Stock Talk School: Inflation? Don’t Worry, Yet!

Join Chris Perras for the 2/12/2021 edition of Stock Talk!

Chris Perras: Good morning. I’m Chris Paris Chief Investment Officer at Goff Carver’s Financial Group in Houston, Texas. Welcome to our February 12 weekly Stock Talk podcast: Keeping You Connected to Your Money. This week’s podcast is a long-titled address addressing an issue that now seems to be on top of the mind for a lot of investors in most of the financial news networks. The topic is, Is Inflation Returning, and If So, Will it Be a Problem this Year? The title of this podcast, Inflation Worries, That’s So 2020. 2021 is about Real Growth Accelerating.

With the election in the rearview mirror for most people, the most common question we’ve been getting the last three or four weeks here at Oak harvest from our clients and prospects is what about inflation? This seems to be the new hot macro topic de jure on the financial news channels as long-term interest rates have steadily risen over the past nine months at the same time that most asset prices, including commodities, have accelerated higher. That includes copper, lumber, and even oil. Listeners, I love this topic. Why? Because it doesn’t take guessing at its answer this cycle to answer it. What do I mean? Clients can log on and view the three charts on interest rates along with this podcast on our web portal. This podcast is dedicated to dissecting interest rates, and its two components that most investors can now follow in real-time for free on many financial data websites. You don’t have to guess, you don’t have to go make up some esoteric or nebulous reason about what’s going on. Best of all, you don’t have to wait for the late and nearly irrelevant government data. You can follow exactly what the market is thinking and seeing right now and in future months with your own eyes. An obscured by the opinions of some money managers on TV that you’ve never met. Here we go. A quick economics lesson that we’ve talked about multiple times, interest rates have covered this in the past, I’m going to do it again. I’m sticking with the 10-year Treasury yield to keep it consistent.

The 10-year Treasury Bond yield, that is, the rate at which our US government borrows money from you, it’s yielding currently 1.15% but you can actually divide this yield into two components. There is the expected inflation component, and there is the expected real growth component. When you add them together, you get the actual yield you see on the treasury bond that you’re looking at. As of yesterday, Thursday, the 10-year Treasury bond was yielding, ready, 1.155%. The inflation component of the Treasury bond was 2.197%. Thank you Federal Reserve, you’re close to your goal. The real growth component was actually negative 1.042%. One looks at the inflation chart on our web portal, one can see that the inflation expectations have risen 63.28 basis points since mid-last October. Much the exact same height in duration move of inflation in the fourth quarter of 2012 into early 2013, which coincided exactly with the launch of QE2 by the Federal Reserve in September of 2012 and President Obama’s second term.

Back then, inflation rose 64 basis points. Fast forward to the fourth quarter of 2016 and Donald Trump being elected and yes, listeners, inflation expectation rose 63.58 basis points over the exact same time periods from September to mid-February. I note all this once again, to remind listeners, these moves are not unprecedented. We’ve seen this before just this cycle. The annotation that you see on these charts for our current rise in inflation was not just drawn yesterday, I drew this projection out last October 15th. What to draw from these charts now? Well, inflation worries should be peaking. Maybe there are another 25 basis move points move up and inflation for the next 12 months. That should not be a worry.

Think about what has transpired over the last 12 months. We set down the global economy. We stopped the vast majority of all manufacturing globally. At the same time, we wrote trillions of dollars of cheques to consumers to keep them spending and try to make them whole for their lost jobs. What happens when supply dries up and demand explodes? You get some inflationary push in prices from consumers. Listeners, what happens to this dynamic once the economy starts to reopen, once those factories go from zero to 50% capacity to returning to 80 to 100% capacity utilization, and supply starts to catch up with demand? What happens? Prices tend to start to pick, at least the rate of change slows.

If that doesn’t happen, what do manufacturers do? They go out and they spend money on CapEx to add capacity to meet demand. This is a boon to the economy and dampens future inflation expectations. What happens as the economy reopens? The velocity of transactions in the real economy picks up, people go out and they eat more, people go out and they get more medical devising plans. People go out and they travel more people go out and they buy more discretionary items to fill their newly purchased homes.

In a nutshell, there’s a handoff from inflationary growth in the economy to real growth in the economy. Listeners, remember that the US economy is over 70% consumer-led and in 2018 of our GDP, 68% was service-based, that’s doctors, lawyers, bankers, construction, hotels, restaurants, and only 32% was goods-based, that was houses, cars. The former areas in the service sector were the hardest hit by the pandemic and are currently underutilized the most. They should have the most leverage to each new incremental dollar spent in our economy through 2022.

Remember listeners, most of the time in the stock market, a disaster becoming horrible, turning into mediocre is enough to drive huge absolute gains in industries and stocks at turning points and pivots. On our web portal, clients can look at the attached real growth rate chart and see how similar the pattern is in real interest rates. When you look at the second half of 2012, in 2013. That was the second Obama administration. I repeat, as I mentioned last week, I was terrified. What happened in 2013, short term inflation peaked in the mid-first quarter, and the real economy accelerated after mid-February in 2013, throughout the rest of the year. Guess what happened to the S&P 500 it rose 32 and a half percent during 2013. As the 10-year Treasury interest rate doubled from 1.5% to 3%, and real growth accelerated, the world did not collapse, the financial markets didn’t collapse, raising interest rates didn’t cause a crash. We didn’t socialize healthcare any more than we already had since we initiated Medicare and Medicaid when they were induced in 1965, which happened to be the year I was born.

Guess what? In 2013, I missed it. I missed the stock move up. I missed almost every bit of 2013 as an investor because I was focused inwardly on my own personal situation. I had blinders on to the overall economy, and what was transpiring throughout the country. I was being emotional. I missed two years of the beginning of a new generation of consumers, millennials, and Gen-Z, taking control of the markets and our economy. The blinders and biases I put up not only cost me worry and stress and last time, it costs me growth in not only my financial portfolio, it cost growth in my character. Since April of last year, we tried to stress the financial markets and stocks move well in advance of the data hitting the tapes and on TV. Tried to share with you real data in advance of what you hear on TV or read a newsletter. For the rest of 2021 remember, the economy is being driven by the average American and the age of the average American is under 40 because they account for over half the population and that group is growing in the cohort. They have standard habits of an age group under 40. The average age of the American population is between 38 and 39. There are almost 170 million Gen Z and millennials in the USA and that segment of the population is growing, not shrinking. There are millions of bright and smart and hardworking younger Americans that will guide us through the future and all its changes. The data has not changed. As a year progressive. The economic cloud should continue to clear and volatility should eventually plummet to levels if you are predicting. At all Carvers, we are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of the volatility of stock markets, give us a call at 281-822-1350. We’re here to help you on your financial journey in retirement through customized retirement planning. Next week. I’m going to talk about the energy markets. I’m not going to have to talk about new energy. I’m going to talk about old energy, which is near and dear to the heart of many Houstonians. Is Chris Perras, many blessings stay safe. May God bless you and your families and God bless America. We are stronger together than we are divided.

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