Cash Machine editor Bryan Perry was recently a guest on Fox Business‘ “After the Bell,” discussing the specter of higher inflation — and investments to make ahead of it. Below is a transcript of the interview.
It does seem like we’re starting to see a trend of higher inflation, starting with a sharp increase in the consumer price index (CPI) — and maybe not just “noise,” as Fed Chair Janet Yellen called it. She definitely wanted to quiet the markets about the impact it would have, but still there was a noticeable reaction: The Treasury inflation-protected securities (TIPS) funds traded higher against a bond yield that stayed flat, and there was a big, $50 spike in the price of gold in reaction, as well.
What you see in the CPI is a little bit telling, because we’re not really seeing wage inflation. Of the CPI, food makes up about 15%, energy accounts for about 10% and housing accounts for roughly 33%, so the balance would be in labor and other types of finished-good price increases. The fact that wage inflation is absent from that reading is a definite outlier, and investors should start taking a hard look at it. Here are four different names that are real opportunities in the current environment.
The first one is GAMCO Global Gold Natural Resources & Income Trust (GGN), a Gabelli fund that used to be primarily gold and base metals. But since then, they have actually folded in energy stocks like Baker Hughes (BHI), Halliburton (HAL) and Schlumberger (SLB). Now roughly 40% of GGN’s holdings are energy names, which have really been leading the market higher.
The fund has a 10% yield and uses a covered-call, buy-write strategy. So, as volatility increases throughout the balance of the year, which I think will take place in commodities and energy, this is a very good way to bring in covered-call premium. GGN pays monthly and allows investors to get involved in that part of the market with a diversified portfolio that pays a double-digit yield. The fund used to trade around $20; today, it’s around $10. Gold was around $1,700; today it’s just a hair over $1,300, so with GGN we can catch a nice trade and at least be well in front of the inflation demons if they do, in fact, come out of the bottle.
Next up is a play on master limited partnerships (MLP), which always have really attractive yields that are well above inflation. Alerian MLP ETF (AMLP) is one of the leaders, a universal name. It’s an MLP exchange-traded fund that’s fit for just about everyone because it casts a net over the entire sector, which has outperformed just about every other sector for the last 10 years on a total-return basis. It pays a 6% yield, and they do not issue a K-1; they issue a 1099, so this can be put into IRAs and 401k plans, as well as for those that just use it in a cash account.
AMLP pays quarterly, and it’s breaking out to the upside thanks to investors’ geopolitical concerns, as well as booming domestic energy policy — and it’s a great inflation hedge. It’s a nice triple threat all the way around.
For those looking for a play on actual rates and different forms of them, FS Investment (FSIC) is a very nice way to come alongside very smart money — very privileged money, if you will. FS Investment is better known as Franklin Square; this went public just three months ago, and they basically have an exclusive arrangement with Blackstone Group (BX) and originate about 60% of their deals.
FSIC lends money to private, middle-sized corporations throughout America. The company’s one of the largest in the business development company space. The stock pays a yield of roughly 8.7% and does pay monthly income, just like the Gabelli fund.
And what’s nice about this is that all the loans that they make out are floating-rate, so they’re tied to LIBOR. LIBOR’s not run by the Fed, but by a collection of banks that set those rates every day. So, as we see rates start to tick higher on the short end, they are able to charge more for the money that they lend out …hence you’ll see a higher income stream, and your principal will hold very well against a tough bond market.
And finally, let’s talk about a real estate investment trust (REIT) that focuses on adjustable-rate mortgages. Of course, if inflation is going up, a lot of people will want to be in mortgage REITs (mREITs). Capstead Mortgage (CMO) is probably the best of breed, with 84 years’ worth of management expertise. Based out of Dallas, they invest primarily in adjustable-rate jumbo mortgages.
Currently, with a yield of better than 10%, CMO is trading near a 52-week high, and it’s an opportunity for investors to transfer some of their fixed-income, long-term holdings into where they can be sensitive toward interest-rate changes. Adjustable-rate mortgages really only have one direction to go, and that’s higher. So like GGN, AMLP and FSIC, CMO is a great way to make money if inflation goes higher.
Bryan Perry is the editor of Cash Machine, a newsletter focused on high-yield income investing with the goal of maintaining a blended total yield of 10% across two portfolios. Bryan is also the editor of Extreme Income, which uses the power of historically cheap money to create a leveraged “baby hedge fund” strategy that paves the way to massive profits and 4x greater income.