“Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.” FOMC Report
The Federal Reserve raised interest rates 50 basis points (1/2 percent) on Wednesday in an effort to tame inflation that’s soaring at a 40-year high. And, the Fed anticipates that ongoing increases in the target range will be appropriate.
The Federal Open Market Committee (FOMC) is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.
Short-term borrowing was nudged up a half a point, and consumers are going to feel the increase in their bank accounts.With a 50 basis-point interest rate hike, you can expect higher costs for:
Credit Cards – Your credit card’s interest rate will likely increase slightly within a couple of billing cycles. The size of that increase can vary based on your credit score and credit card provider. A 1% interest rate increase will likely only add a few dollars to your monthly interest payments on a few thousand dollars of outstanding debt. Current average interest rates are close to 16%, but they could be as high as 18.5% by the end of the year.
Mortgages – Mortgage interest rates are calculated based on multiple factors, like inflation and the housing supply — but they’re also affected indirectly by the federal funds rate, which influences how much banks pay to borrow money. When that rate increases, the interest on adjustable-rate mortgages tends to follow.
Other loans – The federal funds rate is used to calculate the lowest interest rate offered for loans, known as the prime rate. Any loan tied to the prime rate, known as adjustable-rate loans, will likely have a slight increase in interest rates.
If you currently have a fixed-rate loan, your payments won’t change. If you have an adjustable-rate loan, you should take some time to look at its terms, says Jacob Channel, a senior economic analyst at LendingTree: “The last thing you want is to think, ‘Oh, I have a few months before my rate goes up,’ and realize that the rate hike will kick in much sooner.”
“If you feel you can dance in and out of securities in a way that defeats the inflation tax, I would like to be your broker — but not your partner.” Warren Buffett
During 2022 Berkshire-Hathaway’s annual shareholders meeting, chairman and CEO Warren Buffett stated, ‘Inflation swindles almost everybody’. Inflation is the decline of purchasing power of the U.S. dollar, the U.S. unit of currency. The rising prices of goods and services, often expressed as the inflation rate, means that a unit of currency effectively buys less than it did in prior years.
Buffett commented that inflation “swindles” equity investors. He elaborated that: “Inflation swindles the bond investor, too. It swindles the person who keeps their cash under their mattress. It swindles almost everybody.” Since inflation is largely a result of loose fiscal and monetary policy. This policy artificially inflated demand and effectively caused a supply/demand imbalance — the cure for which was rising prices to try and lower demand.
He stated that inflation also raises the amount of capital that companies need and that raising prices to maintain inflation-adjusted profits is not as simple as it may seem.
In Buffett’s opinion, “only gains in purchasing power represent real earnings on investment. If you (a) forego 10 hamburgers to purchase an investment; (b) receive dividends which, after tax, buy two hamburgers; and (c) receive, upon sale of your holdings, after-tax proceeds that will buy eight hamburgers, then (d) you have had no real income from your investment, no matter how much it appreciated in dollars. You may feel richer, but you won’t eat richer.”
Additionally, “High rates of inflation create a tax on capital that makes much corporate investment unwise – at least if measured by the criterion of a positive real investment return to owners”, states Buffett.
In a 1977 Fortune magazine article, Buffett conveyed his views on inflation: “The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislatures. The inflation tax has a fantastic ability to simply consume capital.”
He opined that the best protection against inflation is investing in your own skills.
During the shareholder’s meeting, Buffett observed that massive fiscal and monetary economic stimuli during the COVID-19 pandemic are the major reason for high inflation today: “You print loads of money, and money is going to be worth less.”
Buffett views inflation as a necessary consequence of the massive fiscal and monetary stimuli, which “artificially inflated demand and effectively caused a supply/demand imbalance”, to get the U.S. out of what could have been a COVID-19 induced depression.
“In my book, Jay Powell is a hero,” Buffett stated. “It’s very simple, he did what he had to do.”
