NOT-Transitory Inflation

July 15, 2022

 

For much of last year, the economists at the U.S. Federal Reserve Board confidently told the public that the rampant inflation we were experiencing in the U.S. was ‘transitory.’ 

They were wrong, and increasingly so as time goes on.  This won’t surprise anybody who has been shopping lately, but economists were shocked to discover that the inflation rate rose 9.1% annualized in the month of June.  You would have to go back to 1981 to find a higher rate.  And the usual culprits of the war in Ukraine—food and energy prices—were not the only reason for the cost of living increase.  If you took out those two parts of the inflation calculation, the rate was still 5.9% overall.  The Federal Reserve’s ‘target’ is 2%.

So far, the U.S. Consumer Price Index measure of inflation is running around 8.6%—that is, it costs roughly 8.6% more to fund a normal lifestyle today than it did at this time last year.   This is part of an international trend; the UK is looking at 11% overall price increases, and the Eurozone is experiencing an 8.6% inflation rate.  South Korea’s 6% annual inflation rate is the highest in 24 years, and even Japan, which has flirted with deflation for the past 30 years, is seeing prices rise 2.5%.

How long will this last?  Nobody knows.  The Fed seems committed to driving U.S. inflation down with a series of aggressive interest rate hikes, but with prices rising everywhere else, one wonders how effective this will be.  But perhaps we can take comfort that our cost of living increases are markedly lower than what people are experiencing in Turkey (78% year-over-year), Argentina (60.7%) and Sri Lanka (54.6%).

We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

Sources:

https://www.nytimes.com/live/2022/07/13/business/cpi-report-inflation

https://fortune.com/2022/07/09/inflation-rates-around-the-world/

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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The Fed and the Bear

June 21, 2022

 

By now, you know that the U.S. Federal Reserve Board raised the so-called Fed Funds rate by three quarters of a percent—the largest increase since 1994.  You may also have heard that the size of the increase took everybody by surprise—a list that includes economists, pundits, journalists and professional investors.  The news drove the markets, already teetering on the edge, into bear market territory—defined as a 20% drop from previous highs.

 

The stated reason for the rate increase is to squeeze inflation out of the economy.  The logic is somewhat complicated, but the simple explanation is that inflation occurs when too much money chases too few goods.  Raising rates will make it more expensive to borrow, diminishing purchasing power on credit, which could (eventually) result in less borrowing, which could (eventually) slow down consumer spending.

 

But of course, consumer spending is a huge component of economic growth, so less spending will slow down the entire economy—at a time when it has already recorded a full quarter of negative growth.  And by making borrowing more expensive, the central bank is also reining in corporate spending, which is another contributor to economic growth.  In fact, some economists believe that the economy was running ‘hot’ for the past decade, because companies could fund their operations with cheap money, and unprofitable companies could stay afloat because they could always borrow enough to get by.  The almost-free money allowed ‘distressed’ companies to rack up $49 billion in obligations that might need to be structured or face default.

 

If you look at the bigger picture, the American economy has experienced something quite extraordinary: more than four decades of falling interest rates, until they finally fell down to zero (short term) or near zero (longer-term) and had no more room to fall.  The Fed action has built on a reversal of that trend, sending mortgage rates to their highest level in nearly 14 years. 

 

If you want to second-guess the Fed economists with their Ph.Ds, you might wonder whether curbing inflation is worth the collateral damage of negative economic growth, diminished consumer spending and reeling investment markets where confidence in the future is shaken.  Their answer is likely to be that sooner or later they had to take away the punch bowl that led to the economic equivalent of drunken excesses—the stock market boom, meme stocks, special purpose acquisition companies, soaring housing prices, the alarming rise in the cost of living.  They might have been more gentle about it, but we all know that economic booms eventually lead to busts, which weed out unprofitable or poorly-run companies and ultimately deliver a healthier economy and, for investors, provide opportunities to buy stocks at a discount. 

 

The Fed has challenged all of us, whether we run companies or manage our monthly budgets, to endure a painful transition that was probably inevitable, and take our medicine all at once rather than gradually over a longer period of time.  Yes, the medicine tastes terrible right now.  Let’s hope it provides the cure that the U.S. central bank is hoping for, and that this will lead us into the next economic expansion and a new bull market.

We hope that you and your family are safe and well. 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Sources:

https://www.washingtonpost.com/business/2022/06/19/fed-rates-economy-markets/

https://www.nytimes.com/2022/05/14/business/inflation-interest-rates.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

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Perspective - Stocks are Fairly Valued

 
 

 

June 16, 2022

 

In an effort to keep you informed about the current market and economic environment, we are sharing this short video from Brian Wesbury. Brian is the Chief Economist of First Trust Portfolios. First Trust is one of our strategic partners that many of you are familiar with.

