Speaker 1 (00:00):
Hi everyone. I’m Tim Melvin. And we’re back once again, to talk about a better way to wealth. Now, one of the biggest headlines recently has been the topic of inflation. We have had some of the highest inflation readings and more than 30 years as the economy reopens from the pandemic. And of course the massive supply chain disruption that we’ve seen, not Jerome Powell at the chairman of the fed. He’s telling us it’s not really that big a deal. It’s all supply chain related. It’s going to eventually dissipate and go away. He’s calling it transitory or temporary inflation. And the problem is I’m willing to accept that. I mean, the fed chief sees everything that happens in the economy, but you know, who sees more Jamie diamond over at JP Morgan, every dollar in the economy eventually finds its way through the JP Morgan apparatus at some point, and is seen by one or more divisions of that bank.
Speaker 1 (00:59):
So Jamie’s got a pretty good idea of what’s going on in the world. And he’s talking to way more people out in corporate America than I think the folks at them, Jamie is building cash and short-term securities because he believes that we’re going to have inflation that drives up rates. He’s sitting on billions of dollars waiting to reinvest it at higher interests, straight caused by inflation. So you’ve got to the people that have kind of a good view of the economy. They disagree right now, the smartest market. And that’s the treasury bond market that eventually reflects everything that is happening and is expected to happen in the economy is saying, Hey folks, Mr. Pal is right so far because treasury rates are dropping every day. And we saw that reflected by the way, in the sell off that we saw not too long ago with the market ground, almost a thousand points in a single day.
Speaker 1 (01:55):
So there is a perception that inflation may be temporary. We’re going to find out for sure in the fourth quarter of this year, when we see whether or not we have any lasting way age inflation right now, we have employers paying bonuses for people to work in drive-through windows around the country and rent to gain restaurant staff. And as we’ve gotten out and about, you know, everybody’s short-staffed right now. So they are paying bonuses and higher starting wages. The extended unemployment benefits are going to expire across the United States. At the end of September, we will see if that wage inflation becomes long-lasting. There are some folks that think it’s going to the massive asset management from BlackRock. They just gave everybody from the lowest janitor on the night shift, all the way up through the executive board, a permanent 15% pay increase. So we are seeing some signs, Hey, wage inflation may be with us.
Speaker 1 (02:52):
If it is wage, inflation is not transitory. That will be with us. We’ll have more dollars chasing goods. And we will have inflation that stays with us for a lot longer than Jerome. Powell is hoping that it will. Okay, why do we care? Do we really care that much that a pack of hotdogs goes up by a buck or the gas goes up? I mean, it’s things, but it’s not going to kill us, right? Well, not really. It could really cause a lot of harm, especially if you’re invested in the stock market, even through your 401k or your IRA, if there’s inflation, you’re going to get hurt. And here’s why if we have higher interest rates, interest rates are a key part of every valuation model that is used to tell us how much or corporation is, or is not worth everybody on wall street.
Speaker 1 (03:43):
They learn it in their first year of business school. And unfortunately they never unlearn it, but they use something called discounted cashflow to figure out what a business is worth. Now, if I’m just going to, I’ll give you an example. So you understand how this works. If you have a company that’s earning a dollar and is expected to grow at 5% and you discount that at 3%, which is about the same 30 year bond rate oxygen, that’s higher than the 30 year bond rate. Right now that business is worth $23 and 92 cents a share. If you’ve got a cop same company, same earnings, same growth rate. If we just bumped the discount rate up to 5%, it goes tonight, $18 and 49 cents. Nice little decline at 8%. It’s only $14 and 76 cents. And at 10%, the business is only worth $12 and 48 cents or about one half of what it’s worth using the current interest rate in a cashflow discount model.
Speaker 1 (04:42):
So every stock that you own is going to be worth less. If we get inflation that spirals out of control, the 1970s were ugly, calm in the stock market because interest rates and we’re rising very rapidly and the fed had a hard time getting the dragon back in the box. We’re hoping that doesn’t happen. And it isn’t the transitory we’ll know more when we get to the fourth quarter of the year, is it going to be permanent? I really don’t know. I think that we do have to wait and see what happens with wages. If wages start going up and stay up yet. No, it’s okay. Not going to be temporary. We’re going to have to make some adjustments. So what do you do? How do you protect yourself from this inflation? There’s two sectors that you really should probably be looking at adding to your portfolio.
Speaker 1 (05:31):
So are we going to have permanent inflation? Who’s right. Jerome, pal or Jamie diamond? No one knows yet. We’re not going to know until later in the year in the fourth quarter. So tomorrow we’re going to come back and talk about what we do with your portfolio to protect yourself against inflation and get the right assets so that the portfolio will still do well. Even if the chair of the fed, the reserve turns out to be correct and inflation goes away. So we’ll be back tomorrow. And we’ll talk about that. I’m to Melvin, thanks for watching.
Subscribe today and receive daily advice right in your inbox, guiding you to a better way to wealth.