A recession is typically considered two consecutive quarters of negative GDP growth.
U.S. economic activity contracted for the first time since mid-2020, with lingering supply chain constraints, inflation at its hottest rate since the early 1980s, expected interest rate increases announced by the Fed, and disruptions amid Russia’s war in Ukraine weighing on economic growth.
The Bureau of Economic Analysis (BEA) released its initial estimate of first-quarter U.S. gross domestic product (GDP).
The main metrics from the report, compared to consensus data compiled by Bloomberg, are:
GDP annualized, quarter-over-quarter: -1.4% vs. 1.0% expected, 6.9% in Q4
Personal Consumption: 2.7% vs. 3.5% expected, 2.5% in Q4
Core Personal Consumption Expenditures, quarter-over-quarter: 5.2% vs. 5.5% expected, 5.0% in Q4
What does the metrics all mean?
The economic metrics are important indicators of the state of the U.S. economy at the start of this calendar year — especially now as the U.S. braces for interest rate hikes to cool inflation and for the possibility of a recession in the near to medium term. A recession is typically considered two consecutive quarters of negative GDP growth.
“It is unfortunate that this GDP rate did not meet expectations, but unsurprising as the U.S. economy remains very volatile with geopolitical turbulence from the war in Ukraine, a global supply chain crisis, increasing inflation and the ongoing COVID-19 pandemic,” Steve Rick, chief economist at CUNA Mutual Group, said in an email. “All of these factors have shrunk GDP growth rates around the globe.”
Politicians rarely let facts get in the way of a good sound bite and political theater.
Experience, economics and simple logic tell you that anything Congress does to “fix” a situation, like high consumer energy prices, will probably do more harm than good, writes Fisher Investment’s manager Elisabeth Dellinger, Senior Editor of MarketMinder. So it is a blessing for equity stocks and financial markets that gridlock on Capitol Hill will likely block any energy related legislation coming out of Washington.
Recently, Congress indulged in one of its favorite pastimes: a public flogging of large company chief executives…on this occasion the targets were major energy company chief executive officers. Politicians have accused the industry of price gouging, and a couple of Senators have proposed windfall profits taxes for energy companies.
The allegations at the Congressional hearings appear ‘more politics than substance’. For one, gas prices have ticked down slightly for three straight weeks. In reality, gas prices tend to follow oil at a lag, so gas’s failure to match oil’s rate of decline over the past four weeks isn’t a shock.
Moreover, the oil executives offered some simple, logical answers why gasoline prices haven’t matched the magnitude of oil’s retreat. Some cited rising costs and shortages of drilling equipment as well as transportation bottlenecks. Others pointed out that the industry is still dealing with the wild swings induced by lockdowns, which brought swift production cuts—and then a need for fast restarts when the companies didn’t have the labor or equipment to oblige.
And, there is a third reason, writes Dellinger: Oil isn’t the only major ingredient in gasoline. The ethanol mandate is still the law of the land. Gasoline sold in the US is required to have a certain amount of ethanol blended with refined petroleum—typically around 10% of every gallon. Ethanol is a “renewable” fuel derived from corn, which has jumped in price since Vladimir Putin invaded Ukraine. Corn is now up 42.2% over the past six months, and unlike crude oil, it hasn’t backed down from the post-invasion spike.[iii] Demand from all corners is keeping the price high, and that is feeding into prices at the pump.
But Congressional hearings are rarely about the truth and facts, especially when the facts put Congress’s past deeds in a bad light. True to form, politicians highlight a hot-button issue, press the blame button and advance a politically motivated policy solution, even though it isn’t likely to pass.
Senators’ have offered windfall tax proposals which are in response to claims that these taxes are necessary because energy firms are restraining supplies and production to keep prices up, tied to “financial discipline” demanded of oil firms by investors. Although these are strong emotional appeals intended for their loyal constituents, but the facts demonstrate that there isn’t much evidence of actual excessive windfall profits.
