What's up guys and welcome to wall street millennial, there's been a lot of noise recently about inflation, especially when it comes to what it means for investing today. Berkshire hathaway's legendary warren buffett recently said in his annual shareholder meeting that berkshire was seeing significant price increases across the board for his company, with everything from lumber and building supplies to paper and any other number of raw input materials. Economists have been warning of looming inflation for several months, while the fed seems to be unaffected by the possibility. In fact, they seem to be unfazed even in the slightest, at the threat of rising inflation in the future, dismissing it as being temporary.

Meanwhile, investing legends such as billionaire hedge fund manager, stanley and drunkenmiller have warned that the seemingly infinite money printing by the fed could have grave consequences for the markets. In a recent interview, bill, ackman explained why he fears for the state of the american economy and the stock market going forward in this video, we'll talk about what exactly ackman said and what it means for investors going forward before we get into the video. Please note that we are not financial advisors and any investment decision should be made only after doing your own research, in consulting with an investment professional in the recent wall street journal interview with bill, agnin ackman revealed that his highly watched hedge fund had swapped out his Starbucks position for domino's pizza, the interview then proceeded to focus around the issues of restaurants and other small businesses in america, increasingly having trouble finding enough people to fill their open jobs. Here's what akman said about the impact it will have when talking about those those drivers that who can who can grow in the company um i mean getting.

Workers is an increasing problem for our restaurants, and can you speak a little bit about um what you think about this debate about the unemployment benefits versus as as a as a factor here or not like what? What do you think needs to change or not yeah? The surprise numbers that came out - i guess uh you know last week - were - are not due to any weakness in the economy. The economy is crushing it. Okay, you know, businesses are um, you know booming, i would say you know the you know thing about hospitality. You can't get a reservation at a restaurant, new york anymore, except 530 or 10 right right and that's with excess capacity.

Now that you know the restaurants are open, i think we're almost fully open indoors and plus all the outdoor space. So i think restaurants are gon na have a boom year and the result is that uh, so there's huge demand for labor. I think this is the largest. I think yesterday there's a number the largest gap between you know, job listings and and uh um.

You know the people uh who need i mean the point is they're plenty of jobs. People haven't had to work partially because of the stimulus i think there that has made it somewhat um. I think when unemployment benefits, step back and some of the stimulus wears off, it will be more of a supply of supply of labor. Should that happen more quickly than september? In your view, um, you know, i think, that's a tough one.

What i'll say is, i think a good thing is wages are going up uh? I think that is obviously good for the worker and also good for the economy, because you know workers are going to spend the money you know chipotle announced recently they're. You know basically an average wage of 15 across the country. Can you tell us a little bit more about that decision? I mean it does cut into profits right, and so how did you? How did that calculus go down? Obviously not my decision. You know management's decision, but i think was a pretty easy one.

So, first of all, chipotle generally pays more than other kind of fast food restaurants. Two they've got a great product at a great value where they do have pricing power and so they're able to offset the incremental cost of of uh paying higher wages with uh. You know, raising you know charging a little bit more for a burrito right. You charge 50 60, 70 cents more for burrito.

You can pay your workers more. It's still very, very good value to the consumer. So the key in a world where there's going to be inflation and there's going to be wage inflation is to have a business that sells a product with this pricing power. The key point in that exchange was at the very end where bill ackman basically asserted that we are now living in a world where there will be inflation.

His long-standing position, chipotle, is raising wages for its employees in order to encourage people to come to work. Otherwise, they would have no way of getting people to staff their restaurants. The way that chipotle will pay the increased wages is by raising prices for burritos, in other words, passing the cost down to consumers. This is a clear example of how money printing by the fed is directly causing inflation, whether it's caused by unemployment, benefits, biden or trump bucks or whatever other reason.

The reality is that businesses all over the country are having trouble finding people to hire in response. They're forced to increase wages to convince people to come back to work. The only logical thing to do to pay those higher wages is to pass the cost on to consumers. So the general population has its average wages go up, but also has the prices of things that they buy go up by an equal amount.

That is a full cycle in the mechanism of how inflation works. To make matters worse. Ackman then went on to say why he believes that inflation will not be temporary sure. So i do agree.

I think it's going to be inflation, i mean you don't say: there's going to be, there is inflation. It's happening this weekend. Is that a debate between like business people who are experiencing rising prices and addressing it versus economists who are saying? Oh, this is just temporary blips coming out of the pandemic, i mean. Where do you come down on that yeah? I think it's not temporary uh.

First of all, it's hard to roll back wages once you roll them up, i mean you go from 15 to 12.. You know it's it. So i would say we have a new baseline in terms of wages, sort of generally uh. You look at every commodity price.

Right, new, hot copper lumber, you know make your list look at. What's going on in energy, even before the colonial uh, you know pipeline issue, um, look at housing prices, look at bitcoin right, everything is inflating um and that's driven by. We have kind of a once and a moment in history. Uh right, you have people emerging from a pandemic with the animal spirits that come from being locked by beings right.

So that's dramatic! You have you have uh all that hit. You know the vaccine roll out. Actually in the u.s, certainly it's been, you know fantastic, so you have a lot of people feeling you know being fully vaccinated, going back to their lives and then you have the trump stimulus, the biden, stimulus infrastructure, an extremely accommodative. You know federal reserve and everything concentrated in a couple of quarters so that the federal reserve too accommodated.

Do you think i think they're gon na have to raise rates for sure, and i think you know they adjusted policy in my view, just at the wrong time. You know the a preemptive policy toward inflation. Uh, i think, is a better approach, particularly in a world where we have uh. You know massive massive uh stimulus, economic stimulus.

Is it too much stimulus? I mean this is, i think, with rates where they are, it will have there's a very good risk of the economy. So inflation is not a concern, it is a reality. Ackman already sees it in all parts of the economy. What's more, he believes that inflation is largely permanent.

Once a company raises wages, they cannot bring them back down. If you can't bring the wages back down, you can't lower your prices back down either. So inflation is here, it's big and investors need to be prepared. Luckily, ackman has some advice for how to brace your portfolio for inflation.

You want to own businesses that have pricing power and you want to own businesses where the value of the business is not going to change dramatically. If rates go up, and so you know the risk to markets, is you know what's interesting if you build a discounted cash flow, you know analysis of a company and the business generates no profits for a decade and then you know grows very rapidly thereafter. You know huge percentage of value the business is in if you will, the the residual value of the company. You know in your little dcf calculation.

Small changes in the discount rate. You use have a very big effect on the value of that kind of a company, and so that's where the kind of high-flying you know highly valued technology companies that are not generating much in the way of earnings. Today, uh, you know those are, i would say, the biggest risk with respect to rate or rates rising uh, and you want to own businesses that can uh. You know, raise prices to make up for their incremental input costs, whether that's labor or or lumber.

Okay, thanks so and you're also exposed to the housing market which, as you're saying, is that's also seeming on fire. I mean, what's your outlook there for the house, i think uh. I think we've gotten to a point where the millennials can afford to buy a home. Uh, we do have very, very low interest rates, uh and i think people after being stuck in a small apartment.

You know the notion of actually having your own space and having a lawn uh. It's become a lot more appealing and uh. I think you're seeing that in in housing, you know we own a company called howard hughes corporation, that owns these sort of small cities. We call master plant, uh communities and we've seen enormous companies just announced earnings.

Yesterday, you know dramatic dramatic increases in everything from condo sales in hawaii to lot sales um and even the new york city. Real estate market is starting to boom again, but but the howard hughes are they focused more on the south and west, and is that is that part of your bet? There i mean, i know, you've learned you've owned them for a long time, but you invested more right yeah. So we we uh first of all, they're most the largest assets are in texas and las vegas and then hawaii and then maryland to a certain extent - and you know, hawaii is not a low tax environment, but it's in a world in which you know it sees The day life is too short, uh it's a destination and a place where people allow a lot of a lot of california technology people who just moved to hawaii and said: look, i'm not moving back and i can run my company virtually. So i think the fact that you can run businesses virtually places like hawaii you're gon na be more appealing.

Even though taxes are not low and then you have, you know, you know las vegas, uh or you know, nevada generally and summerlin were our. You know kind of the best real estate in las vegas and you can have a great quality of life and and pay no uh state taxes, which is a huge advantage. What he's saying here is that the types of businesses whose value is most affected by inflation are companies whose future earnings are not going to come until many years from now, aka growth or hope stocks think about quantum scape, for example. They are not projecting to make any revenue until 2024 and hope to make cash flow by 2027.

In a best case scenario, if inflation and interest rates are high earnings that far into the future aren't as compelling. Instead, companies that have strong pricing power or whose values are not as much determined by cash flows in many years in the future, have an advantage that could include raw material producers such as oil or steel producers or companies that have strong brands and can thus increase Prices with inflation, such as popular restaurant brands, he didn't explicitly mention this, but another way to position your portfolio for inflation in a way that could actually benefit from inflation rather than just be resistant to. It is to invest in companies whose costs are fixed in nominal terms, for example, take a company whose main asset is their brand recognition. This hypothetical company has spent years, maybe even decades, building up a recognizable brand that consumers trust and will pay extra for without even thinking about it.

The value of the brand has been built up over many years in the company's history. When inflation happens, not only does the company have pricing power, but their costs associated with the value of their product doesn't go up. Compare that to chipotle, which has pricing power, but we'll also see labor prices rise. Accordingly, the company with the dominant brand, on the other hand, gets its pricing power from the brand itself, which is already paid for in this case, any inflation and prices go straight to profits, alright, guys that wraps it up for this video.

What do you think about inflation? Do you think it is transitory and that the fed should continue printing money, or do you think that it's something we should be worried about? Let us know in the comments section below also don't forget to like subscribe and check out our second channel wsm research, where we do dd on high growth stocks in the meantime. Thank you guys so much for watching and we'll see in the next video wall street millennial signing out.