Inflation, CPI and the PPI

By Staff Reporters

***

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.

***

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.

***

***

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/

***

***

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

***

***

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

***

UPDATE: The Markets, Crypto and Online Retailers

By Staff Reporters

***

  • 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.

***

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.

***

COMMENTS APPRECIATED

Thank You

***

***

What is STAGFLATION?

By Staff Reporters

***

***

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.

***

COMMENTS APPRECIATED

Thank You

***

***

UPDATE: The FOMC, Markets and Cinco deMayo

By Staff Reporters

***

***

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.

***

COMMENTS APPRECIATED

Thank You

***

****

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

***

***

By Staff Reporters

***

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

***

COMMENTS APPRECIATED

Thank You

***

***

UPDATE: Holiday Weekend Investing?

By Staff Reporters

***

***

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.

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

COVID, Inflation and Value Investing [Millennial Interview]

***

By Vitaliy Katsenelson CFA

***

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.

***

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

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

UPDATE: Domestic Stocks Fall Amid FOMC Comments

By Staff Reporters

***

***

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.”

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

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

By Staff Reporters

***

***

  • 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.

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

UPDATE: The Markets, Oil and T-Notes

By Staff Reporters

***

***

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.

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

****

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/

***

***

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%

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

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

By Staff Reporters

****

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.

***

***

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.

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

COVID, Inflation and Value Investing

Millennial Investing

***

By Vitaliy Katsenelson, CFA

***

***

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. 

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

UPDATE: The Markets, Federal Reserve and Omicron

By Staff Reporters

***

Markets: Stocks were in the green yesterday until Fed Chair Jerome Powell explained that the Federal Reserve Open Market Committee was planning to start hiking interest rates in March to combat soaring inflation. Then, they tanked and Treasury yields rose sharply higher. Microsoft still had a solid day after its superb earnings report offered bullish signs for the entire software industry. But, stock markets in Asia tumbled to their lowest in nearly 15 months after America’s central bank chief confirmed widely expected plans to tackle higher inflation with an increase in interest rates this year, beginning in March. And finally, Cryptos got crushed, again!

FOMC: “With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” said Chairman Powell.

Omicron: The Food and Drug Administration pulled its authorization of two of the most-used monoclonal antibodies to treat COVID-19 this week, leaving doctors with fewer options to help their patients avoid the hospital. Related: https://www.cdc.gov/coronavirus/2019-ncov/vaccines/different-vaccines.html?s_cid=11305:%2BModerna%20%2B%20%2Bcovid%20%2Bvaccine:sem.b:p:RG:GM:gen:PTN:FY21

***

COMMENTS APPRECIATED.

Thank You

Subscribe to the Medical Executive-Post

***

Healthcare NOT a Part of the US Inflation Surge!

WHO KNEW?

By Staff Reporters

****

According to Wikipedia, in economics, inflation refers to a general progressive increase in prices of goods and services in an economy.[1] 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.[2][3] The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualised percentage change in a general price index.[4]

READ MORE: https://en.wikipedia.org/wiki/Inflation

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

***

***

Health Care Price Changes and Per Capita Growth in Medicare | Mercatus  Center

***

Healthcare Not a Part of the US Inflation Surge: Who Knew?

However, according to Jeff Goldsmith, overall health spending has only risen by 4.4% since January of 2020, and the percentage of GDP devoted to health has fallen by more than half a percent, from 18.1% pre-pandemic to 17.5% in October.   This is despite four surges of COVID hospitalizations, overflowing ICUs and ERs, labor shortages, and other COVID-related stresses.  Health system staffing levels are still nearly a half-million lower than they were pre-pandemic.  Had the federal government not stepped in through the CARES Act, FEMA funding, and temporary suspensions of Medicare rate cuts, the nations’ hospitals would have been seriously damaged by COVID-related financial stresses, which are far from being over.  