“Energy is a cyclical business, and companies won’t survive if they can’t bank on having good times to counterbalance the bad”, writes Dellinger. “If eventual profits can’t offset losses, there is no math there for shareholders or creditors. Essentially, a windfall tax implemented now would punish companies for surviving. Moreover, it would destroy the incentive to invest. What is the point in stomaching the high upfront costs it takes to drill and pump new wells if there is a risk the government will confiscate your profits retroactively? How can you plan? Retroactive taxes kill investment, and doing this in the oil and gas industry would probably whack US oil production, making prices even higher over time.”
On the bright side, the likelihood this windfall tax legislation goes anywhere stands about zero. The 50/50 Senate hasn’t managed to pass anything contentious and probably won’t start now—not with Democratic Senator Joe Manchin, who has effective veto power, representing a state with a big natural gas and coal industry.
Midterms currently look poised to deepen gridlock next year. Angry Congressional political tweets and sound bites might stoke fear and hit constituents’ sentiment during midterm campaigns, but financial markets should quickly view that these bills are likely to be ‘dead on arrival’.
Conversely, NYT foreign affairs columnist Thomas Friedman suggests that the U.S. needs to implement an ‘oil import tax’ that sets the price of oil in America at around $50 to $60 per barrel. This tax, he opines, would provide a stable, predictable price for oil companies, and eliminate the wild price swings and volatility in oil prices American have experienced over the past two decades.
“One of our learnings from past mistakes is to act promptly when we discover new information about an investment that is inconsistent with our original thesis.” Bill Ackman, Pershing Square
The main benefit of I Bonds is that they protect your cash from inflation. I bonds currently earn 7.21% through April 2022.
U.S. Treasury issued Series I savings bonds are a low-risk savings product. They are a good hedge against inflation (the “I” in the name stands for “inflation”), because during their lifetime they earn interest and are protected from inflation.
Inflation can be a very destructive economic force that reduces the value and purchasing power of your money over time. With inflation at a 40-year high, many investors are looking for ways to protect the value of their cash, and Series I bonds could be a good solution.
These Series I bonds have two interest rates:
A fixed rate that never changes for as long as you hold the bond — currently 0%
A variable inflation adjusted rate that changes every six months based on the Consumer Price Index (CPI) — current annual rate is 7.12% through April 2022.
The Treasury will announce the new I bond annual interest rate based on CPI in May, which might be higher or lower than the current rate.
You may purchase:
Electronic I bonds via TreasuryDirect.gov
Paper I bonds with your IRS tax refund via IRS Form 8888
I bonds are sold at face value and earn interest from the first of the month in the issue date. Interest is earned monthly and is compounded semiannually: the interest the bond earned in the previous six months is added to the bond’s principal value; then, interest for the next six months is calculated using this adjusted principal.
Interest accrues until the bond reaches 30 years maturity or you cash the bond. You can’t access the interest payments until you cash the bond.
I bonds do not incur state or local taxes (SALT), but the bond owner will owe federal tax on the interest earnings unless the money is used for qualified education expenses.
You can’t redeem the bond for at least 12 months, and if you redeem the bond within five years, you forfeit the last three months of interest.
There are dollar limits on the quantity of Series I bonds you can purchase each calendar year:
$10k maximum in electronic bonds per person (minimum $25)
$5k maximum in paper bonds (minimum $50)
You can also purchase bonds for children under the age of 18 and, in some instances, for trusts and estates.
The main benefit of Series I bonds is that they protect your cash from inflation. And, Series I bonds can be a good solution if you have a savings goal over the next 2 to 5 years and want to protect the value of your savings.
“The compounding of returns is an incredible miracle of business, finance and human existence. Everything you learn is additive, every day. And if you keep at it and don’t quit, it’s an incredible miracle.” Bruce Flatt
Bruce Flatt, the chief executive officer of Brookfield Asset Management Inc. said in an episode of Bloomberg Wealth with David Rubenstein, “Everyone always thinks about geopolitical events, and one needs to be careful in business with everything they do. But, all geopolitical events pass. Wars, explosions, recessions — all those things, they come and go. And they’re really important at the time, but if you have good businesses in great places and keep compounding returns, you’ll earn excellent long-term returns.”
