Inflation, inflation, inflation!

Inflation

A Blog by your local Financial Planner on the Sunshine Coast, Mike Beal

Inflation is really starting to emerge. The latest reading was 7.5% in the US. With interest rates at 0%…and inflation at 7.5%, that doesn’t make a lot of sense, hence interest rates will be going higher (Russia/Ukraine tensions resulted in oil prices increasing 4.5% on Friday alone). In the ‘Goldilocks scenario’ the Fed gradually increases rates with no shocks to the market over time, and then slows down inflation. But inflation can be like the tomato sauce bottle, you keep shaking it, nothing much happens, and then whooomph! You get too much & that makes it very difficult to combat unless you’re increasing interest rates at a much faster rate, although, seeing as the US has increased debt from approximately $17 trillion a few years ago to around $30 trillion now…if interest rates were to normalise it could be rather tricky to pay back the interest – let alone the principal, so they might not be so inclined to REALLY fight inflation until it’s gone so far they HAVE to fight inflation…watch this space! The first Fed rate hike is expected to be next month with forecasters anticipating a 0.25% increase in interest rates. How will 0.25% fight inflation? It can’t, so interest rates may move higher more quickly than anticipated. This is bad news for stocks and particularly bad news for bonds, especially longer dated bonds. Interest rates, according to Warren Buffett, are the ‘gravity’ for stocks. “If interest rates are nothing, values can be almost infinite.” Thus we get money flowing into the more speculative areas of markets – for example, tech stocks that are worth tens of billions of dollars despite making no profits (think Afterpay), cryptocurrencies, of which there are now over 17,000, and even more absurd, ‘Non Fungible Tokens’ (NFT’s – if you’re interested, Google Beepl’s NFT which sold for $69m!). So, rising interest rates are bad news for most asset classes, particularly asset classes that are expensive in the first place – for example, US shares which are trading on their highest values in history excluding the internet bubble of the early 2000’s – and that ended with the world’s stock markets dropping by almost 50%. How can we reduce the risk? By avoiding the most expensive asset classes, such as US shares, by looking at cheaper markets which will tend to fall less and recover faster, and of course diversification across asset classes.

If you would like to discuss your investment options in these unusual times, please get in touch with Mike Beal, your local Sunshine Coast Financial Planner and Wealth Management expert: [email protected]

Bubbles Bubbles Bubbles!

The talk of speculative asset classes has segues nicely into chat about the world of bubbles, I could try and summarise this myself…but I think it’s best left to Mr Jeremy Grantham, a legend in the investing world and a man that has very successfully identified the largest bubbles in his investing lifetime – which is long! So when he is saying that the US share-market is now in a ‘super-bubble’, I think it would be wise to take heed.

Download Jeremy Grantham – Let the Wild Rumpus Begin

Visit Jeremy Grantham’s Website