Inflation insights

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

– Milton Friedman The 35,000-foot view

The 5- and 10-year breakeven peaked in mid-May 2021 and found a bottom in mid-June 2021. Media headlines talk of the markets being past peak inflation fear. Meanwhile, inflation moved from 4.2% in April to 5.4% at the end of June. Since then, the 5- and 10-year breakeven have been in a tight range, signaling inflation concerns may have abated, but still persist.

10-Year Breakeven 5-Year Breakeven 3

2.8

2.6

2.4

2.2 Fed Target 2

1.8

1.6 Breakeven Inflation Rate (%) Rate Inflation Breakeven 1.4

1.2

1

8/31/20 9/30/20 10/31/20 11/30/20 12/31/20 1/31/21 2/28/21 3/31/21 4/30/21 5/31/21 6/30/21 7/31/21 8/31/21 Source: Bloomberg What’s past is prologue … maybe

CPI closed the year at 3%. By the. end of 1969, CPI clocked in at .As suspected by Milton Friedman, the 6.2%. phenomenon of inflation, as a result of monetary policy, was locked in. CPI increased from 1.9% to 3.5%. .In the UK, annual inflation . reached 23%...... 1960 1965 1966 1967 1970 1973 1974 1975 1977 1979 1980

Average inflation rate of 1.3%. CPI increased from 3.4% to 12.3%. CPI snapped back from 4.9% to 13.3%.

• M2 grew at an average annual rate of 7%. Disco decade experienced an average monthly inflation rate of 7%. • Deficits peaked at a paltry 2.8% of GDP, when compared to today’s levels.

Source: Bloomberg – “The Fed Doesn’t Fear Inflation. Its Critics Have Longer Memories” by Niall Ferguson, March 7, 2021 Suspect Housing data has kept a lid on CPI

Since housing is considered an investment good and not something that is consumed, the U.S. Bureau of Labor Statistics (BLS) attempts to identify the shelter cost component of CPI by creating a hypothetical blob of rental rates as known as Owners’ Equivalent Rent of Primary Residence (OER) Index and Rent of Primary Residence Index (Rent).

How is Rent Calculated? The BLS surveys respondents that reside in rental apartments, houses, or condominiums and asks what they currently pay in rent. How is OER Calculated? Imagine that you are a primary homeowner and a BLS surveyor asks how much you think you can rent your primary home for, unfurnished and not including utilities. You, as the homeowner with no knowledge of the rental market in your area, need to quickly come-up with a hypothetical rental value. You respond $4,000. The surveyor then enters $4,000 into the BLS terminal and that data set immediately becomes part of the CPI calculation. ? ... the next day … You see a friend, who is a realtor/re-location specialist with a firm grasp of the supply and demand dynamics impacting the current rental market. Your realtor friend has a client moving from another city and thinks you could easily rent your house for $6,500. You’re very happy because 1) you just hypothetically made a lot more money and 2) you’re shocked because you realize you had no idea what you were talking about when you spoke to the BLS surveyor. What Does CPI OER ReallyTell Us? Homeowners are terrible at judging rental rates for their primary residences and the OER data collection process is seriously flawed. How Much of an Impact Does OER and Rent Have on Overall CPI? OER and Rent account for the largest weights of the 211 categories that comprise CPI. OER is 25% and Rent is 5.9% – in the aggregate nearly 32%.

Source: U.S. Bureau of Labor Statistics Suspect Housing data has kept a lid on CPI

Case Shiller vs. OER vs. Rent • From June 2020 - June 2021, S&P/Case-Shiller 20-City Composite CPI Rent 20.00 CPI OER the S&P/Case Shiller increased 19%. 15.00 • Over the same period, OER

Year (YOY) (YOY) Year rose 2.3%. When adjusted for

- 10.00 CPI weighting (25%), it rose a Over Increase (%) Increase minuscule 0.58%.

