Tag Archives: Economy

Historic Inflation Worries Americans

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Worries by Americans over historic inflation level and higher retail prices are now larger than concerns about the coronavirus pandemic, according to recent polls from Monmouth and AP-NORC.

The U.S. consumer price index rose 0.8% in November from October. The Labor Department said consumer prices grew last month at an annual rate of 6.8%, which is the highest in 39 years since President Carter administration. The growth in prices were led by cars, food, gasoline, electricity and fuel oil.

As the bulk of Americans cite inflation and paying their bills as their top concerns, President Joe Biden’s job approval ratings fell to new lows with 69% disapproving of how he is handling inflation, according to an ABC/Ipsos poll.

Additionally, inflation concerns could potentially cost the President and Democrats’ their coveted social and environment legislation. It is believed that adding additional fiscal spending to already exploding government debt that adds juice to the economy might worsen inflation critics assert.

Most economists agree that the Build Back Better bill would add to inflationary pressures in the short run, however, they differed over its effects on inflation over the long term. Furthermore, most economists see inflation coming down sometime next year, but the debate is over how soon and by how much.

The bill will probably increase demand over the next few years, Harvard University professor Doug Elmendorf said. “That will tend to push up GDP and employment and inflation — which is not the policy impulse we need right now,” he added. Elmendorf served in the administration of former Democratic President Bill Clinton

References:

  1. https://www.barrons.com/articles/two-thirds-of-americans-polled-disapprove-of-how-biden-has-handled-inflation-51639331904
  2. https://www.bloomberg.com/news/articles/2021-11-17/top-economists-see-biden-s-spending-plan-adding-to-inflation

Best Business to Own When Inflation Spikes

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Invest in asset-light businesses with pricing power.

In a letter to Berkshire Hathaway shareholders, the best type of business to own when inflation spikes, according to Berkshire Hathaway Chairman and CEO Warren Buffett, have two characteristics that make a business well adapted to an inflationary environment:

  1. An ability to increase prices easily, and
  2. An ability to take on more business without having to spend too much in order to do it.

In other words, aim to invest in asset-light businesses with pricing power.

Buffett also stated that the best business to own is one that doesn’t require continuous reinvestment of capital because it becomes more and more expensive as the value of a dollar drops.

“The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently,” Buffett said, adding that “any business with heavy capital investment tends to be a poor business to be in inflation and often it’s a poor business to be in generally.”

Businesses like utilities or railroads “keep eating up more and more money” and aren’t as profitable, he explained. He prefers to own companies that people have a connection to. That is why “a brand is a wonderful thing to own during inflation,” Buffett said. Owning part of “a wonderful business,” as Buffett said in 2009, is useful because no matter what happens with the value of the dollar, the business’ product will still be in demand.

Buffett also said that it’s particularly handy to own real estate during times of inflation because the purchase is a “one-time outlay” for the investor, and has the added benefit of being able to be resold.

Inflation quietly eats away at earnings and purchasing power.

When the economy exhibits strong economic growth, there is a higher demand for goods and services, which in effect increases prices of those goods and services; that’s attributed to inflation. Essentially, the rate of inflation increases when demand in the economy is higher than supply, causing an overall price rise.

Inflation also impacts money sitting in the bank. While you may be receiving interest on savings from a money market account, the growth of inflation can outpace that of the savings rate offered by the bank. Keeping all your savings in cash is warranting your liquid assets a definite loss to inflation.

Effectively, your money does not grow at a higher rate, but loses purchasing power over time compared to if it was properly invested in equity assets.

Inflation

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of [all] their citizens.” John Maynard Keynes

Inflation is tracked using the Consumer Price Index, known as the (CPI). This index, reported by the U.S. Bureau of Labor Statistics each month, measures the average change over time of prices consumers pay for goods and services.

The immediate effects of inflation are the changes in the behavior of consumption habits. In the long-term, inflation erodes the purchasing power of your income and accumulated wealth.

