Navigating Inflation: Strengthening Your Portfolio with Alternative Investments

Investors & Community Members,

In light of the recent economic policy proposals from presidential candidates, we find it vital to examine the potential implications for inflation on investor portfolios. The policies under discussion, including substantial government spending through tax credits and the introduction of cost controls that could disrupt supply chains, are likely to contribute to inflationary pressures. These measures could increase demand while simultaneously restricting supply, leading to higher prices across the board. As a result, inflation could rise significantly, impacting both consumer costs and investor returns.

Given these risks, it is more important than ever for investors to reassess their portfolios with an eye toward inflation resilience. Understanding how these economic shifts may affect different asset classes is key to preserving and growing wealth. At Crescent Capital, we specialize in constructing portfolios designed to outperform traditional investments like bonds and equities in inflationary environments. We encourage you to reach out for a portfolio review to ensure your investments are well-positioned to withstand potential inflationary challenges.

We trust that these insights will be valuable in your investment journey. Do not leave your financial future to chance—reach out today for a portfolio review. Let’s position your investments for success, no matter what the economic landscape holds.

Understanding Inflation: The Cause and Impact on Your Portfolio

Inflation is a critical factor affecting financial markets and investment strategies. Understanding its causes and impact on your portfolio is essential in today's economic environment. This week, we delve into the mechanics of inflation, including recent government stimulus efforts, and explore how alternative investments, particularly private credit, can mitigate inflation risk, ensuring your portfolio remains resilient.

How Does Inflation Occur?

Inflation generally occurs when there is an increase in the overall price level of goods and services in an economy. Several factors contribute to inflation:

• Demand-Pull Inflation: Occurs when demand for goods and services exceeds supply, leading to higher prices. It’s often driven by increased consumer spending, government stimulus, or robust economic growth.

• Cost-Push Inflation: Happens when the cost of production increases, causing businesses to raise prices to maintain profitability. This can be triggered by rising wages, raw material costs, or government-imposed cost controls.

• Monetary Inflation: Results from an excessive increase in the money supply. When more money circulates in the economy without a corresponding increase in goods and services, it leads to higher prices.

• Imported Inflation: Occurs when the cost of imported goods rises due to factors like currency depreciation or global supply chain disruptions, which then drives up domestic prices.

Real-Life Examples of Inflation Components

• Demand-Pull Inflation

  • COVID-19 Stimulus Checks: The U.S. government issued over $800 billion in stimulus checks during the pandemic, significantly boosting consumer demand and contributing to inflation as the economy reopened.

  • Federal Deficit: The federal deficit surged from about $1 trillion in 2019 to over $3 trillion in 2020 due to increased government spending, injecting more money into the economy and fueling inflation. The Federal Gov’t deficit will continue to rise under Kamala’s plan.

• Cost-Push Inflation

  • Rising Raw Material Costs: Supply chain disruptions during the pandemic increased costs for materials like lumber and steel, leading businesses to raise prices for consumers.

  • Government Cost Controls: Government-imposed price caps or wage freezes have, at times, led to reduced supply or higher prices in other areas, exacerbating inflation. This is proposed under Kamala’s Economic Plan.

• Monetary Inflation

  • Federal Reserve Actions: The Federal Reserve expanded the money supply by approximately 25% in 2020, increasing its balance sheet from $4.2 trillion to over $7 trillion by the end of 2021, driving up prices through greater spending power.

• 4. Imported Inflation

  • Global Supply Chain Disruptions: The pandemic caused significant supply chain issues, raising the costs of imported goods like electronics and vehicles, contributing to higher domestic inflation.

  Mitigating Inflation Risk with Alternative Investments

As inflation risks rise, alternative investments are essential for safeguarding portfolios:

• Real Assets: Investments in real estate, commodities, and infrastructure tend to appreciate during inflation, serving as a hedge against rising prices.

• Private Credit: Offers a strong opportunity, especially with floating-rate loans. These loans adjust with market rates, providing a natural hedge against inflation and enhancing portfolio returns.

• Private Equity: Delivers returns that can outpace inflation, particularly when traditional assets underperform.

• Hedge Funds: Employ strategies focused on inflation protection, offering diversification and stability uncorrelated with traditional asset classes.

Crescent Capital’s High-Conviction Investment Themes

Our investment strategy centers on high-conviction themes designed to thrive in inflationary environments. For a detailed exploration of these strategies, please visit our High-Conviction Investment Themes - August 2024 as we move into the latter half of the year.

These strategies focus on maximizing resilience and growth during inflationary periods, ensuring your portfolio is well-positioned to outperform traditional investments.

• Private Credit: Utilizing floating-rate loans that adjust with rising interest rates, this strategy ensures income growth alongside inflation, protecting and enhancing returns.

• Real Assets: Investments in tangible assets like real estate and infrastructure offer stability and potential appreciation during inflationary periods, making them essential components of a resilient portfolio.

These themes are carefully chosen to outperform during economic challenges, helping portfolios remain robust and growth-oriented despite inflationary pressures.

• Understanding inflation's impact on your portfolio is crucial in today’s economic climate. As inflation risks continue to rise, taking proactive steps to protect and grow your wealth is more important than ever. At Crescent Capital, we specialize in crafting inflation-resistant portfolios tailored to outperform traditional investments during challenging times.

  Don’t leave your financial future to chance—reach out today for a portfolio review.

Sean McEvilly, CFA