EasyBlog

Welcome to the 'No-Guilt' blog!
People come to here because they want to build financial confidence and take meaningful action. We provide the context for those things that affect your financial health. Our goal is to help you live in the 'No-Guilt Zone'.

Inflation, Inflation, Inflation.

Are we headed to runaway inflation? That question seems to be top of mind these days. Inflation is already here. No duh, right? Many companies are reporting strong demand for goods and services following the 2020 pandemic lockdown. Everywhere we look, everything we see and hear says prices are rising substantially. Are the price increases we are currently experiencing a signal for a coming wave of broad and persistent inflation? (Baby boomers may be having flashbacks to the 1970s and 80s). Or is this just a temporary adjustment following the unusually sharp economic downturn in 2020 and a major disruption to the supply chain?

So, what is really driving inflation?

Is it Federal Spending or the money supply? Is it too few goods? Or is it something else? If you listen to the pundits and media prognosticators, you’d believe the answer to the questions are yes. That’s not true. I read a book called “Free Money: Plan for Prosperity” back in 2013 that examined multiple facets of our monetary system. One topic covered in depth was inflation. The author, Rodger Malcolm Mitchell, analyzed the relationship between Federal government spending, the money supply, and a variety of factors that many people believe lead to increasing inflation. Mitchell provided charts, graphs, and sources that showed there was no relationship between federal deficits — even large federal deficits — and inflation. The chart below shows that the peaks and valleys of deficit growth (blue line) do not match the peaks and valleys of inflation growth (red line): CPI vs Federal Debt 2021  Mitchell did similar analyses for other factors looking for potential drivers of inflation. He found no immediate relationship between money supply (i.e., too much or too little money in the system) and inflation. Nor did he find a relationship between too few goods and inflation. Nor increasing labor costs and inflation. Time after time, analysis after analysis, he found no relationship among the things we hear in the “news” and from the pundits that drive inflation higher. None.

Except: Oil

Mitchell found a relationship between changes in energy prices—driven by oil prices—and inflation. Oil has worldwide usage and affects the prices of most other products and many services. The graph below compares overall inflation (red line) with changes in energy prices (blue line) over the last 51 years from 1970 through the end of 2021. CPI vs Energy Prices Do you see what I see? More specifically, when oil prices rise, inflation also rises. When oil prices fall, inflation also falls. I’m going to make an obvious and not so bold statement: When production costs increase, manufacturers pass along those costs to consumers. No duh, right? If this is true, then we should see skyrocketing energy costs in the current inflationary environment to support this claim. The graph below shows the percentage increase of prices in the Consumer Price Index from December 2020 to December 2021. The overall year-over-year price increase for all items was 7.0 percent. CPI 2021 vs 2020 Now look closely. Did you notice that nearly everything above that 7 percent line are energy and transportation-related costs? If you drive a gasoline powered vehicle, does it now cost you almost twice as much or more to fill up your car as it did in late 2020 and maybe early 2021? Just sayin’. When we look toward the future of the markets, remember that inflation is just one of many factors that investors consider. Given the markets general response to changing conditions, the potential consequences of inflationary pressures and similar issues are already reflected in current market prices. The current view of inflation points to a moderate pickup in consumer prices in the coming years. Treasury Secretary Powell’s view and that of many economists hold, however, that the recent spike in inflation will be brief. And, we are resolving many supply chain issues. Investors don’t need to outguess markets or undermine their portfolio objectives to outpace or hedge against inflation. If you already have a well-crafted personalized financial plan and investment plan, maintain your discipline. Let your plan work for you. Markets go up and markets go down. When you stick to your plan and exercise patience as an investor, a well-diversified, global portfolio has historically delivered positive results. No need to overreact to short-term fluctuations in consumer prices.  

Continue reading
25 Hits

17X – Not a Fitness Program, but It's Still PE

I’m a huge fan of P90X fitness programs, but 17X is not about fitness.  It’s about the U.S. stock market.

The stock market is a forward-looking barometer and reflects the future expectations of the economy.

One of the oldest and commonly used metrics to value individual stocks and the stock market is the price-to-earnings ratio (P/E ratio).  The P/E ratio is defined and calculated as market price per share divided by annual earnings per share.

Copyright

© focusyouadmin

Continue reading
2111 Hits
0 Comments

Investor Sentiment – A Poor Measure of Irrational Exuberance

Former Fed Chief Alan Greenspan coined the phrase “Irrational Exuberance” in 1996, during the dot-com craze of the 1990s.  Many interpreted the phrase as his warning that the market was getting overvalued or overheated.

Since the dot-com bubble imploded in 2000, we’ve heard the phrase whenever someone perceives any kind of speculative frenzy in the stocks, housing, commodities or some other asset class or area of the economy.  For many, irrational exuberance means we’re in bubble territory.

Continue reading
2137 Hits
0 Comments

VIX, Not the Cold or Flu Remedy, But a Poor Measure of Market Volatility

When you hear someone say VIX, don’t confuse it with Vick’s, the brand that brings you "The Nighttime Sniffling Sneezing Coughing Aching Stuffy Head Fever So You Can Rest Medicine.”

VIX is the CBOE Volatility Index, a popular measure of near-term volatility of S&P 500 index options. It is often referred to as the fear index and it represents one measure of the anticipated stock market volatility over the next 30-day period.

Continue reading
4262 Hits
0 Comments

When the Fed Strikes Back…Yield, Don’t Stop!

It’s hard for many to believe that the economic recovery is now over six years old.  GDP is steadily improving. And, the Bureau of Economic Analysis reports that our economy is larger than it has ever been.

When we look at the economy from an investor's perspective only two things come to mind: stocks and interest rates.

Continue reading
1621 Hits
0 Comments

Find your financial balance.

Our Financial Self-evaluation Tool helps you identify your financial blindspots and increase your financial power.

Download a free financial self-evaluation

 
 

Find balance in your Financial Life

Download our Financial Wheel of Life Self-Evaluation