“Inflation reduces the ‘power’ of each dollar you have,” says Rob Isbitts, co-founder of The Hedged Investor in Weston, Florida. “A dollar is a dollar, but what it buys can be less in the future than it is today.”

Purchasing power risk – also known as inflation risk – is when the real interest rate, which accounts for adjusted inflation, shows the gain or loss in purchasing power.

“Inflation reduces the ‘power’ of each dollar you have,” says Rob Isbitts, co-founder of The Hedged Investor in Weston, Florida. “A dollar is a dollar, but what it buys can be less in the future than it is today.”

Assets That Protect Against Inflation

Inflation can pose a threat to investments since prices that increase over time can decrease the value of your savings.

And, financial experts agree that there is no way to fully protect your investments against inflation. Nonetheless, there are ways to help protect against this risk. These experts say having a substantial allocation to stocks is important for growth potential while offsetting against inflation risk.

In the long term, the stock market is expected to outperform the inflation rate. Stocks are commonly thought of as an inflation protection asset since, over time, stock performance will outpace inflation. These assets are seen as a hedge against inflation:

  • TIPS, or Treasury Inflation-Protected Securities, which are bonds backed by the full faith of the U.S. government and protect against rising prices, make a very safe asset
  • REITs, or real estate investment trusts, are an organic hedge against inflation. When prices increase, real estate values increase as well. This asset is highly correlated with inflation, which means REIT returns are higher when inflation increases.
  • Gold is an asset that might provide protection against inflation and a good safeguard of inflation over the long run,

Inflation can significantly weaken your purchasing power and the performance of your investments and thus impact their value. That’s why acting to suppress the dangers of inflation is important to preserve the value of your cash flow and wealth in the long run.

References:

  1. https://finance.yahoo.com/news/warren-buffett-says-best-type-195900081.html
  2. https://money.usnews.com/investing/investing-101/articles/how-inflation-and-deflation-impact-your-investments
  3. https://www.cnbc.com/2021/08/19/warren-buffett-inflation-best-businesses.html

Best Investment Advice – Mark Cuban

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“You can’t buy health and you can’t buy love.” Warren Buffett

“The best investment you can make is paying off your credit cards, paying off whatever debt you have.” Mark Cuban

Cuban lived for years on the budget of what he referred to as “a broke college student”, driving lousy cars, eating lousy food and saving, saving, saving. He believed that overspending can be an unnecessary cause of stress, and he advocates for living like a student if that’s all you can truly afford. “Your biggest enemies are your bills,” Cuban wrote. “The more you owe, the more you stress. The more you stress over bills, the more difficult it is to focus on your goals. The cheaper you can live, the greater your options.”

A forward-thinking investor and notorious taker of calculated risks, he built his wealth slowly over time and he derived as much pleasure out of saving as he did spending.

Here is top investing advice from Mark Cuban to builde wealth and achieve financial freedom:

  • Pay Off Debt, Then Invest – Paying off debt before you invest delivers the best returns for your money (capital). “The best investment you can make is paying off your credit cards, paying off whatever debt you have. If you have a student loan with a 7% interest rate, if you pay off that loan, you’re making 7%, that’s your immediate return, which is a lot safer than picking a stock, or trying to pick real estate, or whatever it may be,” Cuban said.
  • Never Invest To Get Out of Trouble – Just like you should never gamble if you absolutely have to win, the same rules apply to investing as a remedy for financial trouble. “If you are buying because you need the price to go up and solve a financial hole you are in, that is the EXACT WRONG time to trade,” Cuban commented. “And we all have to respect people who choose to sell because they need to. Bills don’t care what the market does. Get right and come back later.”
  • Don’t Invest In the Stock Market – Cuban disagrees with investors who think capitalism’s greatest wealth-generation machine is the stock market. “Put it in the bank. The idiots that tell you to put your money in the market because eventually it will go up need to tell you that because they are trying to sell you something. The stock market is probably the worst investment vehicle out there. If you won’t put your money in the bank, NEVER put your money in something where you don’t have an information advantage. Why invest your money in something because a broker told you to? If the broker had a clue, he/she wouldn’t be a broker, they would be on a beach somewhere.”
  • But If You Invest in the Stock Market, Buy an Index Fund – Avoid picking your own stocks or buying into expensive mutual funds — buy an index fund. “For those investors not too knowledgeable about markets, the best bet is a cheap S&P 500 fund,” according to Cuban.
  • Buy a Stock You Believe In and Hold on for Dear Life – Ignore short term volatility and market gyrations. “When I buy a stock, I make sure I know why I[‘m] buying it. Then I HODL until … I learn that something has changed,” using text-slang acronym for “hold on for dear life.”
  • Take Risks — But Play It Safe 90% of the Time – Without risk, there can be no reward, and the bigger the risk, the bigger the potential payout. Cuban suggests that investors to go for broke and swing for the fences — but only with a sliver of their investments. “If you’re a true adventurer and you really want to throw the hail Mary, you might take 10% and put it in Bitcoin or Ethereum, but if you do that, you’ve got to pretend you’ve already lost your money,” Cuban commented. “It’s like collecting art, it’s like collecting baseball cards, it’s like collecting shoes. It’s a flyer, but I’d limit it to 10%.”
  • If One of Those Risks Is Crypto, Stick With the Big Boys – If you’re considering jumping on the cryptocurrency bandwagon, you’d be wise to place your bets on the biggest names in the game because Cuban sees way too many similarities to 1999 for comfort. “Watching the cryptos trade, it’s exactly like the internet stock bubble. exactly. I think Bitcoin, Ethereum, a few others will be analogous to those that were built during the dot-com era, survived the bubble bursting and thrived, like AMZN, EBay, and Priceline. Many won’t,” commented Cuban
  • If You Don’t Understand an Investment, Walk Away –  Investing fundamentals dictates against investing in things you don’t understand. “If you don’t fully understand the risks of an investment you are contemplating, it’s okay to do nothing,” Cuban wrote. “No. 1 rule of investing: When you don’t know what to do, do nothing.” Always invest in what you know.
  • Knowledge Is the Best Investment – The best way to avoid investing in something you don’t understand is to understand whatever you’re invested in. “At MicroSolutions it, “knowledge advantage”. gave me a huge advantage. A guy with little computer background could compete with far more experienced guys just because I put in the time to learn all I could. I read every book and magazine I could. Heck, three bucks for a magazine, 20 bucks for a book. One good idea that led to a customer or solution paid for itself many times over.”

You must be able to earn, save, and manage your spending, then you can start investing and building wealth.

Cuban was influenced by a book called “Cashing in on the American Dream: How to Retire by the Age of 35.”“The whole premise of the book [Cashing in on the American Dream] was if you could save up to $1 million and live like a student, you could retire” Cuban said. “But you would have to have the discipline of saving and how you spent your money once you got there. I did things like have five roommates and live off of macaroni and cheese and really was very, very frugal. I had the worst possible car.”

  1. https://www.gobankingrates.com/money/wealth/millionaire-money-rules/
  2. https://www.gobankingrates.com/investing/strategy/mark-cubans-top-investing-advice

Housing Boom is Over as New Home Sales Fall to Pandemic Low

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“Housing has been one of the brightest lights of the economic recovery from COVID-19, but a shortage of homes for sale and rising prices have crimped sales.” U. S. News & World Report

CNBC reported that:

  • Sales of new single family homes fell to an annualized rate of 676,000, 6.6% below May’s rate of 724,000 and 19.4% below the June 2020 level of 839,000.
  • The inventory of new homes for sale jumped from a 5.5-month supply in May to a 6.3-month supply in June. Last fall, it sat at a low of just 3.5 months.