- 5.00

Year 0.00 • National asking rents rose 8/1/18 12/1/18 4/1/19 8/1/19 12/1/19 4/1/20 8/1/20 12/1/20 4/1/21 8/1/21 10.3% in August, measured on an annual basis according to Real Page, which analyzed Unabated Surge – Annual Apartment Rates Were Up In All Top 30 U.S. Metro Areas more than 13 million August YOY (%) August YOY (%) professionally managed units – Phoenix 22.0 Baltimore 10.6 marking the first double-digit Tampa 20.2 Orange County 10.4 increase in 20 years. Las Vegas 19.2 Seattle 9.5 Inland Empire Boston 8.7 17.5 • Over the same time period, Philladelphia Miami 17.5 8.6 Rent rose 2.1%. When Raleigh 17.0 Indianapolis 8.3 adjusted for CPI weighting Atlanta 14.9 Chic ago 8.0 (5.9%), it rose a minuscule Charlotte 15.4 Houston 7.5 0.12%. Austin 14.9 Los Angeles 7.0 Sacramento 13.9 Washington DC 6.2 • OER flaws aren’t biased to Nashville 13.0 Kansas City 5.6 the upside. When housing Orlando 12.7 San Jose 3.4 prices began to tumble in Denver 11.9 Twin Cities 3.0 2006, 2007 and 2008, OER Portland 11.3 New York 2.8 never experienced a down Dallas 10.6 San Francisco 1.4 month.

Sources: Yardi Matrix | Bloomberg | U.S. Bureau of Labor Statistics Watch the philly fed “ Looking ahead one year, the prices that firms anticipate receiving for their own goods and services rose further still – the expected rate of growth has nearly tripled among manufacturers since last year and has more than doubled for nonmanufacturers.

– August 2021, Philadelphia Beige Book ” watch the philly fed

Many firms were reluctant to raise prices in 2020. However, current data is foretelling of an increasing willingness/need to pass along price increases in the future.

PPC (Current Prices Paid (i.e. Inputs)) Philly Fed Manufacturing Business Outlook PRC (Current Prices Received (i.e. Prices Sold)) 100 The current prices received index 80 increased 7 points to 53.9, its highest reading since May 1974. Nearly 74% of 60 firms reported increases in input prices, 40 but 40% of firms reported stable output prices. Price ($) 20 – August 2021, Philadelphia Fed 0 Manufacturing Business Outlook Survey -20 Jul-19 Jul-20 Jul-21 Jan-19 Jan-20 Jan-21 Jun-19 Jun-20 Jun-21 Sep-19 Sep-20 Feb-19 Feb-20 Feb-21 Apr-19 Apr-20 Apr-21 Oct-19 Oct-20 Aug-19 Dec-19 Aug-20 Dec-20 Aug-21 Mar-19 Mar-20 Mar-21 Nov-19 Nov-20 May-19 May-20 May-21

PPC (Current Prices Paid (i.e. Inputs)) Philly Fed Nonmanufacturing Business Outlook PRC (Current Prices Received (i.e. Prices Sold)) 60 The Nonmanufacturing sector presents a 50 different picture when compared to the 40 Manufacturing sector. While prices paid 30 and prices received remain elevated, 20 there was a slow down and those surveyed expect their own prices to rise Price ($) 10 0 slower (3.8%) than the median inflation forecast of 4.5%. -10 -20 – August 2021, Philadelphia Fed Nonmanufacturing Business Outlook Survey Jul-19 Jul-20 Jul-21 Jan-19 Jan-20 Jan-21 Jun-19 Jun-20 Jun-21 Sep-19 Sep-20 Feb-19 Feb-20 Feb-21 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Dec-19 Dec-20 Mar-19 Aug-19 Mar-20 Aug-20 Mar-21 Aug-21 May-19 Nov-19 May-20 Nov-20 May-21

Sources: Federal Reserve Bank of Philadelphia | Bloomberg | U.S. Bureau of Labor Statistics Base metal input costs haunt manufacturers

The $6 trillion U.S. Manufacturing sector, already struggling with semiconductor shortages, logistic challenges, scarce labor and Trump/Biden tariffs, now faces additional challenges in the form of more expensive base/industrial metals – presenting a fluid pricing environment over the next 12 to 24 months.

