FIGHTING Inflation!

By Staff Reporters

Fed Official Says Inflation Fight Will Take Time, Despite Signs of Progress

Bringing inflation down from 40-year highs is likely to take time and will require a slowdown in economic growth and reduced demand for workers by employers, a Federal Reserve official said yesterday.

Those efforts are showing tentative signs of progress, said Fed governor Philip Jefferson, in his first public remarks since taking office in May. But Mr. Jefferson also said he remains concerned that higher prices could change consumer expectations around inflation in a way that makes further price increases self-fulfilling.

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READ: Fed Official Says Inflation Fight Will Take Time, Despite Signs of Progress (msn.com)

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FOMC: May Keep Tightening Until a Recession!

By Staff Reporters

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The FOMC just reiterated calls for aggressive policy to combat stubbornly high inflation—fueling expectations for bigger rate hikes amid a stock-market sell-off that’s seen major indexes hit new lows for the year—and some analysts project the losses could only deepen.

Expectations for rate hikes climbed amid the comments, with markets pricing in an end-of-year rate of 4.5%—above the 4.4% rate Fed officials projected earlier this month, which itself was one percentage point higher than the forecast in June.

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FINANCE: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

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What is the PRODUCER PRICE INDEX?

JUST RELEASED FOR APRIL 2022

By Dr. David E. Marcinko MBA CMP®

CMP logo

SPONSOR: http://www.CertifiedMedicalPlanner.org

DEFINITION: The PPI is a group of indexes that measure the change, over time, in the prices received by domestic producers of goods and services. It measures price changes from the perspective of the seller rather than the consumer, as with the CPI. The CPI would include imported goods, while the PPI is relevant to U.S. producers, and therefore would not include imports.

CITE: https://www.r2library.com/Resource/Title/0826102549

The PPI measures over 10,000 products and services. It reports the price changes prior to the retail level. This information is useful to the government in formulating fiscal and monetary policies. The data gathered from the PPI is often used in escalating purchase and sales contracts. That is the dollar amount to be paid at some time in the future.

NOTE: Long-term managed medical care contracts of the future will seek escalation clauses for increases in prices.

BLS: https://www.bls.gov/pPI/

full report: https://www.bls.gov/news.release/pdf/ppi.pdf

your comments are appreciated.

thank you

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FINANCE: https://www.amazon.com/Comprehensive-Financial-Planning-Strategies-Advisors/dp/1482240289/ref=sr_1_1?ie=UTF8&qid=1418580820&sr=8-1&keywords=david+marcinko

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INVITE DR. MARCINKO: https://medicalexecutivepost.com/dr-david-marcinkos-

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Inflation, CPI and the PPI

By Staff Reporters

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DEFINITION: In finance, inflation is a general increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

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DEFINITION: The Producer Price Index PPI is a group of indexes that measure the change, over time, in the prices received by domestic producers of goods and services. It measures price changes from the perspective of the seller rather than the consumer, as with the CPI. The CPI would include imported goods, while the PPI is relevant to U.S. producers, and therefore would not include imports.

CITE: https://www.r2library.com/Resource/Title/0826102549

The PPI measures over 10,000 products and services. It reports the price changes prior to the retail level. This information is useful to the government in formulating fiscal and monetary policies. The data gathered from the PPI is often used in escalating purchase and sales contracts. That is the dollar amount to be paid at some time in the future.

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Inflation stayed elevated in April but eased off its 40-year high, signaling that a stomach-churning surge in consumer prices since last summer may have peaked.

PPI April 2022: https://medicalexecutivepost.com/2022/05/12/what-is-the-producer-price-index/

The consumer price index increased 8.3% annually, down from 8.5% in March, as a drop in gasoline prices offset a continuing run-up in food, rent and other costs, the Labor Department said Wednesday. March’s yearly advance marked the fastest since December 1981.

READ: https://www.msn.com/en-us/money/markets/inflation-stays-elevated-at-83percent-in-april-but-eases-from-40-year-high/ar-AAX9vp3?li=BBnb7Kz

2nd Opinions: https://medicalexecutivepost.com/schedule-a-consultation/

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INVESTING: https://www.amazon.com/Comprehensive-Financial-Planning-Strategies-Advisors/dp/1482240289/ref=sr_1_1?ie=UTF8&qid=1418580820&sr=8-1&keywords=david+marcinko

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Inflation and Crypto-Currency

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By Staff Reporters

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The inflation-proof nature of cryptocurrency works in the same way as stocks– inflation will cause prices to increase so companies can charge more for their goods which means people are willing to pay.

