Fed Reserve Chairman Says Inflation Is Coming… Here’s What That Means For You
Last week I went through a best-case economic scenario and told you to be cautious while investing… Even if the Covid pandemic officially comes to an end this Summer.
Best Case Scenario
Let’s hope for the best and say the pandemic “officially” ends by June 1st worldwide.
If this happens, things will get back to some semblance of normal in a matter of months.
Which will lead to lower unemployment, low or minimal lockdowns, and far higher economic activity.
If this all happens its amazing considering what we’ve dealt with over the past year.
But it will still take time for the economic situation to get back to pre Covid levels because people will be cautious.
This means a drawn-out economic recovery.
Here’s what I said about this a few weeks ago.
This was proved even more when the US government released full year 2020 GDP numbers that showed the US economy grew at its slowest rate since 1946 – 75 years ago.
How bad were things in 2020 for the US economy?
It shrunk at a 3.5% rate for the full year.
9.8 million jobs are still gone.
And 23.8 million adults are struggling to feed their kids.
This is from the US economic data and The Washington Post.
This is bad enough… But here’s what David Wilcox Senior Fellow of the Peterson Institute for International Economics and the former director of the domestic economics division of the Federal Reserve said about last year’s economic numbers.
“2020 has no precedent in modern economic history,” “The influenza of 1918 and 1919 predates our modern system of economic statistics, and since World War II, there’s never been a contraction that even remotely approached the severity and the breadth of the initial collapse in 2020.”
One example is that in the US alone there are still an estimated 15+ million people are out of work and receiving state or federal unemployment benefits.
The peak unemployment rate during the financial crisis was in 2009 at 9.9%. Pre crisis unemployment rate was at 4.4% in 2006.
It took 9 years until 2017 to have an equal or lower unemployment rate.
In a best-case scenario, it shouldn’t take 9 years to see a full recovery to pre covid levels of unemployment… But it might.
Federal Reserve Chairman Jerome Powell said the following a couple weeks ago that put the current unemployment rate around 10%.
“The headline unemployment rate has “dramatically understated” the true damage, [to the economy] including the biggest 12-month drop in labor force participation since at least 1948.”
Without misclassification errors that have plagued the Labor Department since the pandemic began in March, the unemployment rate would be closer to 10%.”
“Despite the surprising speed of recovery early on, we are still very far from a strong labor market whose benefits are broadly shared.”
Emphasis above is mine.
This is right at the 9.9% unemployment rate we saw at its height in 2009… And it took 9 years to get back to pre-crisis levels.
Plus, on top of this market valuations are still either at their all-time highest levels or their second highest levels ever depending on which metric you look at.
Yes, the only other time in history according to the metric – Shiller PE or CAPE ratio – the S&P 500 was valued higher only once in the last 120 years and that was right before the Dot Com bubble crash.
The market is valued at a higher level now then right before the Great Depression.
High valuations don’t mean a crash is coming soon… But they increase the likelihood of a crash…
Again, here’s what I said about this last week and why this is so important.
But this isn’t just me talking… Here’s Jeremy Grantham of famed investment firm GMO…
“The current stock market is “one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”
“These great bubbles are where fortunes are made and lost — and where investors truly prove their mettle…Make no mistake — for the majority of investors today, this could very well be the most important event of your investing lives.”
These bubbles and then crashes were some of the worst in world financial history.
According to some estimates, at its height the South Sea Company was worth $4 trillion in today’s money after factoring in inflation. Making it by some estimates the most valuable company ever.
As you can see in the chart above shares, in the South Sea Company rose from £100 in 1719 to more than £1,000 in August 1720… Only to spectacularly crash after the speculation ended.
The company never fully recovered. And many of its directors went to jail and were accused of treason.
This according to Beth Daley of TheConversation.com.
The same thing happened before the Great Depression in 1929…
This led to the greatest and longest recession in world history. And transformed an entire generation and how they thought about the stock market.
Many never invested in stocks again. And it took 25 years for the stock market to reach another high.
The same thing happened again with the 2000 Tech Bubble Grantham mentions…
It took almost 20 years for the NASDAQ to reach another high after this crash.
We’re repeating history again today… In both my estimation and Grantham’s.
This makes investing in stocks riskier now… And it also means you should expect lower returns owning stocks – if you buy today – for potentially decades going forward.
Yes, you can still buy individual stocks that will make you a lot of money over the long term – which is what I try to help you do every day. But the overall risks in the market are extremely high right now.
And this is a best-case scenario.
Frankly, I’m not going to go into the mid case or worst-case scenarios I researched because they follow these same lines… But the economic and investment situations are far worse.