ESSAY: https://thehealthcareblog.com/blog/2021/11/19/healthcare-not-a-part-of-the-us-inflation-surge-who-knew/

***

COMMENTS APPRECIATED

Thank You

Subscribe to the Medical Executive-Post

***

***

PODCASTS: What is a STABLECOIN?

HEDGE AGAINST INFLATION

By Dr. David E. Marcinko MBA CMP®

CMP logo

SPONSOR: http://www.CertifiedMedicalPlanner.org

***

What Are Stablecoins? - CB Insights Research

***

DEFINITION: Stablecoins are blockchain-based digital currencies that have been created with the aim to have a stable value. Stablecoins achieve price-stability through various different methods such as a peg against a fiat currency or a commodity, through collateralization against other cryptocurrencies or through algorithmic coin supply management.

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

Every stable coin includes a specific set of mechanisms that mostly behave in the same way. In general, stable coins keep collateral of the asset and manage the supply. In this way, they incentivize the market, which allows trade of the coin for no more or less than $1.

A stable coin can be considered the best depending on several factors: It should be stable. PAX is one the most stable stablecoin. It should be liquid and available on most exchanges. It should be backed by FIAT. PAX is 100% collateralized in US bank accounts. It should be regulated. It should be redeemable.

MORE: https://www.msn.com/en-us/money/markets/treasury-fed-fear-stablecoins-could-disrupt-financial-system/ar-AAOE7lO?li=BBnb7Kz

PODCAST #1: https://www.youtube.com/watch?v=O3rVWLhBIPo

PODCAST #2: https://www.youtube.com/watch?v=GsSSLDzKCOE

YOUR COMMENTS ARE APPRECIATED.

Thank You

***

How We INVEST IN INFLATION?

STRATEGIES AND MITIGATION

Finding investments to weather the storm. Strategies and ways to mitigate inflation risk, including investing in businesses with pricing power, capital intensity, and investing abroad.

By Vitaliy Katsenelson CFA

COMMENTS ARE APPRECIATED.

Thank You

***

***

PODCAST: Inflation Update

NOT TRANSITORY … YET!

imausa-vitaliy-katsenelson

By Vitaliy Katsenelson CFA

Here is my advice to you

Instead of straining your eyes, you can strain your ears and listen to the following articles. I’m providing links to my pieces on the inflation landscape (read, listen) and how we invest in inflation (read, listen).

***

Five Facts On Inflation | RealClearPolicy

***
YOUR COMMENTS ARE APPRECIATED.

Thank You

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

***

***

HAPPY 2022: Story of the New Year = INFLATION

INFLATION – Did we say [Health Care] Inflation?

****

Inflation Definition

***

Why? Inflation, which is the rate of price increases over time, affects all of us on a personal level. We pay electric bills, go grocery shopping, decorate our houses, buy cars—and this year all of those things got more expensive. Especially health care.

Thanks to a nefarious mix of soaring demand for goods and snarled supply chains, US consumer prices jumped the most in 39 years in November, and the 6.8% inflation rate marked the sixth straight month inflation grew by 5% or more. Producer prices, which can eventually trickle down to individuals, also increased at their fastest pace on record last month.

Of course, some inflation is good for the economy when wages keep up with rising prices (the Fed aims for a 2% inflation rate over time). But, so far in the pandemic, that hasn’t happened. While many Americans have gotten a raise in 2021, wage gains haven’t been sufficient to offset inflation, resulting in the erosion of purchasing power—especially for folks on a more or less fixed income.

Where do we go from here?

After months of claiming inflation was “transitory,” the Fed has dropped that term and adopted a more hawkish monetary policy to tamp down surging prices. The central bank is winding down its bond-buying stimulus program faster than originally planned, and also plans to hike interest rates three times in 2022.

In its inflation-fighting efforts, the Fed isn’t alone on the front lines. The Bank of England became the first major central bank to raise interest rates during the pandemic in order to combat the biggest annual jump in consumer prices in 10 years. Russia has raised rates seven times this year. Mexico, Chile, Costa Rica, Pakistan, and Hungary are among other countries which are tightening monetary policy to combat higher prices.

