Category Archives: Economy

Inflation…the Enemy of Savers

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Inflation is the enemy of those who save.

For most of the 21st century, savers and investors have experienced a favorable period of relative low inflation stock market growth. In fact, the average annual inflation rate from 2000 through 2021 was 2.31%. Even with that “low” inflation rate, the proverbial uninvested dollar hidden under one’s mattress in the year 2000 would be worth a mere $0.62 today.

With inflation approaching 7% in late 2021, we’re on the precipice of witnessing the rapid erosion in the value of the dollar which will create substantial risk for ordinary savers and ultra conservative investors. Keeping your money in a savings account, money market or CDs is failing to protect it from inflation.

Instead, the best place to invest is in the economy. While large sums of money are generally required to purchase real estate or a small business, the stock market allows those with limited capital a means to invest regularly in a wide variety of businesses and benefit from the strength of the economy.

The equity markets have a history of robust returns over the long run. Over the last one hundred years, the average annual stock market return is 10%. That means investors who stay invested are nearly doubling their investments every seven years.

Some individuals view the stock market as too risky and they literally view investing in the market as “gambling”. But, when you choose to use less “risky” investments like bonds rather than investing in stocks, the results vary great.

A study by NYU’s Stern School of Business gives insights into historical returns provided by an investment in U.S. Treasury bonds as opposed to corporate bonds and the S&P 500.

Assume an investor received a $300 inheritance on the day he was born. On that date, his parents invested $100 (the inflation-adjusted equivalent of $1,630 today) in several asset classes in 1928.

As of September of 2021, the above investor would have $8,920.90 in U.S. Treasury bonds, $53,736.50 from corporate bonds, and $592,868 in returns from an index fund that tracked the S&P 500.

Obviously, the stock market beats “safe” investments. While bonds might play an important role in a balanced portfolio, a 100% bond portfolio will fail to achieve the investment goals for most.

Investing a little now is better than a lot later

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

A strong argument can be made that the amount of time one is in the market is of more importance than the sum invested in stocks.

Consistently timing the market is impossible. There literally is no human being who can claim that he or she has been successful at that task with any degree of honesty. However, timing the market is not only unachievable, attempting to time the market can lead to poor investment returns.

Over time, this would result in an ever-falling income stream. You spent your life buying stocks because they are a great source of return, that doesn’t stop just because you retire! The market is still the best source of future returns, you should be continuing to buy more, not sell!

If one largely invests in stocks with yields of 5% or more, you can receive a substantial annual income without cannibalizing your portfolio. Furthermore, if the average annual market return is 10%, a stock that yields in the high single digits does not need to appreciate markedly to provide market-beating returns.

Higher yield stocks outperform more often. They distribute cash on a recurring basis, whether share prices are up or down. Prices are volatile, and at the whims of emotional investors, dividends are the profit generated by the business and distributed to shareholders.

Any investor with an employer with matching contributions should take full advantage of that opportunity. Any investor with an employer with matching contributions should take full advantage of that opportunity.

By investing in dividend-bearing stocks and resisting the temptation to time the markets, you can be well on your way to building wealth and achieving financial freedom.

References:

  1. https://seekingalpha.com/article/4484316-retirement-what-novice-investors-must-know

Inflation…a “Hidden Tax”

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Inflation means there is more money out there chasing the same number of goods and services. 

Inflation is an economic situation in which the general price level in the economy increases over a period of time, increasing the market value of all goods and services in monetary terms. As the general price level rises, the quantity of goods and services each unit of currency can buy decreases, indicating a decline in the purchasing power of the currency.

A little bit of inflation is considered by economists to be good for the economy. Technically speaking, inflation gets the economic ball rolling, greases the wheels of commerce, and stimulates the economy. The Federal Reserve has set as a goal 2% inflation.

Most people and politicians believe that inflation is just rising prices. That is not quite true. Inflation means there is more money out there chasing the same number of goods and services. As a result, the value of the money is diluted. One result is higher prices. Thus, there are two different types of “inflation”.

  • The first kind of inflation is “monetary inflation” i.e. an increase in the overall money supply. This is accomplished by a complex process between the government, the central bank, the open market, and the member banks.
  • The second form of inflation is an increase in the price that consumers pay, which is the result of an increase in the money supply and it is more accurately called “price inflation”. Price inflation reduces our purchasing power (as prices rise each dollar in your bank account buys less) and thus makes us poorer.