Sales of newly built homes dropped in June to the lowest level since the early days of the coronavirus pandemic in April 2020, according to data released by the U.S. Census Bureau.

After a year of frenzied buying and price gains in the double digits, newly built homes are now out of reach for much of the demand that remains in the market, according to CNBC. 

The median price of a newly built home in June rose just 6% from June 2020, and while that is a large gain historically, it is nothing compared with the 15%-20% annual gains seen in previous months.

Most of the homebuying is on the higher end of the market, and builders cannot afford to put up affordable homes due to skyrocketing construction costs.

Softwood lumber, in particular, spiked more than 300% during the pandemic, and while it has fallen back dramatically in the last month, it is still about 75% above its 2019 average. Other lumber products are still significantly more expensive.

“We also know there are shortages of appliances, labor and affordable lots,” noted Peter Boockvar, chief investment officer at the Bleakley Advisory Group. “The moderation in home sales is likely a combination of sticker shock and the slowdown in the ability of builders to finish homes because of a variety of delays.”

While there is unquestionably still strong demand from buyers, much of it is being squelched by affordability and supply issues.

Those signs clearly showed up at builder home sites in June and have been a factor in weakening homebuilder sentiment for the past two months. Noted builder analyst Ivy Zelman wrote as much in a note last month.

The U.S. housing market is a major indicator of the strength of the economy.

When the economy is strong and people are confident about the future, they are more inclined to buy houses, upgrade their current homes or buy larger houses. When they are more concerned about the economy, new home construction, remodeling, median prices and housing sales are all depressed.

For years, real estate was considered a reliable way to increase personal wealth because the cost of property and housing consistently increased over time.

References:

  1. https://www.cnbc.com/2021/07/26/housing-boom-is-over-as-new-home-sales-fall-to-pandemic-low.html
  2. https://www.census.gov/construction/nrs/pdf/newressales.pdf
  3. https://www.usnews.com/topics/subjects/housing-market
  4. https://www.usnews.com/news/economy/articles/2021-07-26/new-home-sales-slip-66-in-june

Buffett on Inflation

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“Inflation often feels like an abstract concept, but it hits everyday people the hardest.” Warren Buffett

Inflation is when the dollars in your wallet lose their purchasing power — either because the money supply has dramatically increased or because prices have surged, according to Bankrate.com.

Effectively, inflation occurs when the cost of goods and services in the economy goes up over a sustained period of time. Yet, inflation doesn’t happen overnight, and it also doesn’t happen when the cost of one particular good or service goes up.

From an economics perspective, inflation refers to price increases to the broader economy. And, price increases aren’t always synonymous with inflation — and some economic experts say a little bit of inflation is actually good for the economy. That’s for two main reasons: One, it prevents a deflationary trap, which experts say can be even worse than deflation because money loses value. Another reason is because households make better financial decisions when they expect stable and low prices.

“We may see prices rise on certain things like gas or milk, but it’s not necessarily inflation unless you see prices rising sort of across the board, across many different products and services,” says Jordan van Rijn, senior economist at the Credit Union National Association (CUNA).

The Berkshire CEO described high inflation as a “tax on capital” that discourages corporate investment. The “hurdle rate,” or the return on equity needed to generate a real return for investors, climbs when prices rise, Buffett said. “The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil,” Buffett added.

Buffett pointed out inflation can hurt more than income taxes, as it’s able to turn a positive return on investment into a negative one. If prices have climbed enough, people who make a nominal return on their investment may be left with less purchasing power than before they invested.

Inflation Causes

Given the federal government’s unprecedented loose monetary policy, fiscal spending spree and money-printing splurge over the last year, many economists have warned that such fiscal irresponsibility could result in a destructive wave of inflation.

‘I worry about inflation. I do not believe inflation is going to be transitory.’ Larry Fink, chairman and CEO, BlackRock Inc.