Base Metals Price Change September 15, 2020 - September 15, 2021 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Aluminum Copper Nickel Tin

Source: Bloomberg watch Ppi & pmi

A suspect CPI means its more important to monitor input costs from the street and mouths of manufacturers and producers.

PPI PMI 70 12 Meanwhile, outside the U.S.: PPI at levels not seen since 1981 60 10 • Chinese PPI rose to 9.5%, the

8 highest in 13 years. 50 6 • “UK inflation rate posts biggest 40 increase since records began.” 4 – CNBC, September 15, 2021 PPI Index PPI

PMI Index PMI 30 2 20 0

10 -2

0 -4 3/29/19 5/29/19 7/29/19 9/29/19 1/29/20 3/29/20 5/29/20 7/29/20 9/29/20 1/29/21 3/29/21 5/29/21 7/29/21 11/29/19 11/29/20

Sources: Bloomberg | U.S. Bureau of Labor Statistics A nervous C-Suite plans for inflation

General Mills is finding out that inflation isn’t exactly a Lucky Unilever Plc warned on Thursday that surging Charm. The maker of the “magically delicious” cereal, along commodity costs would squeeze its full-year operating with a slew of other food products, told investors Wednesday margin, overshadowing strong second-quarter sales that the company expects to see inflation running at a lofty 7% growth fueled by the easing of pandemic-related curbs this year. That’s considerably above the expectations of many in many of its markets. Unilever said that besides investors and economists and another sign that, at least in accelerating price hikes, it was introducing pack some areas, cost pressures will keep building. changes and narrowing promotions in the second half in “While I don’t want to get too specific at the segment level, response to rising costs. what I will tell you is all of our segments are experiencing higher inflation,” General Mills Chief Financial Officer Kofi The company raised prices by 1.6% in second quarter. Bruce told analysts on an earnings conference callWednesday. In June those were up to 2.2%

CNBC – July 1, 2021 Reuters – July 22, 2021

In an interview, General Electric Chief Executive Larry Stellantis CEO Carlos Tavares said last week that Culp said the company is managing the inflationary economists pushing a tame inflation outlook need to pressure through a combination of price increases, wake up. better sourcing of parts and raw materials, elimination "When I ask the experts, the economists, they say, 'No, of waste and higher productivity. no, no, it's not going to happen. There is no structural "We're certainly not immune from these inflationary inflation.' That's what they say. What I see is that pressures," he told Reuters. "We're going to see more inflation is coming." of that pressure in the second half."

Reuters – July 27, 2021 CNBC – July 28, 2021 consumer Costs have increased

Bloomberg & UN Food and Agriculture World Food Price Index Experian Auto Industry Insights 135 38,000 130 127.40 Average Auto Amount Financed Average Auto Monthly Payment 125 37,000 570 120 36,000 115 575 110 35,000 105 100 34,000

95 Price ($) 33,000 36,121 90 555 35,163 85 32,000 80 31,000 32,345 30,000

1/31/19 4/30/19 7/31/19 1/31/20 4/30/20 7/31/20 1/31/21 4/30/21 7/31/21 Q2 2019 Q2 2020 Q2 2021 10/31/19 10/31/20

WTI & Heating Oil Price Housing - S&P CoreLogic Case-Shiller 20-City Composite 80 250 WTI Last Price Heating Oil Last Price 25 70 60 200 20 50 150 15 40 100 10 30 Price ($) WTI PriceWTI ($) 20 50 5 10 Oil PriceHeating ($) 0 0 0 9/30/16 3/31/17 6/30/17 9/30/17 3/31/18 6/30/18 9/30/18 3/31/19 6/30/19 9/30/19 3/31/20 6/30/20 9/30/20 3/31/21 6/30/21 5/31/19 7/31/19 9/30/19 1/31/20 3/31/20 5/31/20 7/31/20 9/30/20 1/31/21 3/31/21 5/31/21 7/31/21 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 11/30/19 11/30/20

Sources: Bloomberg | UN Food and Agriculture World Food Price Index | Experian State of the Automotive Finance Market Q2 2021 | S&P CoreLogic Case-Shiller 20-City Composite Home Price Index Wage growth

Will employees accept "transitory" wage increases? Not if CPI continues at a 5 to 6% clip.