Looking ahead…as if economic policymakers needed another inflation curveball, Omicron has taken the mound. Central banks generally don’t expect the new variant to significantly dent economic growth, but they do think it may prolong inflation by exacerbating the supply–demand imbalance that fueled higher prices in the first place.

***

RICARDIAN DEMAND HEALTH ECONOMICS: https://medicalexecutivepost.com/2021/12/14/ricardian-derived-demand-economics-in-medicine/

RISING HEALTH CARE COSTS: https://medicalexecutivepost.com/2018/03/11/medical-treatment-costs-becoming-expensive-25-factors/

Elderly CPI: https://medicalexecutivepost.com/2019/06/13/what-is-the-elderly-cpi/

***

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

COMMENTS APPRECIATED.

Thank You

***

***

INFLATION Is Here – UPDATE?

But for How Long?

See the source image

Vitaliy N. Katsenelson, CFA

[CEO & Chief Investment Officer]

READERS

DEFINITION: In economics, inflation (or less frequently, price inflation) is a general rise in the price level of an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. The opposite of inflation is deflation, a sustained decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index, usually the consumer price index, over time.

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

***

See the source image

***

DEAR READERS

This essay is going to be long.
I blame inflation, be it transitory or not, for inflating its length. 

The number one question I am asked by clients, friends, readers, and random strangers is, are we going to have inflation? 

I think about inflation on three timelines: short, medium, and long-term

The pandemic disrupted a well-tuned but perhaps overly optimized global economy and time-shifted the production and consumption of various goods. For instance, in the early days of the pandemic automakers cut their orders for semiconductors. As orders for new cars have come rolling back, it is taking time for semiconductor manufacturers, who, like the rest of the economy, run with little slack and inventory, to produce enough chips to keep up with demand. A $20 device the size of a quarter that goes into a $40,000 car may have caused a significant decline in the production of cars and thus higher prices for new and used cars. (Or, as I explained to my mother-in-law, all the microchips that used to go into cars went into a new COVID vaccine, so now Bill Gates can track our whereabouts.)

Here is another example. The increase in new home construction and spike in remodeling drove demand for lumber while social distancing at sawmills reduced lumber production – lumber prices spiked 300%. Costlier lumber added $36,000 to the construction cost of a house, and the median price of a new house in the US is now about $350,000.

The semiconductor shortage will get resolved by 2022, car production will come back to normal, and supply and demand in the car market will return to the pre-pandemic equilibrium. High prices in commodities are cured by high prices. High lumber prices will incentivize lumber mills to run triple shifts. Increased supply will meet demand, and lumber prices will settle at the pre-pandemic level in a relatively short period of time. That is the beauty of capitalism! 

Most high prices caused by the time-shift in demand and supply fall into the short-term basket, but not all. It takes a considerable amount of time to increase production of industrial commodities that are deep in the ground – oil, for instance. Low oil prices preceding the pandemic were already coiling the spring under oil prices, and COVID coiled it further. It will take a few years and increased production for high oil prices to cure high oil prices. Oil prices may also stay high because of the weaker dollar, but we’ll come back to that.

Federal Reserve officials have told us repeatedly they are not worried about inflation; they believe it is transitory, for the reasons I described above. We are a bit less dismissive of inflation, and the two factors that worry us the most in the longer term are labor costs and interest rates. 

Let’s start with labor costs 

During a garden-variety recession, companies discover that their productive capacity exceeds demand. To reduce current and future output they lay off workers and cut capital spending on equipment and inventory. The social safety net (unemployment benefits) kicks in, but not enough to fully offset the loss of consumer income; thus demand for goods is further reduced, worsening the economic slowdown. Through millions of selfish transactions (microeconomics), the supply of goods and services readjusts to a new (lower) demand level. At some point this readjustment goes too far, demand outstrips supply, and the economy starts growing again.