Defenders of federal government pandemic monetary and fiscal interventions have insisted that any resulting price inflation is just transitory. But recent data is showing that price inflation is hitting new highs and many economists believe that inflation is deep rooted and non-transitory.

However, the June’s Consumer Price Index (CPI) shows prices once again sharply on the rise. From June 2020 to June 2021, the data show that consumer prices rose a staggering 5.4 percent. Larry Fink, Chairman and CEO of BlackRock Inc., isn’t convinced by the Federal Reserve’s arguments that U.S. inflation pressures will fade away once supply bottlenecks and other temporary factors resulting from the COVID-19 pandemic fade away.

Economists lump inflation causes into two categories: demand-pull and cost-push inflation.

Cost-push occurs when prices increase because production is more expensive; that can include rises in labor costs (wages) or material prices. Firms pass along those higher costs in the form of higher prices, which then cycles back into the cost of living.

On the flip side, demand-pull inflation generates price increases when consumers have resilient interest for a service or a good.

While price inflation has many causes, much of the current inflation can be traced back to the policy of the Federal Reserve. The Fed essentially created trillions of new dollars to pump into the economy in the name of “pandemic stimulus.”

“The quantity of money has increased more than 32.9% since January 2020,” Federal Economic and Education (FEE) economist Peter Jacobsen explained in May. “That means nearly one-quarter of the money in circulation has been created since then. If more dollars chase the exact same goods, prices will rise.” 

“We are seeing very substantial inflation,” Warren Buffet said at a recent shareholder meeting. “It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.”

The typical person’s standard of living declines as a result of price inflation, because what really matters is not what number appears on your paycheck but the purchasing power of your paycheck. Working-class Americans suffer tremendously when their energy bill increases by nearly 25 percent in just one year, for example.

It is not a secret that stocks, like bonds, do poorly in an inflationary environment, according to Warren Buffett.

“There is no mystery at all about the problems of bondholders of in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner” Buffet states. “You hardly need a Ph.D. in economics to figure that one out.”

Regarding stocks, the conventional wisdom believes “…that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms; let the politicians print money as they might.”

The main reason it, stocks as a hedge against inflation, do not turn out the way conventional wisdom believed, according to Buffett, is that “stocks, in economic substance, are really very similar to bonds”.

References:

  1. https://www.bankrate.com/banking/federal-reserve/what-is-inflation/
  2. https://fee.org/articles/inflation-just-hit-a-13-year-high-here-s-why-you-should-care/
  3. https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-warned-inflation-prices-tapeworm-investors-businesses-2021-5
  4. https://www.cnbc.com/2018/02/12/warren-buffett-explains-how-to-invest-in-stocks-when-inflation-rises.html
  5. https://fee.org/articles/the-costs-are-just-up-up-up-warren-buffett-issues-grave-warning-about-inflation/
  6. https://fortune.com/2011/06/12/buffett-how-inflation-swindles-the-equity-investor-fortune-classics-1977/
  7. http://csinvesting.org/wp-content/uploads/2017/04/Inflation-Swindles-the-Equity-Investor.pdf

Investing Goals, Time Horizon and Risk Tolerance

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When it involves investing, it’s important that you start with your financial goals, time horizon and risk tolerance.

At times in calendar year 2020, the global economy seemed on the verge of collapse. Risk, ruin and enormous opportunity were the big stories of the year. Overall, the year was marked by change, opportunity, calamity and resilience in the financial markets.

Yet, in the financial markets, winners dramatically outweighed the losers, according to Forbes Magazine. Almost overnight, new winners were born in communications, technology, lodging and investments. Innovative technology companies in the S&P 500 Index propelled U.S. markets higher. And, many industries were more resilient than expected, in part because of an unprecedented monetary and fiscal response from Washington.

In light of the unprecedented upheaval, you, like everyone else, want to see their money grow over the long term, but it’s important to determine what investments best match your own unique financial goals, time horizon and tolerance for risk.