However, since cryptocurrencies are fairly new and not backed by anything at this point it’s better if they make up a small portion of your portfolio instead of trying to go all in with one coin unless you have enough money lying around where losing some won’t hurt too much.

A lot of corporate investment portfolios have started to include crypto because let’s face it, inflation matters.

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RELATED: https://www.routledge.com/Comprehensive-Financial-Planning-Strategies-for-Doctors-and-Advisors-Best/Marcinko-Hetico/p/book/9781482240283

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Inflation Reduction Act of 2022

By Claire

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While the Inflation Reduction Act of 2022 looks good on paper, it will actually do more harm than good if it passes. The plan would hurt working-class taxpayers and small business owners across the country.

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READ: https://wealthofgeeks.com/irs-expansion/

MORE: https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf

FINANCIAL PLANNING: https://www.amazon.com/Comprehensive-Financial-Planning-Strategies-Advisors/dp/1482240289/ref=sr_1_1?ie=UTF8&qid=1418580820&sr=8-1&keywords=david+marcinko

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UPDATE: The Markets, SS COLAS, EY, and Monkey-Pox?

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Markets: Stocks sagged for the second straight day, with technology chip stocks taking some of the biggest blows. A new consumer report showed that Americans are not confident in the economy, but are confident that inflation will be remain for the next year.

A Social Security official earlier this month said he expects a COLA bump of about 8%, based on the current inflationary trends. But if inflation continues at its current pace — the cost of goods and services in May accelerated to 8.6% — seniors could receive a COLA hike of 10.8% in early 2023, according to a new analysis from the non-partisan Committee for a Responsible Federal Budget. If inflation grinds to a halt over the final months of 2022, seniors would receive a COLA increase of 7.3%, the group predicted. 

Ernst and Young (EY), one of the world’s largest auditing firms, has agreed to pay a $100 million SEC fine after admitting hundreds of its accountants have cheated on their ethics exams between 2017 and 2021.

US health officials ramped up their fight against the Monkeypox outbreak, expanding the group eligible to get vaccines and deploying more doses and testing capabilities.

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COVID, Inflation and Value Investing

Millennial Investing

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By Vitaliy Katsenelson, CFA

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COVID, Inflation, and Value Investing: Millennial Investing
I was recently interviewed by Millennial Investors podcast. They sent me questions ahead of time that they wanted to ask me “on the air”. I found some of the questions very interesting and wanted to explore deeper. Thus, I ended up writing answers to them (I think through writing). You can listen to the podcast here

By the way, I often get asked how I find time to write. Do I even do investment research? Considering how much content I’ve been spewing out lately, I can understand these questions. In short – I write two hours a day, early in the morning (usually from 5–7am), every single day. I don’t have time-draining hobbies like golf. I rarely watch sports. I have a great team at IMA, and I delegate a lot. I spend the bulk of my day on research because I love doing it. 

This is not the first time I was asked these questions. If you’d like to adapt some of my daily hacks in your life, read this essay.

How has Covid-19 changed the game of value investing?

Value investing has not changed. Its fundamental principles, which I describe in “The Six Commandments of Value Investing,” (one-click sign up here to receive it in your inbox) have not changed one iota. The principles are alive and well. What has changed is the environment – the economy. 

I learned this from my father and Stoic philosophers: You want to break up complex problems into smaller parts and study each part individually. That way you can engage in more-nuanced thinking. 

Let’s start with what has not changed. Our desire for in-person human interaction has not changed. At the beginning of the pandemic, we (including yours truly) were concerned about that. We were questioning whether we were going to ever be able to shake hands and hug again. However, the pandemic has not changed millions of years of human evolution – we still crave human warmth and personal interaction. We need to keep this in mind as we think about the post-pandemic world. 

What we learned in 2021 is that coronavirus mutations make predicting the end of the pandemic an impossible exercise. From today’s perch it is safe to assume that Covid-19 will become endemic, and we’ll learn how to live with it. I am optimistic on science. 

Let’s take travel, for example. Our leisure travel is not going to change much – we are explorers at heart, and as we discovered during the pandemic, we crave a change in scenery. However, I can see business travel resetting to a lower base post-pandemic, as some business trips get resolved by simple Zoom calls. Business travel is about 12% of total airline tickets, but those revenues come with much higher profit margins for airlines. 

Work from home. I am still struggling with this one. The norms of the 20th-century workplace have been shaken up by the pandemic. Add the availability of new digital tools and I don’t need to be a Nostradamus to see that the office environment will be different. 

By how much? 