This pandemic was not a garden-variety recession 

The government manually turned the switch of the economy to the “off” position. Economic output collapsed. The government sent checks to anyone with a checking account, even to those who still had jobs, putting trillions of dollars into consumer pockets. Though output of the economy was reduced, demand was not. It mostly shifted between different sectors within the economy (home improvement was substituted for travel spending). Unlike in a garden-variety recession, despite the decline in economic activity (we produced fewer widgets), our consumption has remained virtually unchanged. Today we have too much money chasing too few goods– that is what inflation is. This will get resolved, too, as our economic activity comes back to normal.

But …

Today, though the CDC says it is safe to be inside or outside without masks, the government is still paying people not to work. Companies have plenty of jobs open, but they cannot fill them. Many people have to make a tough choice between watching TV while receiving a paycheck from big-hearted Uncle Sam and working. Zero judgement here on my part – if I was not in love with what I do and had to choose between stacking boxes in Amazon’s warehouse or watching Amazon Prime while collecting a paycheck from a kind uncle, I’d be watching Sopranos for the third time. 

To entice people to put down the TV remote and get off the couch, employers are raising wages. For instance, Amazon has already increased minimum pay from $15 to $17 per hour. Bank of America announced that they’ll be raising the minimum wage in their branches from $20 to $25 over the next few years. The Biden administration may not need to waste political capital passing a Federal minimum wage increase; the distorted labor market did it for them. 

These higher wages don’t just impact new employees, they help existing employees get a pay boost, too. Labor is by far the biggest expense item in the economy. This expense matters exponentially more from the perspective of the total economy than lumber prices do. We are going to start seeing higher labor costs gradually make their way into higher prices for the goods and services around us, from the cost of tomatoes in the grocery store to the cost of haircuts.

Only investors and economists look at higher wages as a bad thing. These increases will boost the (nominal) earnings of workers; however, higher prices of everything around us will negate (at least) some of the purchasing power. 

Wages, unlike timber prices, rarely decline. It is hard to tell someone “I now value you less.” Employers usually just tell you they need less of your valuable time (they cut your hours) or they don’t need you at all (they lay you off and replace you with a machine or cheap overseas labor). It seems that we are likely going to see a one-time reset to higher wages across lower-paying jobs. However, once the government stops paying people not to work, the labor market should normalize; and inflation caused by labor disbalance should come back to normal, though increased higher wages will stick around.

There is another trend that may prove to be inflationary in the long-term: de-globalization.  Even before the pandemic the US set plans to bring manufacturing of semiconductors, an industry deemed strategic to its national interests, to its shores. Taiwan Semiconductor and Samsung are going to be spending tens of billions of dollars on factories in Arizona.  

The pandemic exposed the weaknesses inherent in just-in-time manufacturing but also in over reliance on the kindness of other countries to manufacture basic necessities such as masks or chemicals that are used to make pharmaceuticals.  Companies will likely carry more inventory going forward, at least for a while.  But more importantly more manufacturing will likely come back to the US. This will bring jobs and a lot of automation, but also higher wages and thus higher costs.  

If globalization was deflationary, de-globalization is inflationary  

We are not drawing straight-line conclusions, just yet. A lot of manufacturing may just move away from China to other low-cost countries that we consider friendlier to the US; India and Mexico come to mind.  

And then we have the elephant in the economy – interest rates, the price of money. It’s the most important variable in determining asset prices in the short term and especially in the long term. The government intervention in the economy came at a significant cost, which we have not felt yet: a much bigger government debt pile. This pile will be there long after we have forgotten how to spell social distancing
 
The US government’s debt increased by $5 trillion to $28 trillion in 2020 – more than a 20% increase in one year! At the same time the laws of economics went into hibernation: The more we borrow the less we pay for our debt, because ultra-low interest rates dropped our interest payments from $570 billion in 2019 to $520 billion in 2020. 

That is what we’ve learned over the last decade and especially in 2020: The more we borrow the lower interest we pay. I should ask for my money back for all the economics classes I took in undergraduate and graduate school.

