Only in 2021 could an animated picture of a cat with a pop tart body be sold for $600,000. Likewise, some prices being paid for securities would seem to make little common sense. The good news is that there are still plenty of reasonably priced businesses to be had, and I will address more on that below.
As Fall begins on the 22nd of this month, it is always a good idea to glance in the review mirror. We can see a rocky summer for equities in general. Our mirror shows us how the new COVID variant shut down large sections of the world, China making changes in the way technology companies do business, lots of talk about tapering bond purchases, and, of course, the spending bill.
Mr. Powell of the Federal reserve quelled fears of an interest rate increase by stating that he believes any rush to increase rates is a potential “mistake.” (I agree with him on that point.) However, the specter of tapering the $80 to $120 billion per month in bond purchases by the federal government was left open for debate, and most believe that will start to happen in the new year. While this is a potential psychological blow for the markets, the Fed has given us plenty of time to get used to the idea. Since the government has created nearly a quarter of all the U.S. dollar money supply ever created since 2020, it would seem that we have to start slowly turning that dollar-making machine down at some point.
- Why do we approach financial planning and investing a little differently?
- What does adding this much currency to an economy mean for investors?
- Can the equity market go higher?
Why do we approach financial planning and investing a little differently?
By now, you know that we are all about Building a Life, Not a Portfolio. If you do not have a copy of my book of the same name, then by all means, reach out, and I will make sure you receive one. I travel the country and speak on this topic and others because I believe it is essential to realize that financial planning and money are simply one vital tool used to build your best life. I was acutely reminded what money could not buy last month when I saw my first two grandbabies for the first time. You can’t purchase that. You can plan to put yourself in a position to spend time with those you love where you want when you want.
That is why we approach things from this point of view. We want to use all we have learned on Wall Street to serve anyone to help them build their best life. Interestingly enough and for all sorts of reasons, nearly 75% of Americans have not fully thought through and planned to create their best life.
What does adding this much currency to the economy mean for investors?
I think we have to go back to the most basic economic concepts, the law of supply and demand, to answer this question. (More supply = lower price.) What this means is that inflation is here, and it is not all “transitory”. History has taught us that when the market is flooded with stimulus, however noble the cause, inflation follows. While some would have us believe that the idea of the U.S. dollar (USD) not being the world’s reserve currency is ludicrous, I would remind them that it has happened before back in the 70’s when the U.S. issued bonds denominated in something other than USD.
What does it mean for the U.S.-based investor when their income and their liabilities are paid in USD? The main risk is for holders of cash that are counting on the idea that their dollars will be there when they need them. While this is true, those dollars will buy them far less of the necessary goods when they need to access them. This tends to afflict those in the lower income levels and those in retirement on fixed incomes. For decades, these individuals have been taught that the safest place for their savings is in the bank or treasury bonds, which now lose significant value with each passing day.
These issues have a slightly smaller impact on the high-net-worth individuals who are more likely to purchase luxury goods which are where this “transitory” inflation argument comes from.
The “transitory inflation” side states that as the supply chain normalizes prices, prices will come down. The idea here is that COVID has choked off supply, and as we mentioned above, More supply = lower prices while less supply = higher prices. The transitory inflation argument also suggests, and rightfully so, that ever-increasing levels of service and utility are being made available in leaps and bounds due to the massive innovation that I often speak of in these updates. The problem becomes the fact that these innovations are less likely to be of value to the lower-income set for quite some time in my opinion. Meanwhile, food, rent, fuel, and other basic necessities continue to move ever higher.
Put another way, what we are seeing is not so much the price of goods going higher but rather the value of your cash going down.
The answer for investors is to keep only a prudent amount of cash on hand and be selective about the investments you choose to make sure they are right for specific long-term needs. This article is not investment advice, so that is as far as I will go on this topic. We genuinely enjoy serving individuals regarding specific investment information, so please reach out if you’re looking for straightforward and clear guidance for your situation.
Can the equity market go higher?
The answer to this question is a resounding YES it can. There are several reasons I believe it can continue to move higher, and here are just a few.
- The math continues to work – profits and interest rates still say there is room to grow
- The markets tend to climb a wall of worry. According to most surveys, I am seeing neutral and bearish investors weighing in at about 60%. Back in the spring, when I warned of potential increasing volatility, the bulls weighed in at close to 60%, and it turned out to be a tough summer for stocks.
- There is still a lot of money looking for a home. As most fixed income securities provide a negative real return, investors flood the real estate and stock market.
While I reiterate that this note is not investment advice, I would again caution inexperienced investors about concerning things we see in the markets. While not all new offerings are bad, there are currently some disturbing things happening in the Special Purpose Acquisition (SPAC) market and many Initial Public Offerings (IPOs). Note that in 2020 there were about 450 new IPOs, and just in the first six months of 2021, there were over 500 IPOs. Please seek someone with the right kind of experience to help you see and sift through all the information and misinformation that proliferates the market.
We ask that you please keep in mind that this report is our opinion from a broad perspective and is not personal investment advice. For individual advice and more information about some of the changes happening in the market and economy, you can schedule a no-cost call directly with me by CLICKING HERE. We are also happy to provide you with a copy of our Amazon best-selling book Build a Life, Not a Portfolio; A Guide to Your Financial Future Based on Your Values.
Additionally, tune into our weekly Building Your Life Podcast and search for topics of interest.
We continue to have one goal; to help you build a life you love supported by a portfolio that fits your specific needs.
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