Because things are getting more expensive and savings are becoming less valuable, inflation discourages saving and encourages spending. This is how it “stimulates the economy” but it also encourages misallocation of capital. Because people are motivated to spend now, they end up chasing short-term goals rather than long-term goals which might actually have been more beneficial and in their best wealth building interest; but they no longer appear so because of the distortions caused by inflation.

Inflation is a long used, secret method of taxing people without their knowledge, a “hidden tax”, because the recipients of inflated money are unaware that it is really worth less than they thought it was; it is certainly “hidden”. And because the primary beneficiary is the government you can rightly say that inflation is a “hidden tax”. Every time someone has to pay an increased price for what they want they are paying this hidden inflation tax.

Inflation is like if a person were to slowly add a little water to the milk that is sold in the store. For a while, no one might notice at all. However, the milk is less nutritious, and won’t taste quite right. Eventually, the people wake up and realize the milk is not nearly as good, although it might still look okay. That is the impact of inflation

When extra money is printed up and put into circulation, it costs the government very little. It seems like governments can create value out of nothing. It is wonderful for the government, which is why most governments do it all the time. The government can spend the money on all their pet projects without worrying about their constituents complaining, because the money seems to be “free”.

However, it is not free and there are consequences to unconstrained printing money. What printing money does is to slowly dilute the money that is in existence already, like diluting the milk in the analogy above. So all the money the people already have, including all their savings, salaries and all the rest, slowly start to be worth less. In this sense, inflation is a very hidden tax, or way the government confiscates the people’s real wealth.

References:

  1. https://inflationdata.com/articles/2020/03/06/inflation-the-hidden-tax/
  2. https://drlwilson.com/Articles/INFLATON.htm

Investing Principles and Rules

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Value investing is one of the most preferred ways to find strong companies and buy their stocks at a reasonable price in any type of market.

Value investors, such as Warren Buffett and Monish Pabrai, use fundamental analysis and traditional valuation metrics like intrinsic a value to find companies that they believe are being undervalued intrinsically by the stock market.

A stock is not just a ticker symbol; it is an ownership interest in an actual business with an underlying value that does not depend on its share market price.

Inflation eats away at your returns and takes away your wealth. Inflation is easy to overlook and it is important to measure your investing success not just by what you make, but by how much you keep after inflation. Defenses against inflation include:

  • Buying stocks (at the right prices),
  • REITs (Real Estate Investment Trusts), and
  • TIPS (Treasury Inflation-Protected Securities).

The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.

No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on a margin of safety  – by never overpaying, no matter how exciting an investment seems to be – can you minimize your odds of error.

Knowing that you are responsible is fundamental to saving for the future, building wealth and achieving financial freedom. It’s the primary secret to your financial success and it’s inside yourself. If you become a critical thinker and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.

Every investment is the present value of future cash flow. Everything Money

Three things to know is that it’s important to understand and acknowledge that a stock is a piece of a business. Thus, it becomes essential to understand the business..

  • Principle #1: Always Invest with a Margin of Safety – Margin of safety is the principle of buying a security at a significant discount to its intrinsic value, which is thought to not only provide high-return opportunities but also to minimize the downside risk of an investment. No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on a margin of safety  – by never overpaying, no matter how exciting an investment seems to be – can you minimize your odds of error.
  • Principle #2: Expect Volatility and Profit from It – Investing in stocks means dealing with volatility. Instead of running for the exits during times of market stress, the smart investor greets downturns as chances to find great investments. The guru of value investing Benjamin Graham illustrated this with the analogy of “Mr. Market,” the imaginary business partner of each and every investor. Mr. Market offers investors a daily price quote at which he would either buy an investor out or sell his share of the business. Sometimes, he will be excited about the prospects for the business and quote a high price. Other times, he is depressed about the business’s prospects and quotes a low price. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.
  • Principle #3: Know What Kind of Investor You Are – Graham advised that investors know their investment selves. To illustrate this, he made clear distinctions among various groups operating in the stock market.1 Active vs. Passive Investors Graham referred to active and passive investors as “enterprising investors” (requires patience, discipline, eagerness to learn, and lots of time) and “defensive investors.”1 You only have two real choices: the first choice is to make a serious commitment in time and energy to become a good investor who equates the quality and amount of hands-on research with the expected return. If this isn’t your cup of tea, then be content to get a passive (possibly lower) return, but with much less time and work. Graham turned the academic notion of “risk = return” on its head. For him, “work = return.” The more work you put into your investments, the higher your return should be.