The work from home genie is out of the bottle. It will be difficult to squeeze it back in. My theory right now is that customer support, on-the-phone types of jobs may disproportionately get decentralized. The whole idea of a call center is idiotic – you push a lot of people into a large warehouse-like office space, where they sit six feet apart from each other and spend eight hours a day on the phone talking to customers without really interacting with each other. Current technology allows all this work to be done remotely.

On another hand, I can see that if you have a company where creative ideas are sparked by people bumping into each other in hallways, then work from home is less ideal. But again, I don’t think about it in binary terms, but more like it’s a spectrum. Even for my company. Before the pandemic, half of our folks worked outside of the IMA main office in Denver. Most of our future hires will be local, as I believe it is important for our culture. However, we provide a certain number of days a year of remote work as a benefit to our in-office employees. 

From an investment perspective, we are making nuanced bets on global travel normalizing. We don’t own airlines – never liked those businesses, never will. Most of their profitability comes from travel miles – they became mostly flying banks. 

Office buildings I also put into a too-difficult-to-call pile. There was already plenty overcapacity in office real estate before the pandemic, and office buildings were priced for perfection. The pandemic did not make them more valuable. Maybe some of that overcapacity will get resolved through conversion of office buildings into apartments. By the way, this is the beauty of having a portfolio of 20–30 stocks: I don’t need to own anything I am not absolutely head over heels in love with.

What is the importance of developing a process to challenge your own beliefs?

My favorite quote from Seneca is “Time discovers truth.” My goal is to discover the truth before time does. I try to divorce our stock ownership from our feelings. 

Let me give you this example. If you watch chess grandmasters study their past games, they look for mistakes they have made, moves they should have made, so in the future they won’t make the same mistake twice. I have also noticed they say “white” and “black,” not “I” and “the opponent.” This little trick removes them from the game so that they can look for the best move for each side. They say “This is the best move for white”; “This is the best move for black.”

You hear over and over again from people like Warren Buffett and other value investors that we should buy great companies at reasonable prices, and I’d like to dig deeper on that idea and its two key parts, great companies and reasonable prices. Could you tell us what it takes for a company to qualify as a “great” company?

This question touches on Buffett’s transformation away from Ben Graham’s “statistical” approach, i.e., buying crappy companies that look numerically cheap at a significant discount to their fair value, to buying companies that have a significant competitive advantage, a high return on capital, and a growth runway for their earnings. 

The first type of companies often will not be high-quality businesses and will most likely not be growing earnings much. Let’s say the company is earning $1. Its earnings power will not change much in the future – it is a $5 stock trading at 5 times earnings. If its fair value is $10, trading at 10 times earnings, And if this reversion to fair value happens in one year, you’ll make 100%. If it takes 5 years then your return will be 20% a year (I am ignoring compounding here). So time is not on your side. If it takes 10 years to close the fair value gap, your return halves. Therefore you need a bigger discount to compensate for that. Maybe, instead of buying that stock at a 50% discount, you need to buy a company that is not growing at a 70% discount, at $3 instead of $5. This was pre-Charlie Munger, “Ben Graham Buffett.” 

Then Charlie showed him there was value in growth. If you find a company that has a moat around its business, has a high return on capital, and can grow earnings for a long time, its statistical value may not stare you in the face. But time is on your side, and there is a lot of value in this growth. If a company earns $1 today and you are highly confident it will earn $2 in five years, then over five years, if it trades at 10 times earnings, a no-growth company may be a superior investment if the valuation gap closes in less than 5 years, while one with growing earnings is a superior investment past year 5. 

Both stocks fall into the value investing framework of buying businesses at a discount to their fair value, looking for a margin of safety. With the second one, though, you have to look into the future and discount it back. With the first one, because the lack of growth in the future is not much different from the present, you don’t have to look far.

There is a place for both types of stocks in the portfolio – there are quality companies that can still grow and there are companies whose growth days are behind them. In our process we equalize them by always looking four to five years out. 

What qualifies as a “reasonable price”? 

We are looking for a discount to fair value where fair value always lies four to five years out. In our discounted cash flow models, we look a decade out. Our required rate of return and discount to fair value will vary by a company’s quality. There are more things that can go wrong with lower-quality companies than with the better ones. High-quality companies are more future-proof and thus require lower discount rates. We are incredibly process-driven. We have a matrix by which we rate all companies on their quality and guestimate their fair value five years out, and this is how we arrive at the price we want to pay today. 

Why do you believe that buying great companies sometimes isn’t a great investing strategy?