Atlanta Fed Wage Growth Track Median 2001 - 2010 average wage growth was 3.96% 6 despite a longer-term pattern of declining wage 5.5 growth that bottomed in 2010. Wage growth 5 remained anemic from 2010 - 2013. Wage 4.5 growth in the following decade (2010 - 2020) 4 resulted in average wage growth that was 100 3.5 basis points below the 2001 - 2010 average. Its 3 % Change not a stretch to say – given rising inflation, rising Average Wage Growth 2.5 2001 - 2010 = 3.96 Average Wage Growth 2 rates, rising food and shelter costs – that wage 2010 - 2020 = 2.85 1.5 gains in a short period of time could be pushing 1 towards 5%, 6%, 7% per annum as evidenced below as corporate America tries to get a jump

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 on the purchasing power conundrum that is taking hold.

To recognize your contributions and ensure you're sharing in our Over the past year, we've raised pay for approximately 1.2 strong growth, we are increasing total compensation by raising base million hourly associates in our U.S. stores, increasing our salaries by 8% for all active employees ...the increase takes effect U.S. average hourly wage to $16.40. September 1, 2021 …

- Larry Fink, CEO of BlackRock - John Furner, CEO of Walmart U.S. Roughly a 7.5% increase over it's average pay for associates of $15.25.

Source: Bloomberg Monetary Inflation – very Real & Scary

In our last inflation primer, we asked “How can we have 12-month CPI of 1.7% in February 2021, yet monetary inflation of 25.7%?” The March 2021 stimulus package helped push monetary inflation to 33.3% as of July 31, 2021. Monetary inflation isn’t going anywhere anytime soon, if ever. Inflation’s growth rate might “abate,” but that doesn’t equate to transitory. If inflation is deemed transitory, why the confusion on rate hikes?

21 The Federal Reserve now sees at least 2/28/21 = CPI = 1.7 two interest rate hikes in 2023. 20

19 7/31/21 CPI = 5.7 18 CNBC – June 16, 2021 33.3% A mere 48-hours later … 17 M2 ($ trillion) ($ M2 16

15 The Fed's Jim Bullard sees first interest rate hike coming as soon as 2022. 14 1/31/20 2/29/20 3/31/20 4/30/20 5/31/20 6/30/20 7/31/20 8/31/20 9/30/20 1/31/21 2/28/21 3/31/21 4/30/21 5/31/21 6/30/21 7/31/21

10/31/20 11/30/20 12/31/20 CNBC – June 18, 2021

Source: Bloomberg A Rising Tide lifts all boats

Since 1991, there have been 41 quarters – most recent being Q2 2021 – where GDP has come in at or above 5.5%. Periods of time defined by consecutive quarters of 5.5% plus GDP generally also experience a lot of volatility in terms of rates and yields.

.5.5% plus GDP year in which Fed Funds remained flat – 5.5% plus GDP year – . starting the year at 5.25% and finishing the year at 5.5%. Fed Funds started the The 5-year Treasury yield started the year at 6.28% and year at 3.05% and closed the year at 5.71%. finished the year at 5.45%. The 5-year Treasury yield started the year at 5.29% and .closed the year at 7.8%...... 1991 1994 1997 1999 2000 2003 2006 2007

From December 2003 to September 2006, there were 12 consecutive quarters of plus 8 consecutive quarters of plus 5.5% GDP. Fed Funds 5.5% GDP. Over that same time period, started at 4.63% and finished the decade at 6.40%. Over Fed Funds started at 1% and moved to the same period, the 5-year Treasury yield started at 5.25%, and the 5-year Treasury yield 4.54%, peaked at 6.8% and closed the decade at 5.02%. started at 3.25%, peaked at 5.23% and closed 2006 at 4.67%.