Because the stock market has the emotions of fear and greed, the lesson here is that you shouldn’t let Mr. Market’s views dictate your own emotions, or worse, lead you in your investment decisions. Instead, you should form your own estimates of the business’s value based on a sound and rational examination of the facts.

References:

  1. https://www.investopedia.com/articles/basics/07/grahamprinciples.asp
  2. https://jsilva.blog/2020/06/22/intelligent-investor-summary/

China’s Challenges According to Jamie Dimon

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China’s Communist Party leaders believe that America is in decline. They believe this not only because their country’s sheer size will make them the largest economy on the planet by 2030 but also because they believe their long-term thinking and competent, consistent leadership have outshone America’s in so many ways, writes Jamie Dimon, CEO, JP Morgan in his 2020 annual letter to shareholders.

The Chinese see an America that is losing ground in technology, infrastructure and education – a nation torn and crippled by politics, as well as racial and income inequality – and a country unable to coordinate government policies (fiscal, monetary, industrial, regulatory) in any coherent way to accomplish national goals. Unfortunately, recently, there is a lot of truth to this, in the next 40 years, according to Dimon.

In recent years, China has been dealing with many challenges to its economic expansion, including pandemic-related curbs, an energy crunch, and an unprecedented crackdown on private enterprises. These challenges and the Communist government’s reaction led to 4% growth in China for the fourth quarter, according to JP Morgan.

Additionally, the government actions against COVID-19 have also kept domestic demand for goods and services suppressed, putting a lid on imports.

However, Dimon opines that “China will have to confront some serious socioeconomic and geopolitical issues”:

  • The Chinese lack enough food, water and energy to support their population;
  • Pollution is rampant;
  • Corruption continues to be a problem;
  • State-owned enterprises are often inefficient;
  • Corporate and government debt levels are growing rapidly;
  • Financial markets lack depth, transparency and adequate rule of law;
  • Income inequality is higher than in the rest of the world; and
  • Their working age population has been declining since 2012.
  • Capital outflows has caused the regime to tighten capital controls.
  • Lower rates make Chinese financial markets less attractive to global and domestic capital.

Additionally, China will continue to face pressure from the United States and other Western governments over human rights abuses (especially against the Uyghur population), democracy and freedom in Hong Kong, and activity in the South China Sea and Taiwan. The Uyghurs are an ethnic Muslim minority in China that have allegedly endured forced labor and other human rights violations.

Autocratic and authoritative leadership works well when you can manage top down and you are starting from a very low base. China’s recent success definitely has its leadership feeling confident.

Regardless of Chinese Communist Party’s opinions regarding its inevitable economic rise, only 100 million people of its more than 1.4 billion population in China effectively participate in the nation’s one-party political system. No other developed nation has such low participation. Growing middle classes almost always demand political power, which helps explain why autocratic leadership almost always falters in a larger, more complex economy.

Under autocratic leadership, a major risk is the allocation of economic assets (capital and people), which are, over time, used to further political interests, leading to inefficient companies and markets, favoritism and corruption.

In addition, autocratic leadership diminishes the rule of law and transparency – damaging the ability to create a well-functioning financial system (this certainly restricts the internationalizing of the RMB).

Disruption of trade is another risk China faces. The United States’ trade issues with China are substantial and real. They include:

  • Theft or forced transfer of intellectual property;
  • Lack of bilateral investment rights, transfer of ownership or control of investments;
  • Onerous non-tariff barriers;
  • Unfair subsidies or benefits for state-owned enterprises; and
  • Lack of rapid enforcement of any disagreements.

China will only comply with international trade agreements and only do what is in its own self-interest. Near term, we should expect challenge and conflict to characterize the relationship between China and the West over a range of economic, human rights and strategic issues.

There may, however, be areas where we will simply never agree. As the two largest economies in the world, China and the United States should continue to have a long-term interest in collaborating where we can on critical global issues, including climate change, global health and stability on the Korean Peninsula.

China does not have a straight road to becoming the dominant economic power. To put this in perspective, America’s GDP per person in 2019 was $65,000 and China’s was $10,000. Even if we do a rather poor job at managing our economy (growing at 2%), our GDP per person in 20 years would be $85,000. And if the Chinese do a good job managing their economy, their GDP per person in 2040 would still be under $35,000. While China is well on its way to becoming a fully developed nation, it may face more uncertainty and moments of slower growth in the future (like the rest of us) than in the past.