Brookfield is a place that tries to make as many small mistakes as you possibly can, according to Flatt, which means that they’re “testing the windows every day, but just don’t make any really large mistakes. People are encouraged to make small mistakes. And that’s a good thing. It means that we’re testing the limits of where we should be going.”
Brookfield focuses on infrastructure investments such as toll roads, utilities and real estate and they use their own balance sheet to invest alongside clients.
The company is also adding more wealth products for individual investors. Last year, it started its own private real estate investment trust after taking over a portfolio of properties overseen by a subsidiary of Oaktree Capital Management.
The best investment advice, according to Flatt, is to invest early and then do not sell your assets in order to take advantage of “the miracle of compound interest”. “The compounding of returns is an incredible miracle of business, finance and human existence”‘ states Flatt. “Everything you learn is additive, every day. And if you keep at it and don’t quit, it’s an incredible miracle.”
https://youtu.be/_B8RWoAlkWU
Thus, they’ve made lots of little mistakes, but you can’t compound at 17% for 30 years, or 20% annualized for 20 years, and make any big mistakes. It’s impossible.
The argument for putting money in an active investment vs. an index fund are straight forward. If an individual has very little knowledge of or time to dedicate to investing, owning a passive index fund in equities is probably the right thing to do. They should “Put their money in an index fund and don’t sell. Just keep it in and let it compound over a long period of time.”
There are two macro concerns every investor should heed:
1970s-like inflation, or
Interest rates at 8% in the United States,.
Those two things are macro things can’t be controlled. But if those two things occur, then it changes the paradigm of what you should be doing with your capital.
“Inflation actually is a positive for most of the things that we do,” Mr Flatt stated. “If this office building costs X to build today and inflation comes, it’s going to cost X plus something, which means that the rent to justify a new building is more.”
The real macro issue of great concern is interest rates. But “if interest rates spiral out of control and go up a lot, then that changes the paradigm”. It is an outcome that he fears but does not expect to happen.
WATCH: Bruce Flatt, Brookfield's CEO, appeared on @wealth with David Rubenstein to discuss where he sees opportunities in #energy transformation and infrastructure, and shares his advice for individual investors: https://t.co/0ZT8wouxdN
— Brookfield Asset Management (@Brookfield) April 6, 2022
“Inflation has now replaced “labor quality” as the number one problem.” National Federation of Independent Business
The National Federation of Independent Business (NFIB) Small Business Optimism Index decreased in March by 2.4 points to 93.2, the third consecutive month below the 48-year average of 98.
Thirty-one percent (31%) of small business owners reported that “inflation was the single most important problem in their business, up five points from February and the highest reading since the first quarter of 1981”. Inflation has now replaced “labor quality” as the number one problem.
“Inflation has impacted small businesses throughout the country and is now their most important business problem,” said NFIB Chief Economist Bill Dunkelberg. “With inflation, an ongoing staffing shortage, and supply chain disruptions, small business owners remain pessimistic about their future business conditions.”
Key NFIB findings include:
Owners expecting better business conditions over the next six months decreased 14 points to a net negative 49%, the lowest level recorded in the 48-year-old survey.
Forty-seven percent of owners reported job openings that could not be filled, a decrease of one point from February.
The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading in the survey’s history.
The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading recorded in the series.
The difficulty in filling open positions is particularly acute in the transportation, construction, and manufacturing sectors where many positions require skilled workers. Openings are lowest in the finance and agriculture sectors.
Eight percent of owners cited labor costs as their top business problem and 22% said that labor quality was their top business problem, now in second place following “inflation.”
