Why Inflation Won't Crash the Stock MarketBy Steve Sjuggerud  'Katie, I'm sorry... but we might sell your car,' my buddy Dave told his daughter recently...
Dave and I were watching the England-Italy soccer match when he gave her the news. And her reaction was probably what you'd expect... "What, Dad?! Why would you do that?" "We bought your FJ Cruiser used for $15,000," Dave replied. "Today, I can sell it for $30,000. When you get back from your year abroad, I can get you a much more expensive car." This story sounds crazy... a used car doubling in value. But it's 100% true. Used car prices have gone nuts. Some people are blaming it on inflation. And yes, inflation is booming... The June Consumer Price Index ("CPI") data came out recently. It was up 5.4% over the last year, the largest jump since 2008. "Core" inflation (stripping out volatile energy and food prices) was the highest it has been since 1991. Inflation is obviously here in a big way. And it's darn scary... not just for investors, but for just about everyone. The question is, will it last? The short answer is "no." The inflation we're seeing right now is temporary. It's the result of a supply and demand imbalance... one that will correct itself. - You know the stories of why the supply of new cars – for example – is low:
- Thousands of new cars are sitting on lots, unable to be sold, simply waiting on computer chips.
Rental car companies bought up more new cars this year than usual, since they sold many of their cars a year ago to stay alive. (They typically buy 2 million cars a year.) Problems like these decimated the inventory of new cars for sale. That caused the prices of used cars like Katie's FJ Cruiser to soar. Of course, cars are just one example of what I'm talking about... We're seeing similar stories throughout the economy. The COVID-19 pandemic caused supply issues everywhere. And it has led to some crazy price increases. But again, these are mostly temporary problems. This wild situation will end – hopefully by the time Katie gets home from her year abroad. Today, I'll explain why you shouldn't be worried about inflation... The price of Katie's used car just doubled... That's crazy, because everyone knows cars are a liability, not an asset. In the real world (not the COVID world), as soon as you drive a car off the lot, it loses value. Today, the script is flipped. And it's not just Katie's FJ Cruiser... Used-car prices are up 45% over the last 12 months. Take a look... These numbers are insane. But this situation will end... guaranteed. The problem with the supply of new cars will go away. The new-car inventory will return. And then, used-car prices will fall – possibly a lot. This is simple economics. I think the main inflation we are seeing now is more temporary (and totally separate from the long-term risk of the value of our dollar falling, which is very real)... Today's near-term inflation is caused by COVID-induced imbalances, like we're seeing in the car market. As an example, the massive spike in used-car prices in June was responsible for more than a third of the latest increase in inflation in the June numbers. We've also had shortages of building materials, which have caused the cost of building new homes to soar. And we've had shortages of hourly labor workers... which have caused the cost of paying hourly workers to soar. Supplies are tight and demand is massive right now because the economy is 'back' in a big way... I live in Florida, where the economy has been back for a while... Real estate prices have gone up incredibly quickly. Between the COVID-19 "refugees" moving here from major cities and the low supply of building materials and labor, prices have soared. They have gone up so fast that the businesses that try to estimate home values simply can't keep up... The house two doors down from me was recently valued at $2.6 million on Zillow (ZG) and Redfin (RDFN). Someone just bought it for $3 million – and then proceeded to gut it completely, down to the framing. They will put in at least a million bucks from here. So Zillow and Redfin weren't even close their estimations of the price gains on this North Florida house. Now, I realize that this is just one house. But the story is the same all along the Florida coast... South Florida is even crazier than North Florida. My wife and I were there a few weeks ago, and we spent time with high-end realtor Heidi Wicky from Palm Beach County. Prices are up as much as 50% in two years in the more desirable areas – and there is no supply. It is a seller's market for sure. (If you need a great realtor in Palm Beach County, look up Heidi with Sotheby's. As always, I have no affiliation, and there are no kickbacks to me of any kind... I don't operate that way. She's just a solid person who is good at what she does.) It's not just Florida, though. The economy is opening up all over America... I was in Maryland last month. The state mask mandate was fully lifted. And when I went to Annapolis that weekend, the crowd was crazy. It was shoulder-to-shoulder on Main Street and along the waterfront... too crowded for me! But people are just ready to be out. And they're spending money. The end of the mask mandate creates a lot of demand for goods and services – instantly – as people get out and get back to their lives. Meanwhile, the supply flow of goods and services can't just turn on again instantly. Therefore, we get a spike in prices. It's Economics 101. People see this price inflation, and they immediately worry that interest rates will rise. I am less worried... Interest rates crashed in 2020 as the coronavirus pandemic hit and it became clear that the economy was going to slow down. The benchmark interest rate (the 10-year government bond rate) fell off a cliff back then – from 1.85% at the start of 2020 to close to 0.5% by the summer of 2020, as you can see in the next chart... As prices accelerated this year (like used-car prices and labor prices), interest rates started to soar. The benchmark interest rate hit 1.75% earlier this year. Many folks feared that interest rates would continue soaring. But they have actually turned lower... The rate on the benchmark 10-year government bond fell to 1.35%. And even more impressive, U.S. 30-year mortgage rates hit all-time lows early this year – below 3%. And they still hover around 3% today. How can interest rates be falling if inflation is really here to stay? That's an important question. Let me answer it... It isn't. Interest rates are surprisingly "smart." In a way, they represent the collective beliefs of trillions of dollars invested. So interest rates do a decent job of "forecasting" inflation and the economy much better than any one person can. The downward move in interest rates tells me that most of the inflation we are seeing today is temporary. Heck, if the spike in used-car prices last month was responsible for more than one-third of the rise in inflation last month, then what happens when used-car prices eventually come back down to Earth? Inflation dies. The recent fall in interest rates also "forecast" slower economic growth down the road. That tells me that the Fed might not even consider raising short-term interest rates at all in 2022. So, while the idea of continued higher – or even runaway – inflation is on people's minds, it's not likely to happen. Instead, the craziness will sort itself out. Car prices, materials prices, and labor prices will sort themselves out. What does it mean for us as investors? It means that the "boogeyman" of today's market isn't a real concern. (Again, with the U.S. economy nearly $30 trillion in debt, there is still a long-term inflation problem looming down the road... But that's not what everyone's worried about today.) With the mask mandates gone, people are thrilled to be out and spending money. That exuberance is carrying through to investing. We're seeing excessive speculation in stocks, cryptos, and real estate (well, it's excessive in Florida's real estate, at least). So, while everything is Melting Up, we simply have too much wild speculation... and a Melt Down will likely follow at some point. But today's inflation won't cause it. It's hard to take the emotion out of investing, especially during turbulent periods in the market... That's why I just published a brand-new video tutorial on how to do just that. In it, I pull back the curtain on a data-driven approach to investing that helps you know exactly when to get in and out of virtually every investment in the world. When the cracks in the U.S. stock market do eventually begin to surface, a different bull market somewhere else in the world will be going strong. And my True Wealth Systems computer database will help me identify those uptrends early, handing my readers massive upside potential in the process. For the next few days, you can watch this presentation where I discuss my strategy in full – and gain access to my most premium research for nearly 70% off the retail price – by clicking here. Regards, Steve Sjuggerud
August 6, 2021 If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply sign up here. |
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