For the near term, if China and the United States can maintain a healthy strategic and economic relationship, it could greatly benefit both countries – as well as the rest of the world.

Another factor is the Chinese currency, the renminbi (RMB). The renminbi cannot be freely moved around the world; it can leave China only in limited amounts and can be invested only as the Chinese see fit. Thus the renminbi is a long way from replacing the U.S. dollar as the world’s reserve currency.

The Chinese currency is subject to their internal politics, laws and regulations. While the Chinese have done a good job building their economy and are slowly moving toward a more transparent society and financial system, they are a long way from having a currency that is fully “convertible” like the U.S. dollar.

References:

  1. https://reports.jpmorganchase.com/investor-relations/2020/ar-ceo-letters.htm
  2. https://www.wsj.com/articles/slow-meltdown-of-china-economy-evergrande-property-market-collapse-downturn-xi-cewc-11640032283
  3. https://www.msn.com/en-us/money/markets/could-chinas-economy-collapse/ar-AAPypxS
  4. https://warontherocks.com/2021/12/could-chinas-massive-public-debt-torpedo-the-global-economy/

Commercial real estate bust.

While the U.S. economy is likely to grow 6% in 2021 and 4% in 2022, the highest rate in decades, analysts project.

China’s economy has been faltering despite it’s exceptionally strong trade surplus and it’s authoritarian government’s heavy hand on COVID-19.

Inflation – The Elephant Affecting the Economy

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Historic inflation and interest rates hike fears are sinking many high growth technology stock prices. Inflation in 2021 was the consequences of rapidly rebounding demand in a supply-constrained world.

The fear of inflation and the the fear of subsequent Federal Reserve interest rate hikes are creating concern and panic among some investors. Rising interest rate and skyrocketing inflation worries are pressuring stocks. And by the Fed signaling raising rates in the future, it unsettles and sends both Wall Street and Main Street into a panic.

But, what is inflation?

Inflation is when consumer prices rise, goods and services become more expensive, and money loses value. Inflation reduces your purchasing power, eats away at your investment returns, and chips away at your wealth. Currently, Americans are experiencing the pernicious effects of inflation, especially in the areas of escalating food and energy prices.

2021 was one of the worst years for inflation that Americans have seen recently, with a 7% increase, the highest since 1982. For consumers, this means $1 at the beginning of the year was roughly worth only $0.93 at the end. While the impact might seem small when examining it on a dollar level, it represents a change in the purchasing power of retirement savings from January 2021 to December 2021. The Wall Street Journal’s Gwynn Guilford writes: “U.S. inflation hit its fastest pace in nearly four decades last year as pandemic related supply and demand imbalances, along with stimulus intended to shore up the economy, pushed price up at a 7% annual rate.”

American economist and Nobel prize laureate Milton Friedman opined that: “Inflation is always and everywhere a monetary phenomenon.”  In other words, inflation is invariably a case of too much cheap money and capital chasing too few goods, services and assets.

In the last twenty years, the United States witnessed a large accumulation of federal public debt under Presidents Bush, Obama, Trump, and Biden administrations. Federal debt climbed from 55% of GDP in 2002 to 105% in 2019. Additionally, the U.S. has also endured a decade plus of loose monetary policy overseen by the Fed which has pumped up asset prices.

As a result of the escalating public debt and loose monetary policy, the Federal Reserve most important immediate task, of its dual mandates, must be to get inflation under control and reduced. Since 1977, the Federal Reserve has operated under a mandate from Congress to “promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates”—what is now commonly referred to as the Fed’s “dual mandate.”

The Labor Department stated that the consumer-price index — which measures what consumers pay for goods and services — rose 7% in December from the same month a year earlier, up from 6.8% in November. That was the fastest growth in inflation since 1982 and marked the third straight month in which inflation exceeded 6%.”

Three sectors–energy/materials, financials and technology–may be viewed as inflation beneficiaries or, at the very least, inflation-agnostic assets:

  • Energy and materials are commodity-based, and oil, gas, and most commodities rebounded from prices that had fallen to a fraction of their pre-pandemic levels.
  • Financials, especially banks, are often viewed as inflation hedges since interest rates historically climb when inflation heats up. This reflects the eroding effect of higher prices on a currency’s value in the future, which is remedied by rate hikes on debt.
  • Technology is a more nuanced winner in the inflation game. The large tech players and most software companies have tremendous economies of scale. As their revenues scale, their costs, particularly labor, do not grow at nearly the same degree, cushioning profit compression from wage escalation.