Because that is first-level thinking, which only looks at what stares you in the face – things that are obvious even to untrained eyes and thus to everyone. First-level thinking ignores second-order effects. If everyone knows a company is great, then its stock price gets bid up and the great company stops being a great investment. With second-level thinking you need to ask an additional question, which in this case is, what is the expected return? Being a great company is not enough; it has to be undervalued to be a good stock. 

We are looking for great companies that are temporarily (key word) misunderstood and thus the market has fallen out of love with them. Over the last decade, when interest rates only declined, first-level thinking was rewarded. It almost did not matter how much you paid for a stock. If it was a great company, its valuations got more and more inflated. 

You’re a big advocate of having a balanced investment approach that is able to weather all storms. What investments have you found that you expect will be able to hold their buying power if inflation persists through 2022 and 2023?


There are many different ways to answer this question. In fact, every time I give an answer to this question I arrive at a new answer. You want to own companies that have fixed costs. You want assets that have a very long life. I am thinking about pipeline companies, for instance. They require little upkeep expense, and their contracts allow for CPI increases (no decreases); thus higher inflation will add to their revenue while their costs will mostly remain the same. 

We own tobacco companies, too. I lived in Russia in the early ’90s when inflation was raging. I smoked. I was young and had little money. I remember one day I discovered that cigarette prices had doubled. I had sticker shock for about a day. I gave up going to movies but somehow scraped up the money for cigarettes. 

Whatever answer I give you here will be incomplete. It’s a complex problem, and so each stock requires individual analysis. In all honesty, you have to approach it on a case-by-case basis. 

With higher inflation, you’d expect bond yields to rise, since bond investors will demand a higher return to keep pace with inflation. However, CPI inflation is currently over 6%, and the 10-year Treasury is sitting at 1.5%. Why haven’t we seen Treasury yields rise more, and what does it mean for investors if a spread this wide persists?

I am guessing here. My best guess is that so far investors have bought into the Fed’s rhetoric that inflation is transitory due to the economy’s rough reopening and supply chain problems. I wrote a long article on this topic. To sum up, part of the inflation is transitory but not all of it. 

I am somewhat puzzled by the labor market today. I’ve read a few dozen very logical explanations for the labor shortage, from early retirement of baby boomers to the pandemic triggering a search for the meaning of life and thus people quitting dead jobs and all becoming Uber drivers or starting their own businesses. Labor is the largest expense on the corporate income statement, and if it continues to be scarce then inflation will persist. 

I read that employees are now demanding to work from home because they don’t want to commute. The labor shortages are shifting the balance of power to employees for the first time in decades. This will backfire in the long run, as employers will be looking at how to replace employees with capital, in other words, with automation. If you run a fast-food restaurant and your labor costs are up 20–30% or you simply cannot hire anyone, you’ll be looking for a burger flipping machine. 

If we continue to run enormous fiscal deficits, then the US dollar will crack. The pandemic has accelerated a lot of trends that were in place. We were on our way to losing our reserve currency status. Let me clarify: That is going to be a very slow, very incremental process. It will be slow because currency pricing is not an absolute but a relative endeavor, and the alternatives out there are not great. But two decades ago the US dollar was a no-brainer decision and today it is not. So we’ll see countries slowly diversifying away from it. A weaker US dollar means higher, non transitory inflation. 

You wrote The Little Book of Sideways Markets, in which you point out that history shows that a sideways market typically occurs after a secular bull market. With the role that the Federal Reserve plays in the financial markets, do you still anticipate that valuations will normalize in the coming years?

I say yes, in part because declining interest rates have pushed all assets into stratospheric valuations. Rising bond yields and valuations pushed heavenward are incompatible. Yes, I expect valuations to do what they’ve done every time in history: to mean revert. In big part this will depend on interest rates, but if rates stay low because the economy stutters, then valuations will decline – this is what happened in Japan following their early-1990s bubble. Interest rates went to zero or negative, but valuations declined. 

The stock market today is very much driven by the Federal Reserve’s monetary policy. Is there a point at which they are able to take the gas off the pedal and allow markets to normalize?

I am really puzzled by this. We simply cannot afford higher interest rates. Going into the pandemic our debt-to-GDP was increasing steadily despite the growing economy. In fact, you could argue that most of our growth has come from the accumulation of debt (the wonders of being the world’s reserve currency). Our debt has roughly equaled our GDP, and all of our economic growth in some years equaled the growth in government debt.

During the pandemic we added 40% to our debt in less than two years. We have higher debt-to-GDP than we had during WWII. After the war we reduced our debt. Also, we were a different economy then – we were rebuilding both the US and Europe. As a society we had a high tolerance for pain. 

Just like debt increases stimulate growth, deleveraging reduces growth. Also, I don’t think politicians or the public care about high debt levels. So far debt has only brought prosperity. However, higher interest rates would blow a huge hole in government budgets. If the 10-year Treasury rises a few percentage points, interest rates will increase by the amount we spend on national defense. One thing I am certain about is that our defense spending will not decline, so higher interest rates will lead to money printing and thus inflation. 

I am also puzzled by the impact of higher interest rates on the housing market. Housing will simply become unaffordable if interest rates go up a few percentage points. Loan-to-income requirements will price a huge number of people out of the market, and housing prices will have to decline. This Higher rates will also reduce the number of transactions in the real estate market, because people will be locked into their 2.5% mortgages, and if they sell they’d have to get 4-5-6% mortgages. There are a lot of second-order effects that we are not seeing today that will be obvious in hindsight. Housing prices drive demand in adjacent sectors such as home improvement. And think of the impact of higher rates on any large purchase, for example a car. 

We’re seeing the continuing rise of China has a big player in the global economy, and I know you like to invest internationally. As a value investor, how do you think about China’s rise as a global powerhouse and how it might affect the financial markets?

During the Cold War there were two gravitational centers, and as a country you had to choose one – you were either with the Soviets or with the West. Something similar will likely transpire here, too. I have to be careful using the Cold War analogy, because the Cold War was driven by ideology – it was communism vs. capitalism. Now the tension is driven by economic competition and our unwillingness to pass the mantle of global leader to another country. 

We are drawing red lines in technology. Data is becoming the new oil. China is using data to control people, and we want to make sure they don’t have control over our data. Therefore, the West wants to make sure that our technology is China-free. The US, Europe, and India will likely be pursuing a path where Chinese technology and Chinese intellectual property are largely disallowed. We have already seen this happening with Huawei being banned from the US and Western Europe. Other countries, including Russia, will have to make a choice. Russia will go with China.

Also, we are concerned that most chip production is centered in Taiwan, which at some point may be grabbed by China. The technological ecosystem would then have to undergo a significant transformation. This has already started to happen as we begin to bring chip production back to the US and Europe. 

The pandemic made us realize that globalization had made us reliant on the kindness of strangers, and we found we could not even get facemasks or ventilators. 

Globalization was deflationary; deglobalization will be inflationary.

This increased tension between countries has led to your investing in the defense industry. Could you tell us how you think about this industry? 

Despite the rise of international tensions, the global defense industry has been one of sectors that still had reasonable (sometimes unreasonably good) valuations. We have invested in half a dozen US and European defense companies. The US defense budget is unlikely to decline in the near future. There is a common misperception that Republicans love defense and Democrats hate it. Those may be party taglines, but history shows that defense spending has been driven by macro factors – it did not matter who was the occupant of the White House. 

There are a lot of things to like about defense businesses. They are an extension of the US or European governments. Most of them are friendly monopolies or duopolies. They have strong balance sheets, good returns on capital, and predictable and growing (maybe even accelerating) demand. They are noncyclical. They have inflation escalators built into their contracts. I don’t have to worry about technological disruptions. They are also a good macro hedge.

We added to our European defense stocks recently for several reasons. Europe has underinvested in defense, relying on the US Yet we have shown time and again that we may not be as dependable as we once were. 

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ECONOMIC INFLATION: Why So High Right Now?

SIX REASONS

By Vitaliy Katsenelson CFA

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DEFINITION: In economics, inflation is a general increase in the prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money.

CITE: https://www.r2library.com/Resource/Title/082610254

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The war in Ukraine will likely pour more gasoline on the already raging inflationary fire, threatening to send the global economy into stagflation. Stagflation is a slowdown of economic activity caused by inflation.

READ: https://contrarianedge.com/why-is-inflation-so-high-right-now-6-reasons/?utm_source=IMA++-+Main+Articles&utm_campaign=8be9ec7af7-UBER_MONEY_MANAGER_KIDNAPPED_COPY_03&utm_medium=email&utm_term=0_f1c90406d1-8be9ec7af7-55139025

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Is the Financial “Stagflation” Risk Real?

Is Stagflation Risk Real?

By Merk Insight

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DEFINITION: In economics, stagflation or recession-inflation is a situation in which the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high. It presents a dilemma for economic policy, since actions intended to lower inflation may exacerbate unemployment.

CITE: https://www.r2library.com/Resource/Title/082610254

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A few days ago, I had the pleasure of attending the Hoover Monetary Conference – I would call it a Powwow of central bankers, if there had not been an actual Powwow a few steps outside the venue. While Hoover is known to reflect “hawkish” views, “hawks” and “doves” alike used the question of whether the Fed is “behind the curve” to argue all things inflation and stagflation.