We hope this seven minute video is timely and gives you some context around what is happening in the market and the economy.

Click here to watch the latest Wesbury 101: Stocks are Fairly Valued

 

 

Sincerely,

 

Edward J. Kohlhepp, Jr., CFP®, MBA

President

 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Founder & CEO

 

 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives. 

 
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Reflections on Yet Another Downturn

April 26, 2022

 

The stock market suffered an ugly downturn on Friday.  Chances are, you knew it was coming.  In fact, so did we.

Come again?  Pretty much everybody knew that sometime, someday, probably before long, stocks would take a weird, unexpected plunge.  The fact is, they do this more often than we realize; one-day drops of more than 2.8% have occurred 20 times since February of 2018 (down 4.6% on Feb. 5, down another 4.15% on the 8th).  Make that 21 after Friday.

The trick isn’t knowing that there will be a market free-fall sometime in the (probably) near future; the trick is knowing exactly when.  Many prognosticators had a feeling that stocks would go into a long-term free-fall after that disastrous few days in the spring of 2020, when people were just realizing that Covid was going to be a thing.  After the markets rewarded buy-and-hold investors, many were pretty sure the markets were going to plunge when President Trump was impeached the first time, and then the second time.  There’s a whole cadre of pundits who make a great living by predicting that some kind of investing or economic catastrophe is just around the corner, and they offer this prediction over and over again until one day (surprise!) they turn out to be right.  

If you knew that there would be a 2.8% market drop on, precisely, April 22 of this year, then you had something worth talking about, and we wish you would have shared this information with us beforehand.  The fact that none of us could predict the date or time is significant; it means that these market moves are completely predictable in that we know they are going to happen, and unpredictable in that we never have any idea beforehand when the hammer will fall.

But that’s also good news.  Just as experience tells us that the markets are going to drop periodically, it also tells us that they tend to recover to new highs later on.  Neither of those rather vague predictions are terribly exciting, but the second one is the one that is going to make you money in the long run.

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA

President

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

Sources:

https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_Dow_Jones_Industrial_Average

https://www.cnbc.com/2022/04/21/stock-market-futures-open-to-close-news.html

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Inflation Fears

April 19, 2022

 

The headlines are kind of alarming: last month, the U.S. inflation rate spiked to the largest increase since December of 1981.  The Commerce Department’s basket of consumer products was 8.5% more expensive in March than it was a year earlier.

Before anyone becomes too alarmed, they should know that half of that increase came at the gas pump, the aftermath of the energy disruptions associated with the ongoing war in Ukraine.  Since then, gas prices have come down a bit, and there is no good reason to imagine that the pain at the pump is permanent.

More problematic is the rise in grocery prices, which are also impacted by the war.  Both Russia and Ukraine are exporters of wheat; whenever supplies decrease, assuming constant demand, prices rise.  Bread and a host of other food products suddenly become pricier. 

Airline tickets are becoming more expensive because airlines are no longer begging people to take the Covid risk of flying.  Airlines are paying more for fuel than they were a year ago.  And manufacturers are still dealing with transportation bottlenecks.

None of this helps us understand why egg prices are up over 11% from last year, and the Easter ham that many Americans prepared over Easter weekend jumped up 14% in cost.

Is there an explanation?  Part of the reason economists fear inflation is the mindset that it creates.  When workers and companies see prices going up, they prepare for it by demanding higher wages and higher prices for their products.  Barbers and massage therapists ask for a few dollars more for their services, and then a few dollars more because everybody else has raised prices—and so it goes.  Suddenly—and nobody knows exactly where or how we cross that threshold—inflation becomes a self-fulfilling prophecy.  And these cycles can be very difficult to stop.

The bottom line is that we are expecting inflation to be with us for quite some time.

Happy Spring!  We hope that you and your family are safe and well. 

Sincerely,

Edward J. Kohlhepp, Jr., CFP®, MBA
President 

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC

Founder & CEO

 

 

Sources:

https://www.npr.org/2022/04/12/1092414592/the-rate-of-inflation-made-its-sharpest-spike-since-1981

https://www.advisorperspectives.com/articles/2022/04/13/u-s-producer-prices-jump-11-2-from-a-year-ago-the-most-on-record

 

This material was prepared by BobVeres.com and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

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Kohlhepp Investment Advisors, Ltd.
3655 Route 202, Suite 100
Doylestown, PA 18902
Phone: 215-340-5777
Fax: 215-340-5788
Email: Info@KohlheppAdvisors.com

Securities offered through Cambridge Investment Research, Inc. a Registered Broker/Dealer, Member FINRA/SIPC. Investment Advisory Services offered through Kohlhepp Investment Advisors, Ltd., a Registered Investment Advisor. Kohlhepp Investment Advisors, Ltd. and Cambridge Investment Research Advisors, Inc. are not affiliated.

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