Source: Bloomberg How to crawl out of debt and deficits according to Professor Charles Goodhart & Manoj Pradhan

Growth – unlikely

Taxation – the Productivity – yes, right solution, but modest but how likely? INFLATION – UNATTRACTIVE BUT NECESSARY

Source: The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival “OK Boomer”

When pundits discuss inflation, they often point to the labor participation rate, however, with the rapidly changing demographics in the U.S. is it enough to point to a low labor participation rate and say there can’t possibly be inflation risk? COVID-19 was a major catalyst to drive a massive uptick in Boomer retirement, but there are an estimated 73 million Baby Boomers in the U.S. and as of September 2020 only 40% of Boomers were “retired.”

Annual Increase in Retired Baby Boomer Population 3.5 3.2 3.0 2.5 2.5 2.2 1.9 2.0 1.9 2.2 2.2 2.0 1.5 1.5

Population (million) Population 1.0 2012 2013 2014 2015 2016 2017 2018 2019 2020

The influence of population ageing on a country’s inflation rate cannot be underestimated. Some principles of inflation never change. • If a certain age group consumes more goods and services than it produces itself, this has a price-increasing effect. This is the case with children, young people and retirees, so that an inflation-increasing effect can be expected from these groups of persons or ages. • The age groups whose members are involved in the production of goods, on the other hand, tend to have a dampening effect on inflation. This applies to all those in employment who make savings. As the number of people of retirement age rises, inflation can therefore be expected to rise.

Sources: Fact Tank – News in Numbers | Pew Research Center, November 9, 2020 Can’t talk about yield and inflation without touching on gold

Considerations on Gold in a Rising Rate Environment In the beginning, its the debate of rising rates lowering the opportunity cost of gold, but that logic doesn’t remain linear – it can breakdown as investors begin to reconcile the potential of principal deterioration. As such, you see gold tick higher. Most recently, we witnessed this from 2003 to 2006.

December 31, 2002 - May 31, 2006 10-Year Yield Gold 750 6 700 5.5 650 28.18% 5 600 45.86% 12.91% 550 4.5

500 4 Year Yield (%) Yield Year - Gold Price ($)

450 10 3.5 400 3 350 300 2.5

1/3/03 3/3/03 5/3/03 7/3/03 9/3/0311/3/03 1/3/04 3/3/04 5/3/04 7/3/04 9/3/0411/3/04 1/3/05 3/3/05 5/3/05 7/3/05 9/3/0511/3/05 1/3/06 3/3/06 5/3/06

Source: Bloomberg Where M2 goes, gold generally follows

M2 vs. Gold – Last 50Year s M2 Gold 25 2000

1800

20 1600

1400

15 1200

1000 Gold Price ($) M2 ($ trillion) ($ M2 10 800

600

5 400

200

0 0

12/31/7112/31/7412/31/7712/31/8012/31/8312/31/8612/31/8912/31/9212/31/9512/31/9812/31/0112/31/0412/31/0712/31/1012/31/1312/31/1612/31/19

Source: Bloomberg For More Information

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President & portfolio manager Mr. Cuggino has served as the President and Portfolio Manager of Permanent Portfolio Family of Funds since his investment advisory firm, Pacific Heights Asset Management, LLC, began managing the Fund’s four Portfolios on May 1, 2003. Mr. Cuggino has served as a trustee of the Fund since 1998, as its Chairman of the Board and President since 2003 and as its Secretary since 2006. From 1993 through 2007, Mr. Cuggino served as the Fund’s Treasurer. Mr. Cuggino serves as the manager and sole trustee of the sole member (also as the President and Chief Executive Officer) of Pacific Heights since its founding in 2002. Mr. Cuggino previously served in various accounting, auditing and taxation capacities at Ernst & Michael J. Cuggino Young LLP and one of its predecessor firms, Arthur Young & Company, from 1985 through 1991. Mr. Cuggino is a Certified Public Accountant (inactive) and received his undergraduate degrees in accountancy and management from Bentley University.

