Blog for 05-04-22
Dear Investor,
Let’s talk more about inflation, It’s on everyone’s mind. I have really started to notice it personally and am conscious of it more than I have been any time in my life. In the 70’s- we had big inflation, and it caused a downturn in stocks. Gerald Ford came up with those WIN buttons people were wearing, “Whip Inflation Now.” You may guess that didn’t work and you’d be right. Eventually we came out of it. It was painful. I was too young to even know it was going on and only know it from history.
In general, companies can do well during inflation. They have the power to increase prices if they have been straining to keep them down. If the inflation is sustained then demand collapses, we normally get reductions in price and things trend back to normal. If demand collapses and inflation and unemployment get worse, we have what they call stagflation. Literally a stagnant economy with low demand and low employment. We had it for 2 years after the 2008-2009 mortgage debacle and stock market crash. This can lead to a recession which can be the reason for a stock market correction. In hindsight 2009 is when a lot of our clients money was made by taking advantage of a historic buying opportunity.
Prices compound due to profit margins lowering. For instance, if a company buys an item for $50 that they sell for $100 they have a profit margin of 50%. Keeping that margin is important to the company. When the cost of the new product goes up $10 to $60, what price are you going to pay? $110 is the usual answer. But it would be $120 if the company wants to maintain the same 50% profit margin. Now a $10 increase of the item is passed along as a $20 increase to consumers.
The CPI was up over 7% for March. That means in March 2022 costs of items was 7% more than March 2021. This is a hard pill to swallow. It also follows that if you have $100,000 in the bank you will wake up a year later and have $93,000. If it continues another year you have about $87,000, etc. Stocks can provide the chance you need to stay ahead. Further, there are no tax breaks on inflation losses, as there are with other investments. If you take a monetary loss you may be able to deduct it. You get no break on the 7% loss per year due to inflation.
Time will tell if we have stagflation in our near future. It is rare. The demand continues as people are still spending coming out of the Covid era. It may be another year before prices level out. In regard to stocks, what can we do? If we have cash we should deploy it with courage and faith that quality equity assets will appreciate over time. It is all you have to believe to grow wealth.
The last 2 years have been taxing. We learned a lot about fear and human nature. A lot of times it was not pretty. As I look to sponsoring a seminar next month on anxiety and depression caused by Covid panic and other current events, it makes us wonder if the government, the CDC under Fauci and the lemmings in media ever thought about the real price we will pay. The numbers of suicides, domestic violence, drug and alcohol addiction, lost education and socialization of kids, and massive amounts of depression and anxiety will greatly outweigh the risk of the virus. In 2018 over 450 children died from the flu. Covid has been less harmful than the flu was for kids. And we didn’t even think about masks for them. This has been 90% political.
You sell fear, and you get results. I have seen people do the same in finance for decades. The fear sale is the easiest. The hard sale is the truth that says faith and patience will inevitably create a great future for those who are able to do it.
I am sad to say that Larry Gebert, as many of you know, passed away last month. He was a friend of mine and had emceed the last 3 years of our Spring Fever event. He did 96 events one year, for events like ours that raised money for charities. And for all those nights he was out working to raise money he never accepted a dime. He was truly a great ambassador for Boise and Idaho. For those of you who don’t know Larry, he was our faithful meteorologist for 26 years and a friend of everyone he met. He will be missed.
If you are interested in attending the event titled The epidemic rise of anxiety, depression and suicide send me an email, or got to https://loveandtransformation.org/.
Please forward this to a friend!
See you soon,
Craig