Inflation is the name of the game, and the game is running hot. We are at 8.6% inflation if you go by the latest consumer price index. The Fed has hiked interest rates to 1% in order to slow down the rate of inflation by cooling off the economy. It is forecast to hike to 1.5% by the end of the quarter and to 3.5% by 2023.
Offsetting this is the fact that unemployment is at 3.6% and the government printed trillions of dollars in stimulus giveaways.
Gimme Stimmy
Well, the stimulus has all been spent on RVs and bored apes. But now the proverbial punch bowl has been taken away and you're thinking you should have left early, sneaking out the back with an Irish goodbye.
Inflation is everywhere and always a monetary problem. There was too much money pumped into the system and now everything costs more.
This leads us to the rule of 72.
The rule of 72 is a back-of-the-envelope calculation that gives you a general sense of how long it takes to double your money.
It is simple. If you want to know how long it will take your returns to double, you divide 72 by the annual interest rates.
For example, if you buy a 10-year Treasury at a 3% yield, it would take 24 years to double your money. If you get a 6% yield, you will double your money in 12 years.
Reverse Vampires
The problem is that the rule of 72 also works in reverse. If you have an 8.6% inflation rate, it will cut your purchasing power in half in just 8.37 years (72/8.6 = 8.37).
Of course what you really want is real returns. You calculate that using your 8.6% inflation minus your 3% yield, which equals 5.6%. Then you divide 72 by 5.6% which equals about 12.86 years. So if you buy a 3% yielding asset in today's market, you will lose half your money in almost 13 years!
That’s bad.
Here at Energy and Capital we like to make a return on our money, or at the very least a return of our money.
So what do you do now while the market is bleeding red?
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The first thing you do is sell all of your speculative junk if you haven't already. Anything that you don’t want to hold for five years, without positive cashflow and/or a fading industry.
We all have them. Wait for an up day then eat the loss — it’s not coming back.
Three Investible Sectors
There are three sectors that are investable right now. They are energy, agriculture, and summer tourism in the U.S.
If you have cash, put some money to work in those places, and then save half for companies you want to own on the cheap when the market stops falling. I like companies like Microsoft (NASDAQ: MSFT), Broadcom (NASDAQ: AVGO), and Apple (NASDAQ: AAPL). But you should have your own list.
At some point, a month or a year from now, we will get a bottom signal. It will look like a double bottom on the chart followed by a break in the downtrend and the market putting in higher highs and higher lows.
Some companies will announce bankruptcy. There will be at least one big name. Around this time Warren Buffett will make the news with some unprobable purchase/bailout of a big-name company with extremely favorable terms.
Remember, you don’t have to catch the absolute bottom. It is unlikely you will. It is more likely you will catch a falling knife. Be patient. Wait for the trend to flatten out.
If you are putting money in a 401k, just keep putting it in there every month. Dollar cost averaging works very well. This is not the time to stop.
The market is primarily worried about inflation and the Fed’s response to it. The market will reverse if we see the inflation numbers coming down. The next CPI report comes out July 13 and it will contain data about June. The CPI is a lagging indicator.
Other factors that will cause the market to bottom and start going up will be stock values getting too cheap to ignore, employment staying low, and the consumer chugging along.
It would be good for supply chains if China opened up but it would also push commodity prices higher. This is a good reason to own oil stocks. Also, remember the U.S. is the No. 1 producer of oil in the world right now. High prices aren’t devastating to the U.S. like they were in the 1970s.
There are plenty of things you can do to win in this market. Stay positive, don’t lose your head when everyone else is losing theirs. Add oil stocks to your portfolio. The next quarter will be huge for services, refiners, and producers.
All the best,
Christian DeHaemer
Energy & Capital
