination camps. You honestly wouldn’t believe what they teach our kids in these schools. They’re creating generations of psychopaths.
I’d say America is fully communist. And, you can disagree if you want, but communism always fails. America’s version will too.
An Asymmetric Investment”
Brian F. writes:
Your wife wrote a great article. I would only add that when the man has to pull the financial weight himself, he will work harder and take risks that the 1/2 income burden man would never consider. The result is that the fully burdened man makes more than the two combined, with half the living expenses – talk about an asymmetric investment!
I’m proud to be one of those guys who made $.90 of every dollar that came into our household. It’s blessed us to have three well-adjusted, professional adult kids while not providing me with ample motivation to figure out living expenses and educational expenses for those three kids. It was the right decision!
“The Most Dangerous Lie In Modern Economics”
Dale R. writes:
Hi,
All I can say is that this essay did a great job articulating one of the key lies that has created a lot of damage to modern families/societies. The basic building block of any society is the family, as it takes at least two people to form. Undermine the family, and you damage the foundation of any society. Enjoyed the read.
“Comparative Advantage Article”
Carol G. writes:
Shannon,
You are “right on the money.” I worked until I married in my late 20s. We moved overseas, my husband having a government assignment. While there, I had my first child and I was grateful that I could stay home with him as I was already in my early 30s. After five years we returned to Atlanta and my husband was anxious for me to go to work. He didn’t see raising a child and taking care of home responsibilities (as you so well elaborate on) as significant.
When I finally did return to the workforce when my son was in the seventh grade, I was doing double duty as my husband did not pick up the slack at home. After eight hours at the office I then came home to cook dinner, planning it as I drove the 30 minutes home. You guessed it, I also cleaned up the kitchen while he watched TV. The marriage dissolved after 19 years as he went into another relationship.
I hope you have a good delivery. I know you will be a tremendous mother. I have been following Porter off and on for almost 20 years. I am happy for both of you.
Please note: The investments in our “Porter & Co. Top Positions” should not be considered current recommendations. These positions are the best performers across our publications – and the securities listed may (or may not) be above the current buy-up-to price. To learn more, visit the current recommendations page of the relevant service, here. To gain access or to learn more about our current recommendations, call our Customer Care team at 888-610-8895 or internationally at +1 443-815-4447.