In a book called “The Great Inflation”, the authors wrote, “Inflation is not an Act of God…inflation is man-made and can be started, prevented, regulated and stopped by human action.”

“To think that a stimulus of this magnitude wouldn’t cause inflation required believing either that such a huge adjustment was possible within a matter of months, or that fiscal policy is ineffective and does not increase aggregate demand. Both views are implausible”, says Jason Furman, former chair of President Obama’s Council of Economic Advisers.

Thus, slowing down in aggregate federal debt growth per capita, tightening monetary policy, and raising interest rates could be effective tools in stemming runaway inflation.

“If I was Darth Vader and I wanted to destroy the US economy, I would do aggressive spending in the middle of an already hot economy… What are you going to get out of this? You’re going to get a sugar high, the higher inflation, then an economic bust.” — Billionaire investor Stanley Druckenmiller, July 23, 2021

References:

  1. https://www.cnbc.com/2021/12/13/op-ed-these-3-market-sectors-shone-even-as-investors-grew-weary-of-hearing-about-inflation.html
  2. https://www.americanthinker.com/blog/2021/12/is_joe_manchin_right_about_inflation.html
  3. https://seekingalpha.com/article/4479557-how-to-better-understand-inflation-and-predict-its-direction
  4. https://www.marketwatch.com/story/why-did-almost-no-one-see-inflation-coming-11642519667

Cathie Wood Dislikes Investing in Chinese Stocks

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“Pouring billions of dollars into China now is a tragic mistake.” George Soros

Cathie Wood, the CEO of Ark Invest, has slashed her company’s investment exposure to China in 2021. Her actions came as Beijing’ tightened its authoritarian grip on domestic businesses and the economy. These actions has rattled global investors, wiping trillion of dollars off the value of Chinese stocks and triggering fears about the future of innovation in China, especially with China experiencing serious economic slowdown and real estate turmoil.

See the source image

Wood revealed that her Ark Innovation ETF has significantly reduced its exposure to China. Sweeping regulatory changes have made the investment environment riskier in,China, according to a Financial Times report.  Additionally, the Chinese government has been accused by the U.S. and the international community of committing genocide specifically against the Muslim Uyghurs and other minorities which has resulted in several countries boycotting the 2022 Beijing Winter Olympics because of these allegations.

Almost every week late last year, China announced a regulatory crackdown aimed at reasserting its absolute control of its economy. The crackdowns included a banned on the ride-share company Didi from app stores a day after it listed on the New York Stock Exchange.

With Chinese authorities apparently focusing on social issues and social engineering at the expense of capital markets, Wood said, “We own very, very few stocks there [in China] because they’re unpredictable. They are grappling with what most governments are grappling with: the gap between rich and poor.”

Furthermore, Chinese authorities have been cracking down on cheap credit in an effort to cool the country’s real estate market that has been driven by speculation. These actions has caused China’s Evergrande Group, the world’s most indebted property developer, and other large property developers to default on bond payments. Wood is concerned that 75% of consumer savings in China is held in real estate, and real estate values have fallen in recent months. Her analysis: That the Chinese government is willing to risk the decline in real estate values and wipe out real estate investors in order to address the wealth gap.

Angel investor and entrepreneur Jason Calacanis commented: “I think the mad king is circling his wagons because he feels threatened. I’m talking about [Chinese President] Xi Jinping.”

President Xi Jinping’s has talked about “common prosperity” as a policy goal in China, and called on high-income Chinese enterprises to “return more [of their profits] to society”. These policies have been particularly focused on cracking down on the power of big private companies, such as e-commerce giant Alibaba and ride-hailing app Didi. Beijing’s policies have prompted investors to sell Chinese assets in 2021.

Moreover, Chinese companies in the technology, education and gaming sectors have faced an onslaught of draconian new rules relating to data privacy and workers’ rights in recent months. Chinese authorities have told the companies to “break from the solitary focus of pursuing profit or attracting players and fans.” Within the past several months, China barred online gamers under the age of 18 from playing on weekdays and limited their play to just three hours on weekends.

Cathie Wood is also circumspect about China’s demographics. China has been confronting the lowest fertility rates it has experienced in seven decades as well as a material gender imbalance. This is a growing concern to the Communist authoritarian government.

