- CNBC's Jim Cramer said inflation may be temporary, so investors should maintain a diversified stock portfolio.
- When commodity prices fall, "you will wish you own more than just the red-hot stocks of the minerals, the oils and the banks," the "Mad Money" host said.
CNBC's Jim Cramer said Thursday investors who are buying stocks that benefit from an inflationary environment should be mindful that price pressures may not last, underscoring the need for portfolio diversification.
Right now, that's become a very popular trade, the "Mad Money" host said, as money managers follow what he dubbed "the hedge-fund playbook."
"That playbook is very clear about what you need to do when you start to get inflation in a rapidly growing economy: You buy the inflation winners at any price and you dump everything else again," said Cramer, himself a former hedge fund manager.
Some of those stocks are obvious, such as mining company Freeport-McMoRan, as well as steelmakers Cleveland-Cliffs and Nucor, according to Cramer. He said industrial giant Caterpillar is also on the list along with oil companies.
Bank stocks also have become popular despite inflation concerns because "this is not a traditional bout of inflation," Cramer explained. Typically, it can cause problems for the financial industry.
"Right now, commodity prices are rising because of short-term considerations: Tariffs on lumber and steel, an energy policy that discourages new oil drilling, a super storm that trashed much of our plastic capacity, a terrible chip shortage, an intractable ports jam up and higher labor costs fueled by more generous unemployment benefits that make it so it may be better to not work than to work," Cramer said.
That makes banks "a terrific hedge for the moment," he said, because if inflation ends up being sustained — and not transitory, as Federal Reserve Chairman Jerome Powell repeatedly predicts — then the central bank will respond by raising interest rates. That, in turn, would help the banks, Cramer said.
"Candidly, I'm not crazy about this style of investing," he cautioned. "I'm increasingly convinced that Powell's right — the inflation we're dealing with right now will be transitory, something that happens as demand comes surging back and supply takes a little while to catch up."
Eventually, Cramer said, he expects the causes of inflation will subside.
"So, sure, you can buy these inflation winners, but try to remember that this kind of action does tend to be temporary," he said. "There's only so high the price of copper or steel can go before the whole thing becomes self-correcting. And when it does ... you will wish you own more than just the red-hot stocks of the minerals, the oils and the banks."