The Inflation Paradox

The Inflation Paradox ๐Ÿ”ฅ๐Ÿ’ธ
Yesterday afternoon, Federal Reserve Chairman Jerome Powell spoke at a press conference where he discussed challenges facing the U.S. economy.
He labeled the rapid rise of prices for raw materials and commodities as “transitory” and he claimed they were caused by unexpected “bottlenecks” in the market. ๐Ÿšฉ
Even in the midst of claiming inflation was transitory, Powell admitted that inflation was much higher than he or other members of the Federal Reserve Board had anticipated. He said the newly revised annual inflation forecast was 3.4%, much higher than the original 2.4%. His response was that the Federal Reserve would increase interest rates twice by the end of 2023. ๐Ÿ‘†
The market reacted by selling off. Most major stock market indices and commodities finished lower. To the average investor, this seemed perplexing. Wouldn’t higher inflation make the market rise? Powell said they were going to raise interest rates, but it’s a tiny increase and it’s predicted two years from now. If goods and services are priced in dollars, and the value of the dollar is predicted to fall, wouldn’t that mean the value of the goods and services priced in dollars would go up? ๐Ÿ’ช
As any good economist would say, it depends. ๐Ÿ•ต๏ธโ€โ™€๏ธ๐Ÿ•ต๏ธโ€โ™‚๏ธ
Inflation is not a simple math formula. It is a complex monetary phenomenon that isn’t explained by one cause alone. Inflation impacts different markets in different ways. Just because prices are rising doesn’t mean you should go buy everything.
There is a prevalent myth in the investing community that holding dollars today is a fool’s errand. Bridgewater Associates’ Ray Dalio was famously quoted saying “cash is trash.” Legendary investor Paul Tudor Jones said that he was prepared to go “all in” on the inflation trade. ๐Ÿ”ฅ
The problem with this approach is that it attempts to answer investing questions in a sound byte. While holding too much cash for 20 or 30 years might be a bad idea, in the short term it’s smart. ๐Ÿ’ก
Paradoxically, holding cash is one of the best things to do during inflation. Cash provides an opportunity to buy investments at cheaper prices. When businesses experience inflation, they have a tendency to wait before handing on higher prices to their customers. They may take a margin hit, or they may even be unprofitable temporarily before they start raising prices.
This affects the value of businesses, and it also affects the stock market. For example, during the bear market of 1973-74, the US CPI climbed to 12%. However, there was a simultaneous 45% drop in the Dow Jones Industrial Average. Even though inflation was much higher by historical standards, the conditions presented an excellent buying opportunity for investors with cash. ๐Ÿ’ฐ๐Ÿ’ฐ
I encourage you to have a well-diversified portfolio. Hold some stock and bond index funds, commodities, and precious metals. However, it’s also a good idea to have some cash, so that you can buy when the market drops. You can buy during a period of rebalancing.
As a reminder, tomorrow at 2 PM Eastern Time, I’ll be interviewing CJ Meenan of Open For Business Ventures inside our Money Mission Facebook Group. If you’d like to join us, comment below or send me a request. ๐Ÿ‘‡
Have a great day, and I’ll talk to you again soon!

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