This broken link between higher borrowing and near-zero interest rates is very dangerous. It tells our government that how much you borrow doesn’t matter; you can spend (after you borrow) as much as your Republican or Democratic heart desires. 

However, by looking superficially at the numbers I cited above we may learn the wrong lesson. If we dig a bit deeper, we learn a very different lesson: Foreigners don’t want our (not so) fine debt. It seems that foreign investors have wised up: They were not the incremental buyer of our new debt – most of the debt the US issued in 2020 was bought by Uncle Fed. Try explaining to your kids that our government issued debt and then bought it itself. Good luck.

Let me make this point clear: Neither the Federal Reserve, nor I, nor a well-spoken guest on your business TV knows where interest rates are going to be (the total global bond market is bigger even than the mighty Fed, and it may not be able to control over interest rates in the long run). But the impact of what higher interest rates will do the economy increases with every trillion we borrow. There is no end in sight for this borrowing and spending spree (by the time you read this, the administration will have announced another trillion in spending). 

Let me provide you some context about our financial situation 


The US gross domestic product (GDP) – the revenue of the economy – is about $22 trillion, and in 2019 our tax receipts were about $3.5 trillion. Historically, the-10 year Treasury has yielded about 2% more than inflation. Consumer prices (inflation) went up 4.2% in April. Today the 10-year Treasury pays 1.6%; thus the World Reserve Currency debt has a negative 2.6% real interest rate (1.6% – 4.2%). 

These negative real (after inflation) interest rates are unlikely to persist while we are issuing trillions of dollars of debt. But let’s assume that half of the increase is temporary and that 2% inflation is here to stay. Let’s imagine the unimaginable. Our interest rate goes up to the historical norm to cover the loss of purchasing power caused by inflation. Thus it goes to 4% (2 percentage points above 2% “normal” inflation). In this scenario our federal interest payments will be over $1.2 trillion (I am using vaguely right math here). A third of our tax revenue will have to go to pay for interest expense. Something has to give. It is not going to be education or defense, which are about $230 billion and $730 billion, respectively. You don’t want to be known as a politician who cut education; this doesn’t play well in the opponent’s TV ads. The world is less safe today than at any time since the end of the Cold War, so our defense spending is not going down (this is why we own a lot of defense stocks). 

The government that borrows in its own currency and owns a printing press will not default on its debt, at least not in the traditional sense. It defaults a little bit every year through inflation by printing more and more money. Unfortunately, the average maturity of our debt is about five years, so it would not take long for higher interest expense to show up in budget deficits. 

Money printing will bring higher inflation and thus even higher interest rates

If things were not confusing enough, higher interest rates are also deflationary 

We’ve observed significant inflation in asset prices over the last decade; however, until this pandemic we had seen nothing yet. Median home prices are up 17% in one year. The wild, speculative animal spirits reached a new high during the pandemic. Flush with cash (thanks to kind Uncle Sam), bored due to social distancing, and borrowing on the margin (margin debt is hitting a 20-year high), consumers rushed into the stock market, turning this respectable institution (okay, wishful thinking on my part) into a giant casino. 

It is becoming more difficult to find undervalued assets. I am a value investor, and believe me, I’ve looked (we are finding some, but the pickings are spare). The stock market is very expensive. Its expensiveness is setting 100-year records. Except, bonds are even more expensive than stocks – they have negative real (after inflation) yields.

But stocks, bonds, and homes were not enough – too slow, too little octane for restless investors and speculators. Enter cryptocurrencies (note: plural). Cryptocurrencies make Pets.com of the 1999 era look like a conservative investment (at least it had a cute sock commercial). There are hundreds if not thousands of crypto “currencies,” with dozens created every week. (I use the word currency loosely here. Just because someone gives bits and bytes a name, and you can buy these bits and bytes, doesn’t automatically make what you’re buying a currency.)

“The definition of a bubble is when people are making money all out of proportion to their intelligence or work ethic.”