To learn the basics of investing, it might help to start at one place, take a few steps, and slowly expand outward.

Begin by Setting Goals

As an investor, your general aim should be to grow your money and diversify your assets. But your investing can take on many different forms.

For instance, it might help you to decide the investing strategies you intend to follow in order to grow your money. Such as whether you are interested in purchasing assets that could appreciate in value, such as equity stocks and funds, or play it relative safe with bonds and cash equivalents.

If you’re interested in investing in bonds, you will receive a steady stream of income over a predetermined time period, after which you expect repayment of your principal.

You might also be interested in pursuing both growth and income, via dividend stocks.

Learning to invest means learning to weigh potential returns against risk since no investment is absolutely safe, and there’s no guarantee that an investment will work out in your favor. In a nutshell, investing is about taking “calculated risks.”

Nevertheless, the risk of losing money—no matter how seemingly intelligent or calculated your approach—can be stressful. This is why it’s important for you to really get to know your risk tolerance level.  When it comes to your choice of assets, it’s important to bear in mind that some securities are riskier than others. This may hold true for both equity and debt securities (i.e., “stocks and bonds”).

Your investment time horizon can also significantly affect your views on risk. Changes in your outlook may require a shift in your investment style and risk expectations. For instance, saving toward a short-term goal might require a lower risk tolerance, whereas a longer investing horizon can give your portfolio time to smooth out the occasional bumps in the market. But again, it depends on your risk tolerance, financial goals, and overall knowledge and experience.

References:

  1. https://www.forbes.com/sites/antoinegara/2021/12/28/forbes-favorites-2020-the-years-best-finance–investing-stories/
  2. https://tickertape.tdameritrade.com/investing/learn-to-invest-money-17155

What the Inflation of the 1970s can Teach Us Today

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A Wall Street Journal survey finds that “strong economic rebound and lingering pandemic disruptions fuel inflation forecasts above 2% through 2023”.

The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s, according to WSJ. Americans should brace themselves for several years of higher inflation than they’ve seen in decades, according to economists who expect the robust post-pandemic economic recovery to fuel brisk price increases for a while.

Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.

On average, the WSJ survey respondents expect a widely followed measure of inflation, which excludes volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023.

That would mean an average annual increase of 2.58% from 2021 through 2023, putting inflation at levels last seen in 1993.

References:

  1. https://www.wsj.com/articles/higher-inflation-is-here-to-stay-for-years-economists-forecast-11626008400

Inflationary Pressures are a Real and Present Concern

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“Inflation jumped 5 percent in the past year, the fastest pace in 13 years.”

Inflation in the US has jumped to the highest rate since 2008.  For the past decade, inflation has averaged under 2 percent a year. But suddenly, inflation is rising much faster than anticipated and planned by the Federal Reserve. For instance, inflation rose 5 percent between May 2020 and May 2021, the Labor Department reported.

Inflation results when demand exceeds supply in an economy. When the economy grows faster than its ability to provide goods and services demanded by consumers, prices rise. When the economy grows more slowly than its potential growth rate, prices tend to fall. Factors that affect an economy’s growth rate include the supply of labor and the productivity of those workers.

Inflation is imply defined as the price of a good or service increasing over time. Conversely, you can also define inflation by looking at the value of the dollars purchasing those goods and services. Said another way, while you might agreed that the price of good and services have increased, you can also state the dollars you spend now purchase less quantity of goods and services … and by extension, the dollars themselves are clearly worth less.

Money supply and budget deficits

We’ve learned that inflation is, “always and everywhere a monetary phenomenon,” according to economist Milton Friedman. Money supply growth is a requirement, but in and of itself, it’s not enough to cause inflation. The money needs to find its way into the economy and turnover rapidly to generate inflation. (This is referred to as the velocity of money or ratio of M2 money supply to gross domestic product, or GDP.) In recent years, the velocity of money has fallen sharply.