Senior investment analyst Mr. Hyatt has served as a Senior Investment Analyst at Pacific Heights Asset Management, LLC since 2010. Prior to joining Pacific Heights, Mr. Hyatt served as a Senior Vice President, Fixed Income Sales at Jefferies & Company, Inc. from 2009 through 2010, as a Vice President, Middle Markets Fixed Income Sales at Merrill Lynch, Pierce, Fenner & Smith, Inc. from 1996 through 2009 and as an Associate, Institutional Sales at R.W. Pressprich & Company, Inc. from 1994 through 1996. Prior to that, Mr. Hyatt served as a Project Engineer at Orth- Rodgers & Associates, Inc., a civil engineering firm. Mr. Hyatt received his undergraduate degree in industrial engineering from Lehigh University. He is a Derek d. hyatt, CFA CFA Charterholder and a member of the CFA Society Jacksonville. The Fund’s investment objectives, risks, charges, and expenses must be considered carefully before investing. The Prospectus and Summary Prospectuses contain this and other important information. They may be obtained by calling (800) 531-5142 or by visiting permanentportfoliofunds.com. Read carefully before investing. Permanent Portfolio invests in foreign securities, which will involve greater volatility, political, economic and currency risks, and differences in accounting methods. The fund will be affected by changes in the prices of gold, silver, Swiss franc assets and U.S. and foreign aggressive growth, real estate and natural resource stocks. The fund is non-diversified and thus may be able to invest more of its assets in fewer issuers and types of investments than a diversified fund. Investing a higher percentage of its assets in any one or a few issuers could increase the fund’s risk of loss and its share price volatility. The fund may invest in smaller companies, which involve additional risks such as limited liquidity and greater volatility than larger companies. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. M2 is a calculation of the money supply that includes all elements of M1 as well as "near money." M1 includes cash and checking deposits, while “near money” refers to savings deposits, money market securities, mutual funds, and other time deposits. Owners’ equivalent rent of primary residence (OER) and Rent of primary residence (Rent) measure the change in the shelter cost consumers receive from their primary residences. Breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity. Velocity of money is a measurement of the rate at which money is exchanged in an economy. The S&P CoreLogic Case-Shiller 20-City Composite Home Price NSA Index seeks to measures the value of residential real estate in 20 major U.S. metropolitan areas: Atlanta, Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Detroit, Las Vegas, Los Angeles, Miami, Minneapolis, New York, Phoenix, Portland, San Diego, San Francisco, Seattle, Tampa and Washington, D.C. Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. Producer Price Index (PPI) is a group of indices that calculates and represents the average movement in selling prices from domestic production over time. Gross Domestic Product (GDP) is a comprehensive measure of U.S. economic activity. GDP measures the value of the final goods and services produced in the U.S. (without double counting the intermediate goods and services used up to produce them). Changes in GDP are the most popular indicator of the nation's overall economic health. As of August 31, 2021, the Fund’s holdings in General Mills, Unilever, General Electric Company and Stellantis were 0%. Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security. Past performance does not guarantee future results. The information provided herein represents the opinion of Pacific Heights Asset Management, LLC (“Pacific Heights”) and is not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Mutual fund investing involves risk; loss of principal is possible. Not FDIC Insured. No Bank Guarantee. May Lose Value. Pacific Heights is the investment adviser to Permanent Portfolio Family of Funds, a Delaware statutory trust (“Fund”). The Fund is distributed by Quasar Distributors, LLC (“Quasar”), a member of FINRA. Quasar is not affiliated with Pacific Heights. Permanent Portfolio®, The Permanent Portfolio Family of Funds®, A Fund for All Seasons® and The Permanent Portfolio Family of Funds logo are registered trademarks of Pacific Heights. Copyright © 2021 Permanent Portfolio Family of Funds. All rights reserved.