By Mike Burry MD
[The Big Short]

I keep reading articles about millennials borrowing money from their relatives and pouring their life savings into cryptocurrencies with weird names, and then suddenly turning into millionaires after a celebrity CEO tweets about the thing he bought. Much ink is spilled to celebrate these gamblers, praising them for their ingenious insight, thus creating ever more FOMO (fear of missing out) and spreading the bad behavior.

Unfortunately, at some point they will be writing about destitute millennials who lost all of their and their friends’ life savings, but this is down the road. Part of me wants to call this a crypto craziness a bubble, but then I think, Why that’s disrespectful to the word bubble, because something has to be worth something to be overpriced. At least tulips were worth something and had a social utility. (I’ll come back to this topic later in the letter).

But ….

When interest rates are zero or negative, stocks of sci-fi-novel companies that are going to colonize and build five-star hotels on Mars are priced as if El Al (the Israeli airline) has regular flights to the Red Planet every day of the week except on Friday (it doesn’t fly on Shabbos). Rising interest rates are good defusers of mass delusions and rich imaginations. 

In the real economy, higher interest rates will reduce the affordability of financed assets. They will increase the cost of capital for businesses, which will be making fewer capital investments. No more 2% car loans or 3% business loans. Most importantly, higher rates will impact the housing market. 

Up to this point, declining interest rates increased the affordability of housing, though in a perverse way: The same house with white picket fences (and a dog) is selling for 17% more in 2021 than a year before, but due to lower interest rates the mortgage payments have remained the same. Consumers are paying more for the same asset, but interest rates have made it affordable.

At higher interest rates housing prices will not be making new highs but revisiting past lows. Declining housing prices reduce consumers’ willingness to improve their depreciating dwellings (fewer trips to Home Depot). Many homeowners will be upside down in their homes, mortgage defaults will go up… well, we’ve seen this movie before in the not-so-distant past. Higher interest rates will expose a lot of weaknesses that have been built up in the economy. We’ll be finding fault lines in unexpected places – low interest has covered up a lot of financial sins.

And then there is the US dollar, the world’s reserve currency. Power corrupts, but the unchallenged and unconstrained the power of being the world’s reserve currency corrupts absolutely. It seems that our multitrillion-dollar budget deficits will not suddenly stop in 2021. With every trillion dollars we borrow, we chip away at our reserve currency status (I’ve written about this topic in great detail, and things have only gotten worse since). And as I mentioned above, we’ve already seen signs that foreigners are not willing to support our debt addiction. 

A question comes to mind.
Am I yelling fire where there is not even any smoke? 

Higher interest rates is anything but a consensus view today. Anyone who called for higher rates during the last 20 years is either in hiding or has lost his voice, or both. However, before you dismiss the possibility of higher rates as an unlikely plot for a sci-fi novel, think about this. 

In the fifty years preceding 2008, housing prices never declined nationwide. This became an unquestioned assumption by the Federal Reserve and all financial players. Trillions of dollars of mortgage securities were priced as if “Housing shall never decline nationwide” was the Eleventh Commandment, delivered at Temple Sinai to Goldman Sachs. Or, if you were not a religious type, it was a mathematical axiom or an immutable law of physics. The Great Financial Crisis showed us that confusing the lack of recent observations of a phenomenon for an axiom may have grave consequences. 

Today everyone (consumers, corporations, and especially governments) behaves as if interest rates can only decline, but what if… I know it’s unimaginable, but what if ballooning government debt leads to higher interest rates? And higher interest rates lead to even more runaway money printing and inflation? 

This will bring a weaker dollar 

A weaker US dollar will only increase inflation, as import prices for goods will go up in dollar terms. This will create an additional tailwind for commodity prices. 

If your head isn’t spinning from reading this, I promise mine is from having written it. 

To sum up: A lot of the inflation caused by supply chain disruption that we see today is temporary. But some of it, particularly in industrial commodities, will linger longer, for at least a few years. Wages will be inflationary in the short-term and will reset prices higher, but once the government stops paying people not to work, wage growth should slow down. Finally, in the long term a true inflationary risk comes from growing government borrowing and budget deficits, which will bring higher interest rates and a weaker dollar with them, which will only make inflation worse and will also deflate away a lot of assets.