Forty percent of owners report that supply chain disruptions have had a significant impact on their business, up three points. Another 28% report a moderate impact and 23% report a mild impact. Only 8% report no impact from recent supply chain disruptions.
The National Federation of Independent Business (NFIB) is the voice of small business and advocates on behalf of America’s small and independent business owners. NFIB is nonprofit, nonpartisan, and member-driven.
“Inflation is like chewing gum. It’s sticky and flexible, and you definitely don’t want to step in it.” Capital Group
For the past 30 years, investors haven’t had to worry much about dealing with inflation, says Capital Group fixed income portfolio manager Ritchie Tuazon. That changed last summer when COVID-related distortions and excessive government stimulus caused prices for energy and most consumer goods to skyrocket.
Today, the biggest questions for long term investors are how high will inflation go and how long will it last?
Adding to the uncertainty is that there are two types of inflation, according to Tuazon:
Sticky inflation tends to have longer staying power. Sticky categories include rent, insurance and medical expenses.
Flexible inflation — affecting items such as food, energy and cars — has risen much faster in recent months but many believe it won’t last.
From Capital Group’s perspective, they expect high inflation might persist longer than expected and should move closer to its 2% historic goal by sometime in 2023.
Higher inflation levels should remain elevated through late 2022, fueled by labor shortages and broken supply chains. “Consumer prices will eventually return to normal, but that process may take longer than Fed officials are expecting,” says Tuazon.
The Fed is left to react to inflation, but not overreact. Start, but not go too fast. Tighten, but not in the “wrong” ways.
Regarding inflation impact, “the first question is whether inflation will cool off enough on its own to not threaten corporate earnings growth or hurt consumer spending”, states Liz Young, Head of SoFi Investment Strategy. “The second question is less about whether the Fed can control inflation expectations with policy moves and more about whether the market is going to think they’re making a mistake and create a self-fulfilling prophecy.”
Benchmark crude oil prices have surged to $115 per barrel.
The ‘pre-Russian invasion of Ukraine’ rise in gas prices has been the tax Americans pay at the pump for Biden’s administration pro-climate and anti-fossil fuel policies.
Upon taking office in January 2021, the Biden administration implemented policies and regulations that have been extremely detrimental to the exploration, production and investment in domestic fossil fuel energy:
They rejoined the Paris climate agreement,
They terminated the Keystone XL pipeline,
They suspended all oil and gas leases in Alaska’s Arctic National Wildlife Refuge
They began working on his pledge to ban all “new oil and gas permitting on public lands and waters.”
The Biden administration entered office promising to “end fossil fuel” and signaled a hostility to the fossil fuel industry with a major push for clean energy, including a pledge to cut U.S. greenhouse gas emissions by at least 50 percent of 2005 levels by 2030. The result has been that investment, exploration and production has fallen across the oil and gas industry within the U.S.
When you announce your intention to tax and regulate the fossil fuel industry out of existence, investors, along with fossil fuel executives and corporate boards listened, writes Marc A. Thiessen, in a Washington Post opinion piece. The results are less production and capital investment — and higher prices.
Considering that the price of gasoline never rose above $3.04 in the year prior to Biden taking office. Once Biden entered office, gasoline prices broke that threshold in four months — long before Putin invaded Ukraine and economic sanctions were imposed on Russian energy.
Entrepreneur Elon Musk — the founder of the electric car company Tesla — says we need to drill for more oil and gas at in the United States to alleviate world wide pressure on crude oil supplies brought on by the ban of Russian oil exports.
Many billionaire investors, such as Berkshire Hathaway’s Warren Buffett, believe that oil prices will continue to remain elevated in the coming quarters and are putting their reserves of capital were their long term investment beliefs are.
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.
Recently, Congress indulged in one of its favorite pastimes: a public flogging of large company chief executives…on this occasion the targets were major energy company chief executive officers. Politicians have accused the industry of price gouging, and a couple of Senators have proposed windfall profits taxes for energy companies.