“I think President Xi is very unsettled that China’s three-child policy is not working. And that’s very forecastable,” Wood said.

Multinational U.S. companies have come under increased pressure both within China and internationally as they aim to comply with Xinjiang-related trade sanctions while simultaneously overlooking Chinese government’s crimes against humanity while continuing to operate in China. These companies issued marketing statements condemning the murder of George Floyd in the U.S. while turning a blind eye and remaining mute regarding genocide and mass murder in China.

Billionaire investor George Soros said BlackRock’s and other U.S. businesses who are investing billions of dollars into China now is a “mistake” and will likely lose money for the asset manager’s clients, according to an opinion piece in the Wall Street Journal.

“Pouring billions of dollars into China now is a tragic mistake,” Soros wrote in the op-ed. “It is likely to lose money for BlackRock’s clients and, more important, will damage the national security interests of the U.S. and other democracies.”

References:

  1. https://www.forbes.com/sites/kerryadolan/2021/12/03/investor-cathie-wood-on-bitcoin-why-she-sold-stocks-in-china-and-what-her-firm-is-buying-now
  2. https://www.cnn.com/2021/09/09/investing/cathie-wood-ark-china/index.html
  3. https://www.afr.com/markets/equity-markets/how-jack-ma-treatment-prompted-cathie-wood-to-quit-china-20211020-p591ia
  4. https://www.reuters.com/business/finance/soros-says-blackrocks-china-investments-likely-lose-money-wsj-2021-09-07/
  5. https://www.cnbc.com/2022/01/11/intel-deletes-reference-to-xinjiang-after-backlash-in-china.html

Inflation: Biggest Threat to Investors and Market

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“Inflation is not going to be transitory.” Paul Tudor Jones, Tudor Investment Founder

Recently on CNBC, Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corporation, was extremely critical of current Federal Reserve policy. He opined that current Fed monetary policy and Administration fiscal policy are creating persistent inflation, instead of fighting existing inflation.

In his opinion, inflation could be worse than feared and is not transitory. “I think to me the number one issue facing Main Street investors is inflation, and it’s pretty clear to me that inflation is not transitory,” Jones said on CNBC’s “Squawk Box”. “It’s probably the single biggest threat to certainly financial markets and I think to society just in general.”

Additionally, Jones opined that inflation will be the death to 60 percent stocks / 40 percent bond portfolios favored by retirees. In his opinion, the Federal Reserve policy is creating inflation instead of fighting it. Instead, the Fed should be aggressively fighting inflation.

Currently, the Fed is slow and late fighting inflation.

Jason Furman, the former chair of the White House Council of Economic Advisers and now a professor at Harvard University’s John F. Kennedy School of Government, contends that both economists, and the market, got inflation wrong in 2021. Furman explained that normal multipliers showed that the fiscal and monetary stimulus was well in excess of the economy’s potential to absorb. He expects inflation to remain “very elevated” because demand will be above trend, and the lag from Federal Reserve policy will mean any tightening won’t make an impact until next year anyway.

Consumer inflation expectations

A Sept. 2021 Federal Reserve Bank of New York survey shows Americans’ inflation rate expectations rising to their highest levels since the survey’s inception.

Consumer expectations for inflation rose to 5.3% over the next year and 4.2% over the next three years, according to the New York Fed. Both are the highest in the history of a data series that goes back eight years.

Powell has long held that inflation is being held in check by forces that the Fed has no control over – aging populations, lower productivity and advances in technology.

Powell’s five-point inflation checklist include:

  • Lack of broad-based pressures;
  • Lower moves in high-inflation items;
  • Low wage pressures;
  • Tepid inflation expectations, and
  • Long-lasting forces that have kept inflation low globally.

High technology companies stocks have underperformed the broader markets amid an increasing possibility of Federal Reserve rate hikes this year. Rising U.S. treasury yields have also recently put pressure on high growth tech names.

The valuations of many tech companies rely on the prospect of profits years in the future, and higher long-term Treasury yields typically discount the present value of future cash.

References:

  1. https://www.msn.com/en-us/money/savingandinvesting/here-s-the-market-move-cathie-wood-says-is-ridiculous-as-her-flagship-fund-sputters/ar-AASCrQL
  2. https://www.aeaweb.org/conference/2022/livecasts/inflation
  3. https://www.cnbc.com/2021/10/20/paul-tudor-jones-says-inflation-could-be-worse-than-feared-biggest-threat-to-markets-and-society.html

Nearly 22 Million Americans are Millionaires

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There are nearly 22 million individuals in the U.S. with financial and real assets to fit the definition of being a millionaire, according to a 2021 Credit Suisse Global Wealth Report. Overall in 2020, total global wealth grew by 7.4% and wealth per adult rose by 6% to reach another record high of USD 79,952, according to the report.