THE END
UPDATE: https://www.msn.com/en-us/news/us/how-us-inflation-rate-is-impacting-americans-wallets-before-the-holiday-season/vi-AAROG5J

CURRENT: https://www.msn.com/en-us/money/markets/us-treasury-yields-tick-lower-on-fears-omicron-will-dent-recovery/ar-AARYSKy?li=BBnbfcL

Your thoughts are appreciated.

THANK YOU

***
See the source image

UPDATE: Markets and Medicine

By Staff Reporters

***

The Federal Reserve announced that it will stop buying bonds about three months earlier than initially planned. The Fed now plans to trim its monthly Treasury and mortgage-backed security purchases by $30 billion a month starting next month. The new pace is expected to put an end to bond buying by March.

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

The Fed also announced that it would leave interest rates unchanged at near-zero percent. The announcement paves the way for three interest rate hikes by the end of 2022, which could weigh on tech and growth stocks.

UPDATE: https://www.msn.com/en-us/money/news/tech-takes-a-beating-as-central-banks-pull-back/vi-AARTp0n

  • Markets: Stocks reversed their post-Federal Reserve announcement rally with a stinker of a day—especially tech stocks. Semiconductor companies like AMD and Nvidia got particularly thwacked.
  • Covid: The CDC recommended adults use Moderna’s and Pfizer’s Covid vaccines over J&J’s due to the risk of developing rare but serious blood clots.

MORE: https://www.msn.com/en-us/money/markets/stocks-fall-as-investors-digest-feds-latest-move/vi-AARTm2C

***
COMMENTS APPRECIATED.

***

***

Thank You

***

PODCAST: HYPER-INFLATION 2021?

Inflated Fears of “Rigged” Markets and Hyperinflation

[By Rick Kahler CFP®]

BIO: Rick Kahler resides in Rapid City, South Dakota and is a fee-only financial planner.

MORE: https://www.msn.com/en-us/money/personalfinance/is-inflation-about-to-trash-your-investments/ar-BB1fZg72

Your thoughts are appreciated.

EDITOR’S NOTE: It has been a few years since I spoke with my colleague Rick. But, I read his newsletters and blog regularly and suggest all ME-P readers do the same.

Dr. David E. Marcinko; MBA

[Editor-in-Chief]

TEXTBOOK:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

ORDER: 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

THANK YOU

***

Inflation is Higher Than You Think

Consumer Price Index

By Forbes Wealth

***

cpi

Inflation is Higher Than You Think

Macro-Economics and What the ‘Chained CPI’ Could Mean for Social Security?

MORE: https://forbeswealthblog.ca/2019/01/11/how-high-can-interest-rates-go-2019/

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

Invite Dr. Marcinko

***

More on Recent Interest Rate Hikes

Impending IRs and … the Economy

By http://www.MCOL.com

***

***

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

***

A 3-D View of a Chart That Predicts The Economic Future

Join Our Mailing List

Yield Curve 101

[By GREGOR AISCH and AMANDA COX]

The yield curve shows how much it costs the federal government to borrow money for a given amount of time, revealing the relationship between long- and short-term interest rates.

It is, inherently, a forecast for what the economy holds in the future — how much inflation there will be, for example, and how healthy growth will be over the years ahead — all embodied in the price of money today, tomorrow and many years from now.

***

3-d

A 3-D View of a Chart That Predicts The Economic Future

***

More:

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)

Front Matter with Foreword by Jason Dyken MD MBA

logos

“BY DOCTORS – FOR DOCTORS – PEER REVIEWED – FIDUCIARY FOCUSED”

***

Why the Government is Not-Like Medical Professionals

Join Our Mailing List

An Endless Supply of US Dollars

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

Is the United States in danger of bankruptcy? Contrary to what you may read in the media or hear from many politicians, no, it isn’t. The US Treasury will never run out of dollars. Unlike doctors and medical professionals, it’s impossible.