Rising budget deficits are not necessarily linked to inflation, either, but can contribute to an overheating economy. It all depends on whether it stimulates demand to exceed supply. From a long-term perspective, there has been little correlation in recent years between the level of debt in the economy and inflation.

The causes of present inflation and the primary explanations are:

  • Pent-up demand following the COVID-19 shutdown.
  • Base effects (essentially older low values rolling off).
  • A massive increase in the supply of dollars.

Rising Prices 

“Inflation is taxation without legislation.” – Milton Friedman.

With commodity prices soaring, money supply growth exploding, and government spending surging, there is a palpable fear of a return to 1970s-style inflation. I get it. I remember those times.

Core inflation, which strips out volatile items such as food and energy, leaped to the highest level since 1992. It rose 3.8% year-on-year, up from 3% in April.
Other official data showed that the number of initial claims for jobless benefits fell to its lowest since mid-March 2020, when the first wave of Covid-19 hit.

The cost of used cars and trucks climbed 7.3% in May from April, accounting for a third of the increase in inflation. Prices were 29.7% higher than a year earlier. They have risen in recent months because of a global semiconductor shortage that has held back car production, pushing people to enter the market for second-hand vehicles instead.

Energy prices rose, by 28.5% year-on-year, including a 56% jump in gasoline prices compared with May 2020, when demand slumped due to the pandemic. And, gasoline prices are destined to go higher with the cancelation of the cross-border permit for the Keystone XL pipeline and suspension of the program for oil and gas leasing on federal lands and waters.

The cost of flights, household furnishings, new cars, rental cars and clothing rose during May.


 

What should investors do?

In response to inflation, investors should:

  • Must become awareness of inflation. Inflation is likely to increase throughout the year (and perhaps further), and bonds are likely to at least be less of a stalwart than they have over the past 40 years. It is important to realize that is possible and you should all be prepared for lower near-term performance in fixed income markets.
  • Diversification is key. Equities, for example, have historically been a reasonable asset during certain inflationary periods as companies can often pass through increased costs.
  • Explore other forms of inflation protection, as well as a broader diversification of fixed income instruments.

Inflation is clearly present for U.S. consumers in the grocery stores, at gas stations and in vehicle sales. Fears over rising prices has investors fearing that pent-up demand and supply chain bottlenecks would create inflationary pressures, and force the Federal Reserve to “tamper” their monetary stimulus program and dampen demand by increasing interest rates.

References:

  1. https://www.bls.gov/news.release/cpi.nr0.htm
  2. https://blog.massmutual.com/post/markets-inflation-vanderburg
  3. https://www.schwab.com/resource-center/insights/content/is-1970s-style-inflation-coming-back
  4. https://www.schwab.com/resource-center/insights/content/schwab-market-update
  5. https://www.theguardian.com/business/2021/jun/10/us-inflation-highest-rate-stocks-consumer-price-index

Meme Stock Risks

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“There’s a problem with the memes (a stock that has gone viral online, drawing the attention of retail investors) because the people who are investing will lose a very substantial amount of money.” Thomas Peterffy

Definition:  A meme stock is a stock that has seen an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums like Reddit. For this reason, these stocks often become overvalued, seeing drastic price increases in just a short amount of time.

The big problem with the so-called “meme”stock, which are assets powered higher on social-media sentiment and not on fundamentals, is that inexperienced investors will be saddled with real losses when stocks like AMC Entertainment Holdings (AMC), and GameStop Corp. (GME), eventually come back down to Earth.

The escalation in the values of these companies, like AMC and GameStop, don’t align with their prospects for earnings or revenue in the near or midterm.“There’s a problem with the “memes” because the people who are investing will lose a very substantial amount of money,” Thomas Peterffy, founder and chairman of Interactive Brokers Group Inc., said.