Net worth, or “wealth,” is defined as the value of financial assets plus real assets (principally housing) owned by households, minus their debts.

The core reasons for asset price increases which have led to major gains in household wealth are a result of significant monetary and fiscal intervention by governments and central banks, like the U.S. Federal Reserve. Many governments and central banks in more advanced economies have taken pre-emptive action to prevent an economic recession in two primary ways: first, by organizing massive income transfer programs to support the individuals and businesses most adversely affected by the pandemic, and second, by lowering interest rates – often to levels close to zero – and making it clear that interest rates will stay low for some time.

There is little doubt that these interventions have been highly successful in meeting their immediate objectives of countering the economic impact of the pandemic. However, they have come at a cost. Public debt relative to GDP has risen in the U.S. and throughout the world by 20 percentage points or more, according to a 2021 Credit Suisse Global Wealth Report.

In essence, there has been a huge transfer from the government coffers to household net worth, which is one of the reasons why household wealth has been so resilient. In one respect, these transfers generously compensated households.

Generous payments have meant that disposable household income has been relatively stable and has even risen. In combination with restricted consumption opportunities, this has led to a surge in household saving, which has inflated household financial assets and caused household debts to be lower than they would be otherwise. This increase in savings was an important source of household wealth growth last year.

The lowering of interest rates by central banks has probably had the greatest impact on the growth in household wealth. It is a major reason why share prices and house prices have flourished, and these translate directly into our valuations of household wealth.

However, there are inflation implications in the long term from lowering the interest rates and also increased equity market volatility linked to expected future rises in interest rates. However, these were deemed relatively unimportant at the time compared to the more immediate economic challenges caused by the pandemic.

Household wealth appears to have simply continued to grow, paying little or no attention to the economic turmoil that should have hampered progress. Effectively, financial assets accounted for most of the gain in total household wealth accumulation.

The wealth of those with a higher share of equities among their assets, e.g. wealthier households in general. And, home owners in most markets, on the other hand, have seen capital gains due to rising house prices.

Wealth is a key component of the economic system. It is used as a store of resources for future consumption, particularly during retirement. Wealth also enhances opportunities when used either directly or as collateral for loans. But, most of all, wealth is valued for its capacity to reduce vulnerability to shocks such as unemployment, ill health, natural disasters or indeed a pandemic.

The contrast between those who have access to an emergency buffer and those who do not is evident at the best of times. Household wealth has played a crucial role in determining the resilience of both nations and individuals

Roughly 1% of adults in the world are USD millionaires.

Global household wealth may well have fallen. But aggressive governments and central banks to intervene help mitigate the economic impact of the pandemic. These have led to rapid share price and house price rises that have benefited those in the upper wealth echelons. In contrast, those in the lower wealth bands have tended to stand still, or, in many cases, regressed. The net result has been a marked rise in inequality

In many countries, the overall level of wealth remains below levels recorded before 2016. Some of the underlying factors may self-correct over time. For example, interest rates will begin to rise again at some point, and this will dampen asset prices.

References:

  1. https://www.cnbc.com/2021/12/22/heres-how-22-million-americans-became-millionaires.html
  2. https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-report-2021-en.pdf
  3. https://www.credit-suisse.com/about-us/en/reports-research/global-wealth-report.html

Beat Inflation with Dividend Stocks | Fidelity Viewpoints

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“Stocks that can boost dividends during periods of high inflation may outperform.” Fidelity Viewpoints

Key takeaways according to Fidelity Viewpoints

  • Dividends aren’t just nice to have, they’re essential to the stock market’s return—accounting for approximately 40% of overall stock market returns since 1930.
  • During periods of high inflation, stocks that increased their dividends the most considerably outperformed the broad market, on average, according to Fidelity’s sector strategist, Denise Chisholm.
  • Dividend-paying stocks’ regular, scheduled payments also may help to reduce the volatility of a stock’s total return.

The economy is gradually recovering from its pandemic-related slowdown and shutdowns, and inflation has hit its highest rate in 39 years. People are emerging from the pandemic and are spending money they saved or money they’re getting from the government. Thus, a combination of soaring pent-up consumer demand and persistent supply chain disruptions has tarnished an otherwise robust economic recovery.