Let’s go one step further though.
Let’s say unemployment craters as Covid cases do and the economic situation in the US and worldwide improves faster than I expect.
The market valuations are still insanely high. And already brings in a huge – almost historic – amount of risk into investing today.
I’m not trying to throw cold water on the Pandemic Victory Parade… I’m an eternal optimist and hope this comes true soon.
But when I talk about investments, I don’t tell you anything based on hope. I do on actual data and information.
And there are still enormous risks in the market right now due to the valuations… Even if we are at the end of this pandemic.
One thing I didn’t factor into that analysis became a big issue this week when United States Federal Reserve Chairman Jerome Powell spoke on Thursday.
He rocked the markets by saying this about what he now expects from inflation in the short term…
“We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” Powell said during a Wall Street Journal conference. “That could create some upward pressure on prices.”
What does this really mean for you?
That he expects inflation to increase in 2021.
Inflation is a constant yet invisible tax on your money.
Before the crisis, The Fed had a stated goal of 2% annual yearly inflation because their belief is that this shows a healthy economy.
For you and I though, it makes our money worth 2% less every year… Which increases prices on food, gas, groceries, and everything else 2% every year.
Yes, there are other factors, and this is a simplification of things. But at a basic level this is what inflation does to your capital.
This is important because Mr. Powell said he expects inflation to pick up this year… As we’re still dealing with high unemployment and terrible to okay at best economic numbers.
This news shook the markets as they fell by 346 points or 1.1% last Thursday.
Because people are worried about the trillions of dollars of money printing and bond buying The Fed’s done to keep the economy afloat during this pandemic leading to “runaway inflation” like we saw in the 1960’s and 70’s where inflation rates peaked at 13.55% in 1980.
The market fell because its worried this or something similar will happen again.
If it does, this will make your money worth 13.55% less each year… Which will make everyday goods 13.55% more expensive.
This is why inflation is so important. This invisible tax that few think about takes real money out of your pocket in the best case 2% scenario.
If inflation goes crazy… It will take even more money away from you and your family.
To further illustrate this, look at the following chart which shows since the advent of The Fed in 1913 that the United States dollar has lost 99% of its value.
As I said last week…
Valuations are still sky high which makes investing right now incredibly risky… Especially combined with the bad economic situation and high unemployment in most countries right now.
And frankly, we still don’t know enough yet to tell whether the pandemic is truly over… Or if it’s going to come roaring back at some point.
We just don’t know.
I’m not saying you sell everything unless you want to lock in profits. What I am advising here – and do daily – is advise caution… And only investing in the best.
Because if you invest in undervalued stocks that have huge competitive advantages, leading to large profits and cash flows, and little to no debt… The best… You’ll earn higher and safer returns no matter whether the market crashes tomorrow or 10 years from now.
And I’m still not saying you should panic now because you shouldn’t.
The high valuation of the markets and individual stocks combined with uncertainty of the direction of the pandemic is risky enough… Throw in inflation on top of that and it’s even worse.
What’s the best way to protect yourself from all these risks?
Make sure you’re in great stocks that have the following traits…
- They’re cheap.
- They have little to no debt compared to a lot of cash.
- They produce large profits and cash flows.
- And make sure they aren’t in industries that could be hammered by Covid.
These kinds of stocks – the ones I try to find for you every day – are things you should continue investing in because they will provide you good to great returns no matter what the market is doing.
All while protecting you from the major risks like valuation, Covid, and inflation.
To see some of those kinds of stocks that will help protect your retirement portfolio – Click the links below.
- The Best Internet of Things Stock
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- 5 Reasons To Buy Emerson Electric
- The Best Telehealth Stock
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- 3 Reasons To Buy Qualcomm – And 1 Not To
- 3 More Reasons To Buy Cisco
- 3 Reasons To Buy Activision
- 3 Reasons To Buy Dollar General – And 1 Not To
- 4 Reasons To buy eBay
- Should You Buy Lockheed Martin?
- Is Xilinx A Buy?
- AMD Buys Xilinx For $35 Billion
- Is eBay Still A Buy After Earnings?
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- Should You Still Buy Emerson After Its 25% Rise Since August?
- Should You Buy Walmart After Online Sales Grow 79%?
- Is Qualcomm A Buy After Sales Rise 73%?
- Should You Buy Cisco Before Earnings?
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- Why Intel Is Still A Buy After Its Latest Earnings…
- Buy This 7.9% Dividend King
- CVS Is Still A Buy After Record Earnings
Disclosure – Jason Rivera is a 14+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.