Hi everyone. I’m Tim Melvin, and welcome once again to A Better Way to Wealth.
Recently, the inflation numbers came in, and they came in hot!
If you were expecting them to slow down, you were badly disappointed as consumer prices jumped year over year by 7% in the United States.
That’s the biggest one month jump in 39 years!
To see that type of jump, you’ve got to go all the way back to about 1982.
Now, if you’ve been in any type of grocery store recently this should not be a big shock to you.
Prices of just about everything have gone dramatically higher over the past three or four months.
With the economy continuing to open up, a multitude of supply chain problems, wage inflation creeping its ugly head in there as employers offer higher salaries in order to incentivize folks to come back to work, we can see we’re far from the end of this.
Folks, there are still somewhere around 10 million unfilled jobs in the US, and that’s going to put more upward pressure on wages and keep the inflation rate going.
The Fed is going to have to be increasingly aggressive in order to get the inflation dragon back in the cage.
Today’s History Lesson
The last Fed chief that let inflation get out and run around and play was Arthur Burns during the Nixon administration.
Why was this done?
To help Nixon win the 1972 presidential election.
Unfortunately for them, neither worked out well and it took almost a decade to fully get inflation back under control.
The man who finally managed to wrangle the nation’s inflation rates was Paul Volcker.
Volcker accomplished this by coming in and taking interest rates up to well over 15%.
Now, I’m hoping it’s not going to get that bad here.
I don’t think that it will, but when they decided to let inflation run a little hot because it’s been running low for a very long time, the task just becomes that more difficult.
In recent remarks Fed Chair Jerome Powell actually said we could now see inflation well into 2023.
We could see three or more rate hikes over the next year.
The Fed is definitely cutting back its buying program, and we may even see them start to shrink their balance sheet by selling some of the assets that they already own just in order to cool things down.
This would bring inflation numbers back towards a more manageable number of around 2%, which is their long-term target.
Guys, I wish him a lot of luck, but I think they’re going to struggle with it.
The CEO of JP Morgan, Jamie Dimon, recently said that he thinks it’s going to take at least four hikes to slow things down out there.
I always make a point to pay attention to Mr. Dimon because his bank sees just about every dollar in circulation at some point during the course of the year.
With trillions and assets and all sorts of you know credit card divisions and loans and securities programs, JP Morgan sees everything in the US economy.
Dimon thinks it’s going to run hotter longer, and I tend to agree with him.
It’s not going to be great for the broader indexes and it’s not going to be great for the highly valued tech companies… They’re going to have a problem.
So, what do we do?
Well guys, we’re just going to go back to the core Better Way to Wealth gospel and we’re going to buy bank stocks.
Banks are one of the groups that do exceptionally well when there’s inflation that’s bringing on higher interest rates.
Higher interest rates mean higher net interest margins for the banks, and that means they’ll be far more profitable in 2022 and into 2023 than they have been in recent years.
It’s going to be easier for the banks to make money and bank stocks, as a result, should do extraordinarily well.
Now, it’s no secret that I have a long-term love affair with bank stocks.
In my opinion, they are probably the best industry group to invest in because there’s simple rules and if you follow the rules, it becomes difficult to not make money overtime.
With that in mind, let’s throw out a couple of bank ideas that you can use to get started to build your own inflation proof bank stock portfolio.
Ames National Corporation
First up is Ames National Corporation (ATLO).
Ames, Iowa, where this company is obviously located, is a great little college town located in the heart of the US farm belt.
Currently, there’s six different banks under the holding company banner and they all do business in the counties around Ames, adding up to about $2.1 billion in assets.
All told, the six banks have about 19 branches in the area.
Their loan portfolio is well diversified, offering single family, multifamily and commercial real estate.
Now, it’s Iowa so there’s some farm loans as you would expect, and of course they do loans to small businesses with commercial and industrial lending, as well.
All told, it’s just a great little bank who does a fantastic job of evaluating loans.
As you might expect, being a Midwestern banker, they’re pretty conservative.
Your non-performing assets number is very low at just .65% of all assets!
They’ve also got plenty of capital on hand.
Insiders own a lot of stock already and, interestingly enough, have been buying more in recent weeks and months.
With this in mind, we’re going to give ourselves an edge by following the rules.
In case you forgot, the rules are very simple…
We’re going to buy banks with low PE ratios (12 or less) and dividend yields of 3% more.
That combination produced returns that actually crushed the market and most hedge funds over the last two decades.
Guys, we’re also going to insist that the banks we use to start our inflation proof bank stock portfolio have recent insider buying.
TrustCo Bank Corp NY
Our second bank is TrustCo Bank Corp NY (TRST).
This is a New York based bank with about $6.1 billion in assets and 147 branches mostly located in the state of New York, with 53 in Florida.
This is a basic, conservative Trust Bank with 88% of their loan portfolio in single family homes in the New York and Florida markets.
They have plenty of capital and do a great job underwriting the loans with just .34% of all assets are considered non-performing assets.
They have paid dividends since their founding in 1902.
More impressively, though, since the day they open their doors, they have been profitable.
Think about all the things that have happened since 1902 in the US economy! Despite these hurdles, they’ve always remained profitable, including during the great financial crisis where not too many banks could actually make that claim.
Currently, it’s trading at 11 times earnings with a 4% dividend yield.
To me, the bank looks to be a good inflation-proof bank stock that is tremendously undervalued, and insiders seem to agree, because they’ve really been loading up on the stock in recent months.
So, if you don’t love banks, you don’t love money.
Bank stocks are one of the most productive assets to own.
A fact that is even more important in today’s environment where they can help you beat back the rising inflation and interest rates that we’re probably going to be dealing with well into 2023.
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