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“Investors Now Fear This Thing More Than Covid”

Dear Reader,

Over the last several weeks I’ve shown you why to remain cautious with your investments even though it looks like the pandemic – hopefully – will come to an end by the start of the Summer.

Largely due to the dual factors of historically high market valuations and inflation.

You can read more detail about both by going to the following articles.

And as I told you in two of our new nightly email sends last week, there are still risks from this for all of us related to both valuations and inflation.

  • Market crashes.
  • Lower investment returns.
  • Unemployment.
  • Prices on everyday goods like food and gas rising.
  • Etc.

Today I want to illustrate why specifically inflation is so important because I found a survey from Bank of America that shows investors no longer think Covid is the #1 risk… Its inflation.

Inflation now has become the biggest “tail risk,” or outlier event, that could cause the most damage, the widely followed gauge of professional investors showed.

A total of 37% of respondents in the March survey cited that as the biggest challenge, followed by 35% for “taper tantrums” — sharp reactions in the bond market in the event the Federal Reserve unexpectedly pulled back on its monthly asset purchases.

A total of 220 investors with $630 billion in assets under management participated in the bank’s survey, which was conducted from March 5 through Thursday.

Inflation has come into view this year as government bond yields have spiked to pre-pandemic levels. One market-based indicator, the “breakeven” rate between 5-year Treasury yields and inflation-indexed bonds, has jumped to its highest level in nearly 13 years.

Survey respondents said a move to the 2% level in the 10-year Treasury note could cause a stock market correction, or a more than a 10% drop. A jump to 2.5% would make bonds more attractive than equities. The benchmark note was trading around 1.6% Tuesday morning.

Emphasis is mine above.  Info from CNBC via the Bank of America survey of professional investors.

Why is this the number one issue for 37% of professional investors?  For the reasons I’ve talked about at length the last few weeks…

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.

Inflation.

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.

Why?

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.

And the $1.9 trillion stimulus adds to these fears… Again, here’s what I said about this last week.

But how is that already affecting things?

Bond yields are rising.

United States Treasury Bills (Treasuries) are now sitting around 1.6%… Which is a huge rise from the 0.55% rate they hit in July 2020.

And when bond yields rise it makes debt more expensive to get and pay… For all of us – including businesses that are looking to hire.

Corporate debt now stands at a record 83.5% of total US GDP… And sits at a record of $17.138 trillion.

What does this really mean?

When interest rates rise it means your any new debt you take on to say buy a car, buy a home, pay credit card bills, or build your business is more expensive.  This is already bad for you especially as we’re still struggling in this pandemic.

But with corporate debt at record levels, it’s even worse.

The 1% rise on $17.138 trillion worth of debt means businesses now must pay $171.38 billion more for their debt now than they did in July.

This extra cost with the higher debt payments will likely slow hiring even more.

And this is already coming true.

Last week new weekly jobless claims in the US “unexpectedly” jumped to 770,000.  This is higher than the week before.  And far higher than the 700,000 expected by analysts.

Why is this happening?

For the reasons above that most people didn’t think through.

The economy is still not in great shape.

The stock market is historically overvalued.  And continues to break new records on an almost daily basis.

The United States and world are sitting on the highest level of debt in the world’s history at $281 trillion… Or more than 2X the entire worlds current GDP.

Which is causing inflation to rise… Which is causing – at least partially – bond yields to rise… Which is causing more job losses.

Most analysts didn’t see the job loss rise coming, because they didn’t think of these third and fourth order effects of everything that’s going on today.

The economy is improving… But there are still enormous risks out there that most people in the mainstream news and financial news aren’t seeing.

I don’t recommend you sell everything… So, 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.

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.


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