The Bureau of Labor Statistics said the Consumer Price Index of food, energy, goods and services rose by 0.8 percent in November, pushing annual inflation above 6.8 percent. The level is the highest since 1982 and it also marked the sixth consecutive month in which annual inflation rates have exceeded 5 percent.

Currently, approximately 70 percent of Americans rate the economy negatively, with nearly half of Americans blaming Biden for inflation, according to a recent Washington Post-ABC poll.

This combination of economic challenges and consumer worries may make this an especially good time to consider investing in stocks that pay consistent dividends.

A few important things for investors to know about dividend stocks:

  • Dividend payouts typically happen quarterly, although there are a few companies that payout monthly.
  • Many high-quality companies routinely raise their dividend payouts, helping hedge against inflation.
  • A stock’s dividend yield moves in the opposite direction of its stock price, all else being equal, so a high yielding stock may be reason for caution.

Fidelity research finds that dividend payments have accounted for approximately 40% of the overall stock market’s return since 1930. What’s more, dividends have propped up returns when stock prices struggle.

Dividends account for about 40% of total stock market return over time

US stock returns by decade (1930–2020). Over various decades, dividends have remained a fairly steady component of stocks’ total returns amid more highly volatile stock prices. Past performance is no guarantee of future results. Source: Fidelity Investments and Morningstar, as of 12/31/2020.

To invest successfully in dividend stocks, one of the keys is finding companies with strong balance sheets and with secure payouts that can grow consistently over the long haul. Moreover, it’s important to understand the concept of dividend yield, which investors use to gauge how much dividend income their investment will produce.

Investing in dividend stocks

When selecting dividend stocks, it’s important to keep dividend quality in mind. A quality dividend payout can grow over time and potentially be sustained during economic downturns. It’s the primary reason investors must not focus solely on yield.

Steve Goddard, founder and chief investment officer of Barclay, prefers companies with high returns on capital and strong balance sheets. “High return-on-capital companies usually by definition will generate a lot more free cash flow than the average company would,” he says. And cash flow is what pays the dividend.

Although overall dividend health has improved markedly since 2020 and looks good heading into 2022, it’s equally important to check a company’s dividend policy statement so you know how much to expect in payment and when to expect it. Dividend yield is a stock’s annual dividend expressed as a percentage of its price.

It’s crucial to recognize that a stock’s price and its dividend yield move in opposite directions, as long as the dollar amount of the dividend doesn’t change. Investing in the highest-yielding shares can lead to trouble, notably dividend cuts or suspensions and big capital losses

This means a high dividend yield may be a red flag of a problem with the underlying company. For example, a stock’s yield may be high because business problems are weighing down the company’s share price. In that case, the company’s challenges may even cause it to stop or reduce its dividend payments. And before that happens, investors are likely to sell off the stock.

Fidelity Investments’ research has found that stocks that reduce or eliminate their dividends historically have underperformed the market by 20% to 25% during the year leading up to the cut.

Also consider the company’s payout ratio—the percent of its net income or free cash flow it pays in dividends. Low is usually good: A low ratio suggests the company may be able to sustain and possibly boost its payments in the future.

“As a rule of thumb, no matter what the payout ratio is, it is always important to stress test a company’s payout ratio at all points in the business cycle in order to carefully judge whether it will be able to maintain or increase its dividend,” says Adam Kramer, portfolio manager for the Fidelity Multi-Asset Income Fund.

“It all depends on the stability of the cash flows of a company, so it’s more about that than the level of payout. You want to test the company’s ability to pay and increase the dividend under different scenarios. In general, when the payout ratio is more than 50%, it’s a good reminder to always stress test that ratio,” Kramer explains.

Be sure to diversify as you build a portfolio of dividend-paying stocks. To help manage risk, invest across sectors rather than concentrating on those with relatively high dividends, such as consumer staples and energy.

References:

  1. https://www.fidelity.com/learning-center/trading-investing/inflation-and-dividend-stocks
  2. https://www.barrons.com/articles/quality-dividend-stocks-51639134001
  3. https://news.yahoo.com/inflation-pinch-challenges-biden-agenda-200620196.html

Past performance and dividend rates are historical and do not guarantee future results. Diversification and asset allocation do not ensure a profit or guarantee against loss. Investing in stock involves risks, including the loss of principal.

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