Peterffy said that the good thing about the surge in memes is that it will likely bring more young investor into the fold, but they will likely learn a hard lesson in the process.

Selling Short and short squeeze

Selling short means investors are betting that the asset will fall in value. The investments in AMC and GameStop originally started out as organized short-squeezes by a cadre of individual investors who had identified that a number of companies were heavily shorted by hedge funds, according to MarketWatch. These individual investors surmised, correctly, that those stocks could be pressured higher if enough buyers collectively swooped in.

A short squeeze is when many investors looking to cover short positions start buying at the same time. The buying pushes the share price higher, making short investors accelerate their attempts to cover, which sends the shares spiraling higher in a frenzy.

Short sellers, who bet a stock will fall, provide potential fuel for stock rallies when they’re wrong. If the stock jumps, instead of falling, the short sellers are forced to buy the stock to stop their losses from growing.

Lesson learned

Trying to identify a fundamental narrative that can justify meme stocks’ price and market cap are admittedly difficult. Still, it is an exercise that might provide some insights for meme stock investors. Essentially, when the music stops for the meme stocks like AMC and GameStop, investors could be looking at big capital losses.

References:

  1. https://www.thebalance.com/what-is-a-meme-stock-5118074
  2. https://www.marketwatch.com/story/interactive-brokers-founder-says-problem-with-amc-entertainment-memes-peoplewill-lose-a-very-substantial-amount-of-money-11622836260
  3. https://www.investors.com/etfs-and-funds/sectors/amc-stock-rally-here-are-the-14-most-shorted-stocks-now-sp500/
  4. https://www.marketwatch.com/articles/buy-sell-amc-stock-51622844305

Five Money Goals to Financial Wellness | TIAA

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According to TIAA, there are five big financial goals anyone seeking financial well-being should include on their list:

  1. Max out your 401(k) / 403(b). One rule of thumb says that by the time you turn 30, you should have the equivalent of your annual salary saved (that’s all savings, not just retirement assets); double your salary saved by age 35; three times the amount by age 40. And, it’s essential to take full advantage of your employer match, if you have one: With a $50,000 salary from an employer matching up to 6% of your contributions, you’d be turning down $3,000 (free money) each year! Letting your employer match go to waste would be like you accepting a $3,000 pay cut without a fight. In the absence of an employer plan, contribute to an IRA instead, even though the target is much lower (the annual contribution rate for 2021 is $7,000.
  2. Build an emergency fund. Each year brings economic uncertainty to many and, even for the financially secure, life happens in the form of medical bills, domestic catastrophes and other unplanned expenses. As a general rule, it’s good to maintain an emergency fund that would cover three to six months of living expenses in case you find yourself unemployed. Once you’ve calculated how much you should save, set aside a certain amount from each paycheck to set you on your way.
  3. Get your financial affairs in order. Estate planning is something you can’t afford to ignore. Getting your financial affairs in order, and designating the right people to manage them in the event of your incapacity or death, takes a huge weight off your shoulders. Necessary documents include durable powers of attorney, which designate someone to manage your day-to-day affairs, and a living will or healthcare directive to instruct your doctor what to do if you’re unable to make medical decisions for yourself. Don’t forget to inform those assigned with the task of handling your estate, who need to know the location of your will and other estate planning documents.
  4. Give yourself a debt deadline. Bad debts. You know which ones they are: the loan you took out to pay for a wedding; the credit card with the sky-high interest rate whose balance keeps rolling like a New York subway car. Convincing yourself that minimum monthly payments are okay? How about setting a deadline for repayment and getting rid of this exponentially growing interest?
  5. Create a budget (and stick to it). If you find that your spending is a bit out of control, you may want to press the reset button on your out-of-control spending behavior with a budget.

Setting these five money goals is enough to start you well on your way toward financial well-being.

References:

  1. https://www.tiaa.org/public/learn/personal-finance-101/5-must-have-financial-goals