I cannot put into words how bad of an idea this is (Fed Rate Cut)

President Trump just posted this:

Oil shocks are inflationary by nature.

Cutting Rates right now would be so insanely stupid and dangerous.

I don't want to make this political, so instead I will keep it based in economics and history.

Ze Economics

When a major artery like the Strait of Hormuz is disrupted, energy supply tightens, oil prices jump, and that pressure flows through the whole economy.

Current reporting says the strait disruption has removed roughly 20 million barrels a day from the market, with prices having spiked sharply in recent days. And there are reports that it could take months for the straight to reopen.

That matters because Goldman Sachs estimates that every sustained 10% rise in oil prices can add about 0.2 percentage points to inflation.

Historically, this is exactly the kind of backdrop where policymakers have to be so careful because shitty monetary policy could cause stagflation.

If you thought inflation was bad, stagnation is worse.

Luckily, we can look back at history.

A History of Stupid Monetary Decisions when there's an Energy Crisis

The 1973 to 1974 oil shock helped fuel the broader Great Inflation, and later Fed history emphasizes that the eventual cure required painful anti-inflation tightening under Volcker, not easier money.

Research on the Nixon era also found that political pressure for easier policy ahead of 1972 contributed to inflationary outcomes.

The 1970s were painful because an energy shock collided with loose policy and the result was stagflation (remember, stagflation is a pretty rare but severe economic cycle with stagnant economic growth, high unemployment, and high inflation).

It took years of pain and eventually very tight policy to break it.... like 20% interest rates (and we thought 6% was bad)

So that's why this is so dangerous. We're playing with almost certain nearterm inflation if the Straight remains closed, but also could be facing the darker eviler cousin-- stagflation

Which is exactly what the Post from President Trump is doing. He's, again, pressuring the Fed to cut rates. Please remember that the Fed is supposed to be independent of the Federal Government. (Trivia points to whomever remembers the dual mandate!)

So what do we do?!

Thank goodness for Buffett.

Remember all the way back in 1970s, Buffett was writing annual letters... so we can look back at his guidance, and see if it stood the test of time

(spoiler alert: it does..Buffett reported returns on beginning equity capital of about 19.0% in 1977, 19.4% in 1978, and 18.6% in 1979...Berkshire was still compounding through an ugly inflation era.).

He said the best business to own during inflation is one that keeps its earning power in real terms without needing a lot more capital. In other words: businesses with pricing power. The kind that can raise prices without losing customers.

So that's our mission right now. Find businesses with pricing power. I'm eyeing Berkshire itself as an investment very soon.

What do you not do?

You avoid businesses that are capital-intensive, commodity-sensitive, and unable to pass through cost increases.

(that doesn't mean sell them if you own them! remember your thesis' and why you bought them in the first place - if your thesis has changed, then consider selling)

And you focus on businesses with:

• strong pricing power

• high returns on capital

• low reinvestment needs

• resilient demand

When inflation risk rises, the answer is not to panic.

It is to own better businesses, and better yet, find the great companies selling at discount prices AND BE GREEDY WHEN OTHERS ARE FEARFUL.

Flankers' favorite holding period is forever.