I left the conference even more concerned about the risk of stagflation; let me explain.

Please read our latest insight: Is Stagflation Risk Real?

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UPDATE: The Markets, Crypto and Online Retailers

By Staff Reporters

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  • Markets: After booming stocks had their worst day of the year because of raging inflation, slowing economic growth, and a potential recession.
  • Crypto: Bitcoin and other major cryptos like ethereum also tumbled in the aftermath of the FOMC announcement. They’ve typically tracked the performance of growth stocks, which have gotten hammered on the prospect of higher interest rates.

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Almost every major online retailer reporting earnings with signs of a decline:

  • Wayfair shares cratered nearly 26% yesterday after announcing that its active customer count dropped 23.4% from a year ago.
  • Bed Bath & Beyond reported an 18% nosedive in online sales.
  • Etsy and eBay shares both dropped by double digits yesterday after giving weak guidance for the current quarter.
  • At least five senior executives from Meta’s fledgling e-commerce division have fled in the last six months.
  • Shopify shares plummeted about 15% on Thursday after posting much lower-than-expected earnings.

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What is STAGFLATION?

By Staff Reporters

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What Is Stagflation?

Stagflation is characterized by slow economic growth and relatively high unemployment—or economic stagnation—which is at the same time accompanied by rising prices (i.e., inflation). Stagflation can be alternatively defined as a period of inflation combined with a decline in the gross domestic product (GDP).

CITE: https://www.r2library.com/Resource/Title/0826102549

The term, a portmanteau of stagnation and inflation, is generally attributed to Iain Macleod, a British Conservative Party politician who became Chancellor of the Exchequer in 1970.

MORE: https://medicalexecutivepost.com/2019/06/25/what-is-a-portmanteau/

Key Takeaways According to Investopedia

  • Stagflation refers to an economy that is experiencing a simultaneous increase in inflation and stagnation of economic output.
  • Stagflation was first recognized during the 1970s when many developed economies experienced rapid inflation and high unemployment as a result of an oil shock.1
  • The prevailing economic theory at the time could not easily explain how stagflation could occur.
  • Since the 1970s, rising price levels during periods of slow or negative economic growth have become somewhat of the norm rather than an exceptional situation.

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UPDATE: The FOMC, Markets and Cinco deMayo

By Staff Reporters

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FOMC: The Federal Reserve approved a rare half-percentage-point interest rate increase and announced plans to shrink its $9 trillion asset portfolio starting next month in an effort to reduce inflation that is running at a four-decade high.

Markets: Stocks boomed after Fed Chair Jerome Powell spoke. Still, JPMorgan CEO Jamie Dimon pegged the probability of a recession at 33% and a “soft landing” (lower inflation, no recession) also at 33%.

And Lyft, the ride-hailing company lost nearly 30% of its value after its profit outlook came in below forecast. Uber tried to distance itself from its ailing rival, saying that it does not need to spend money recruiting drivers like Lyft does.

Cinco deMayo commemorates the defeat of French forces by the Mexican army at the Battle of Puebla in 1862, but its popularity jumped in the 1980s, when beer companies leveraged it in aggressive marketing campaigns. Now, Cinco de Mayo is a day for celebrating Mexican culture and, interestingly, it’s now more popular in the US than in Mexico.

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UPDATE: The Domestic GDP, Bond Yield Surge and Stock Market Volatility [VIX]

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By Staff Reporters

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The U.S. economy reversed course in this year’s first quarter, when it shrank at an annual rate of 1.4% after posting full-year growth of 5.7% in 2021. While many economists believe the first-quarter setback was temporary, it marked the worst quarterly GDP result since the second quarter of 2020, when the pandemic triggered a brief recession.

And, despite a relatively flat result in the latest week, the yield of the 10-year U.S. Treasury bond jumped in March and April, climbing from 1.83% at the start of that two-month period to around 2.89% on Friday. Rising interest rates have eroded bond prices, pushing yields higher.

Finally, the stock market’s relative calm in the first half of April was fleeting, as the past two weeks produced a 47% jump in an index that measures investors’ expectations of short-term volatility. The CBOE Volatility Indexꟷalso known as the VIXꟷrose to an index level of 33.4 on Friday, up from 22.7 on April 15.

CITE: https://www.r2library.com/Resource/Title/082610254

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UPDATE: Holiday Weekend Investing?

By Staff Reporters

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Investors are about to embark on a three-day (or three-and-a-half-day) holiday weekend.

The stock market is closed on Friday, April 15, 2022 – Good Friday, as well as the start of Passover this year – ahead of the Easter Sunday holiday, which falls on April 17th. As a result, no major earnings are scheduled for Good Friday.

However, bond traders will enjoy not just a full Friday off, but also had a partial trading day Thursday. The bond markets shut down early, at 2 p.m., for Maundy Thursday. Stock and bond trading resume at their normal hours on Monday, the day after Easter Sunday.

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COVID, Inflation and Value Investing [Millennial Interview]

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By Vitaliy Katsenelson CFA

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COVID, Inflation, and Value Investing: Millennial Investing Interview
I was recently interviewed by Millennial Investors podcast. They sent me questions ahead of time that they wanted to ask me “on the air”. I found some of the questions very interesting and wanted to explore deeper. Thus, I ended up writing answers to them (I think through writing). You can listen to the podcast here

By the way, I often get asked how I find time to write. Do I even do investment research? Considering how much content I’ve been spewing out lately, I can understand these questions. In short – I write two hours a day, early in the morning (usually from 5–7am), every single day. I don’t have time-draining hobbies like golf. I rarely watch sports. I have a great team at IMA, and I delegate a lot. I spend the bulk of my day on research because I love doing it. 

This is not the first time I was asked these questions. If you’d like to adapt some of my daily hacks in your life, read this essay.

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CITE: https://www.r2library.com/Resource/Title/082610254

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UPDATE: Domestic Stocks Fall Amid FOMC Comments

By Staff Reporters

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US. stocks faltered and were dragged down by losses in tech, as investors weighed remarks by Federal Reserve [FOMC] Governor Lael Brainard that indicated policymakers were ready to act more aggressively to rein in inflation. Investors also monitored reports indicating the U.S. and European Union are expected to unveil more sanctions against Russia on Wednesday.

The S&P 500 tumbled 1.3%, and the Dow Jones Industrial Average shed 280 points after climbing for two straight trading sessions. The NASDAQ Composite plunged 2.3% to log its biggest drop in three weeks and erase gains from a tech rally that helped the index pop on Monday. Meanwhile, the 10-year U.S. Treasury yield jumped to 2.56%, its highest level since May 2019.

CITE: https://www.r2library.com/Resource/Title/082610254

Brainard, who is awaiting a confirmation vote to serve in the central bank’s number two role, said at a conference on Tuesday that the Fed can raise interest rates more aggressively to dampen the high rate of inflation felt by Americans, also noting that officials will likely start shrinking asset holdings in a about a month (a move that could have the effect of further raising long-term interest rates).

“Currently, inflation is much too high and is subject to upside risks,” Brainard said. “The Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”

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UPDATE: The Markets, Treasury Yields, Ukraine & the Week Ahead

By Staff Reporters

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  • Markets: US stocks rose for two straight weeks. Investors appear to be putting more emphasis on strong corporate earnings than all the uncertainty around the war in Ukraine and inflation.
  • Treasury: Yields climbed (in anticipation of higher interest rates), giving a lift to financial stocks.
  • Ukraine: Top Russian military officials signaled a change in approach to the war. They spoke about the “complete liberation” of the Donbas region in eastern Ukraine, which means Russia could potentially be pivoting from its initial goal of taking Ukraine’s biggest cities and toppling its government.
  • EARNING REPORTS THIS WEEK:
  • Monday: Earnings from Dave & Buster’s.
  • Tuesday: US consumer confidence; US Job Openings and Labor Turnover (JOLTS); earnings from Micron, Chewy, Lululemon and RH.
  • Wednesday: US ADP jobs report; US GDP for Q4 (third estimate); weekly crude oil inventories; earnings from BioNTech and Paychex.
  • Thursday: End of first quarter; US personal income and spending; US weekly jobless claims: earnings from Walgreens and Blackberry.
  • Friday: US jobs report; US ISM manufacturing.

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UPDATE: The Markets, Oil and T-Notes

By Staff Reporters

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MARKETS: Stocks rose for a fourth day in a row Friday, closing out their biggest weekly gain since November 2020. The S&P 500 added 1.2%, bringing its weekly gain to 6.2%. The NASDAQ climbed 2.1% and the Dow Jones Industrial Average rose 0.8%. Investors have welcomed the long-expected pivot from the Federal Reserve from stimulating the economy to fighting inflation, which began this week with its first interest rate increase since 2018.

OIL: The price of oil remains above $100 a barrel as investors monitor the ongoing Russian invasion of Ukraine.

10 Year Treasury Note: The yield on the 10-year Treasury Note fell to 2.15%.

CITE: https://www.r2library.com/Resource/Title/082610254

WINTER: Today is the last day of winter.

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UPDATE: Dark Russian Stock Markets, Damaged ETFs, US Housing Inflation and the Markets

By Staff Reporters

DARK : With Russia’s stock market closed, U.S. exchange-traded funds are signaling the scale of the rout facing the nation’s equity markets.  The Bank of Russia halted trading in Moscow on Monday, one of several measures unleashed in a bid to shield the nation’s economy from sweeping SWIFT and other sanctions.

SWIFT: https://medicalexecutivepost.com/2022/02/26/what-is-swift-banking/

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ETFs: According to Bloomberg, the VanEck Russia ETF (ticker RSX) and the iShares MSCI Russia Capped ETF (ERUS) plunged 30% and 27%, which was likely a create-to-lend activity where new shares are created for short sellers to borrow and bet against. That turned the two ETFs, which primarily track Russian energy stocks, into useful price-discovery tools for traders seeking to navigate the geopolitical turmoil caused by Russia’s invasion of Ukraine.  “ETFs are suppose to be index trackers, but when that process breaks down, they take on the role of price-discovery vehicles — and it’s impressive how accurate they have been.” 

CITE: https://www.r2library.com/Resource/Title/0826102549

Housing: Amounted to about 4% for the 12 months ending in January. Comparatively, Zillow reported that home values had risen by nearly 20% over that same period of time, while rents had increased by nearly 15%.

Domestic Markets: Stocks were a mixed bag, but the S&P still suffered back-to-back losing months.

10-Year: 1.828%

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UPDATE: IRS Interest Rates Rising, Currency Inflation and Upcoming Earning Reports, etc.

By Staff Reporters

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IRS: The IRS sent out a notice on February 23rd, warning taxpayers about a price hike coming in the next few months. The tax agency said that interest rates will increase for the calendar quarter starting April 1st, 2022. You can accrue interest on two types of payments: over-payment or underpayment. So starting in April, over-payments will have an interest rate of 4 percent, except for corporations which will earn a 3 percent rate and a 1.5 percent rate for the portion of a corporate over-payment that exceeds $10,000. In terms of underpayments, the interest rate will increase to 4 percent overall and 6 percent for large corporate underpayments.

“Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis,” the IRS website explained. The tax agency did not change interest rates in this last quarter, which began Jan. 1, 2022. Before they get changed in April, the rates are currently 3 percent for general over-payments and 2 percent for corporation over-payments, with a 0.5 percent rate for the portion of a corporate over-payment exceeding $10,000. The underpayment interest is 3 percent right now, expect for large corporations which have a 5 percent rate.

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CURRENCY INFLATION: Inflation may occur when the Federal Reserve, or another central bank, adds fiat currency into circulation at a rate that exceeds that of the economy’s growth rate. That creates a situation in which there are more dollars bidding on fewer goods and services. The result is that goods and services cost more. One reason that inflation has been a constant in the US since 1933 is that the FOMC has continually increased the money supply. In response to the 2008 financial crisis, the Fed dropped its lending rate close to zero as a way to inject more liquidity into the economy, which led to increased inflation but not hyperinflation. While those increases have usually moved in step with growth, that hasn’t always been the case.

CITE: https://www.r2library.com/Resource/Title/0826102549

And so, in response to the COVID-19 pandemic and subsequent lock-downs, the Federal Reserve released the equivalent of $3.8 trillion in new liquidity in 2020. That amount was equal to roughly 20% of the dollars previously in circulation. And it is one reason why many investors were watching the CPI closely in 2021.

EARNING REPORTS:

Monday: India GDP data; Earnings from Lordstown Motors, Groupon, HP, SmileDirectClub and Zoom Video

Tuesday: US and China manufacturing data; Earnings from AutoZone, Baidu, Domino’s Pizza, Hostess Brands, J.M. Smucker, Kohl’s, Target, AMC Entertainment and Salesforce

Wednesday: European inflation data; Earnings from Abercrombie & Fitch, Dine Brands, Dollar Tree, Snowflake and Victoria’s Secret

Thursday: ISM Non-Manufacturing Index; Earnings from Best Buy, Weibo, Costco and Gap

Friday: US jobs report

10-Year: Treasuries rallied to 1.902%.

Oil: The rise in oil prices is spilling over at the gas pump: The average gas price in the US has jumped 10 cents, to $3.64/gallon, in the past two weeks.

Partial SWIFT ban: Western governments put aside their hesitations and proposed banning some Russian lenders from SWIFT, the global messaging service that facilitates cross-border transactions. It’s a move that could cause turmoil across global financial markets.

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