I’ve long admired Harris Kupperman, the founder of Praetorian Capital, for his ability to cut through noise and spot big-picture themes before they become consensus.
He has a knack for finding opportunities where others aren’t looking, blending a sharp macro perspective with a pragmatic investor’s mindset.
In his latest, he writes about inflation and nominal GDP growth. I know my subscribers will benefit from his perspective and wanted to share it with you all this morning.
What is Inflation?
What exactly is inflation? We’ve all been told it’s bad, and we all get annoyed with things increasing in price. Economists intuitively understand that it’s the lagged effect of money printing, but is it that simple?
When stocks go up in value, is that inflation? What about when homes appreciate? No, those are financial assets, even if homes are technically durable consumer goods. For some reason, this is a good thing, even when it prices many people out of homes. What about when wages go up? Is that inflation? No, that’s also a good thing, except when wages go up too fast, then it’s a bad thing because it squeezes corporate profit margins, even though real wages have lagged corporate profits for decades. What about when an airline raises ticket prices? Is that inflation? No, that’s a sign of economic strength where demand is pushing prices higher, so it’s also a good thing, unless you’re shopping for a flight at that moment—in which case it’s inflationary. What about when the price of beef goes up? That has to be inflation? Except, we understand that many ranchers, and most abattoirs are currently losing money, even at currently elevated beef prices. As a result, we grudgingly accept it, without asking why these businesses cannot earn a profit at all-time high beef prices. What about when the price of gasoline goes up? For some reason, gasoline is where we draw the line. As a rule, we all universally agree that higher gas prices are a terrible thing. Except, how is this any different from airlines seeing increased demand, and getting pricing power? Besides, it’s not like oilmen are having it much better than ranchers over the past decade.
Inflation is a funny thing culturally. There’s good inflation, inflation we sort of accept, and then bad inflation. It’s odd, because these are all different forms of inflation, but our collective reaction function is quite different.
Let’s take a step back and think abstractly about inflation.
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