Reasons Why?

The reason is relatively simple. The US government owns a printing press. As long as goods, services, or obligations are priced in US dollars, the supply of dollars to our government to buy those goods and services is unlimited. This is not true of individual physicians, corporations, cities, states, and countries that don’t issue their own currency.

For most people, this is a hard concept to grasp, with good reason. The capacity of our government to create an unconstrained supply of dollars is a relatively new phenomenon.

The Gold Standard

Until 1971, all US currency was theoretically redeemable in gold. This was known as the gold standard. In the early decades of the 20th century, you could actually go to a bank and change your dollars for gold. That ability was terminated in 1933, but the dollar’s value was still tied to gold. This basically meant the only way the US government could create new dollars was by obtaining more gold, the supply of which only increases by the new amount of gold mined.

Nixon

In 1971 we had a paradigm change in monetary policy that many still don’t understand. President Nixon decoupled the dollar from the gold standard [Nixon also wanted to flood the country with MDs, and drive down physician income, by opening up medical school admissions]. It became a fiat currency, which is used as a medium of exchange but has no intrinsic value. Suddenly, the US government was no longer constrained by solvency issues and could never run out of money. It could create as many dollars as it wished ie; inflation].

Constraints

This didn’t mean it had no constraints. The major constraint to an issuer of fiat currency is inflation. However, creating money does not guarantee inflation if the newly created money is not spent. Japan, for example, is still fighting deflation even though they’ve been pumping money into reserves like crazy for 20 years.

What should have caused a massive rethinking and reeducating of the financial sector went relatively unnoticed. Text books, professors, economists, and politicians largely continued to follow many pre-1971 monetary principles that became irrelevant overnight.

Unlike the federal government, US states, cities, and other government entities cannot print money. They have to get it the old-fashioned way—from taxes, fees, or borrowing. It’s entirely possible for these entities to go bankrupt, just like individuals and corporations, if their outflow exceeds their inflow.

Europe

Interestingly, the same is true for member countries of the European Union. When in 1999 they adopted the Euro and gave up their sovereign right to print their own money, they took on the same status as states. Therefore, a country like Greece, which is a user of currency as a member of the European Union, can involuntarily default on its obligations.

This is a significant difference between the United States and Greece. While Greece can (and most likely will) go bankrupt because it doesn’t have an unlimited supply of Euros, the US can’t go bankrupt because it does have an unlimited supply of dollars.

The major threat that sovereign countries face is not running out of money, but devaluing their currency through inflation. A devalued currency is one that loses its purchasing power and often results in a lower standard of living.

Assessment

Just because the US can’t involuntarily default on its obligations doesn’t mean we can keep on over spending and pretend we don’t have any money worries. As a nation, we still need to acknowledge and deal with our serious financial problems. So should our doctors, financial planners and financial advisors.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

Our Other Print Books and Related Information Sources:

Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Hospitals: http://www.crcpress.com/product/isbn/9781439879900

Physician Advisors: www.CertifiedMedicalPlanner.org

Product Details  Product Details

“A Guide to Sound Money”

The ME-P Recommends

By Staff Reporters

Join Our Mailing List 

“A Guide to Sound Money”, by economist Judy Shelton PhD from the University of Utah, is a 19 page report on global finance, the value of money as a standard unit of worth, inflation, the USD and related monetary issues.

Link: http://www.soundmoneyproject.org/wp-content/uploads/2010/11/Booklet-SMP-Guide-Spread-PDF1.pdf

We highly recommend it for all doctors, financial advisors and ME-P readers and subscribers   

Get our Widget: Get this widget!

Our Other Print Books and Related Information Sources:

Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest ME-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Sponsors Welcomed: And, credible sponsors and like-minded advertisers are always welcomed.

Link: https://healthcarefinancials.wordpress.com/2007/11/11/advertise

Product Details  Product Details

%d bloggers like this: