Hey!
Spooky SZN is underway! Halloween is here and inflation metrics and supply chain issues are scary enough to have Michael Myers shaking in fear. The world seems so chaotic, and everything is getting more expensive, yet financial markets have continued to hit new all-time highs throughout the month of Uptober. How is that so?
After a month of strong downside pressure in September, markets have rallied back strong throughout October. Third quarter earnings season is now fully underway, and companies have been able to paint a cleaner picture as to what their outlooks into next year look like. Coupled by easing of debt ceiling concerns and tapering expectations, markets have been able to digest the news and run with it.
Regardless of price action, there are still a lot of structural concerns investors should be paying attention including Fed speak, surrounding monetary policy moves, government spending plans and tax implications.
Let’s talk about the various market factors in play and what you should be thinking about in this environment coming into the final months of the year.
First though, these newsletters are meant to be informational and educational only. They are not financial advice, and I am not a financial advisor. Always do your own research before investing any of your hard-earned money into something!
Letter Highlights
· Inflation Pressure Persists
· Taper on the Table
· Protect and Grow Your Wealth Through Provable Scarcity
Index Year to Date Gains Through End of September
· S&P 500 +24.4% (+6.25% mo./mo.)
· Nasdaq +22.4% (+7.15% mo./mo.)
· Dow Jones +16.8% (+4.75% mo./mo.)
· Russel 2000 +15.5% (+3.5% mo./mo.)
· Bitcoin +111% (+40% mo./mo.)
· Ethereum +476% (+40% mo./mo.)
Inflation Pressure Persists
Over the past couple of month’s people have really started to wake up to the inflationary pressures post COVID. The word ‘transitory’ is now being buried and replaced with ‘more persistent’ and ‘longer lasting than anticipated’. To say this wasn’t the obvious outcome of continued easy monetary policy and economic supply constraints is an understatement.
Companies worldwide have had to make huge adjustments to their business models to fight with supply chain issues, longer lead times on materials and labor shortages. These adjustments include pricing adjustments and wage increases, passing most of the cost off to the consumers.
This has materialized throughout the year in basically every industry. On Halloween, American Airlines canceled about 14.3% of its flights, according to data shared by the company to Yahoo Finance, in large part because it was unable to find staff to carry out operations. The airline has canceled an astounding 1,623 flights since Friday due to labor shortages, the data indicates.
The latest company to raise its prices is McDonald’s. This past week they announced they would be raising prices on menu items by roughly 6%! What a bummer! The company cites this is being done in an effort to offset wage increases and supply costs with wages this year up at least 10% and supply costs anticipated to increase 4%. When will the madness end?! Now they’re coming after my McDoubles?! Not cool.
Current CPI inflation metrics are showing a 5.5% inflation rate. A flawed metric, but still a scary number. Prices are rising much faster than wages and many people are refusing to work without large pay increases. The lack of workforce participation has fueled increasing supply chain issues and constraints, a vicious cycle that self-perpetuates the issues further.
Through inflation, the middle class is quickly disappearing. Everyday people are being pushed further into poverty through price increases of goods and services while the rich are getting richer through asset appreciation.
Unfortunately, most people don’t realize what’s going on nor do they know how to rise above the pressures brought by inflation. Most people can’t easily negotiate a 5.5% pay increase to keep up with the cost of living nor do they feel they have the capacity to invest and grow their net worth.
That’s not good. The way to wealth appreciation is through investments, not your 9-5 job. Putting your money to work and into assets that will appreciate in value over time can appear scary to the uninformed, but its really the primary way to grow your worth.
To quote Warren Buffet;
No matter how small the contribution, little amounts add up over time. Don’t let your ability to only invest an extra $10 a month deter you from the long-term benefits that would reap. I like to look at building out an investment portfolio as rolling a snowball. It may start small but as you continuously add and roll the money it will grow larger and larger exponentially.
If you’re interested in seeing what compound returns look like in the long run, check out the link below and mess around with some value inputs for a better idea.
What’s scary more is that the worst of inflationary pressures haven’t even fully developed yet. ‘More persistent and longer lasting than expected’ as now being projected by Federal Reserve officials telegraphs this exactly. Price pressures are going to remain well into next year and many will be caught off guard by the new cost of living.
Furthermore, official Fed data presented is flawed and under reported. Calculation metrics used by the Fed are limited, outdated and far from robust. A 5.5% inflation rate is a joke if you actually run the numbers.
This is being brought to light by corporations who have better data and understand the data much better than the Fed. Outside obvious price increases, CEOs of large companies have begun to join the debate presenting some hard truths about inflation.
Jack Dorsey, the CEO of Twitter and Square, sent the tweet heard around the world last week. He explicitly called out hyperinflation happening in the US, which has been historically considered an off-limits topic for executives and politicians in developed nations.
While the actual use of the term ‘hyperinflation’ may be a bit exaggerated, the point here is that inflation is exceedingly higher than we are being told.
To add further context as put forth in Anthony Pompliano’s latest newsletter, think about this.
“Square has a suite of products that gives them a multidimensional view of what is happening in the economy, how the price of goods are changing, and any differences between demographics, location, or income levels. Most people don’t realize how many products Square has:
1. Square Reader (physical device that allows mobile phones to process payments)
2. Square Register (more traditional register for merchants)
3. Virtual gift cards
4. CashApp (consumer mobile app for banking services & investing)
5. Square Capital (financing to merchants)
6. Square Payroll
7. Square Financial Services (bank charter)
8. Credit Karma Tax (acquired and integrated into CashApp)
9. Afterpay (Square acquired the “Buy now, Pay later” giant)
So, quite literally, Square is sitting on one of the most robust data sets in the world to measure inflation within the United States. They have direct integration with more than 100,000 merchants at the point-of-sale (Reader, Register, Afterpay, etc). They have over 30 million monthly active users on CashApp and more than 7 million people using a CashCard (gives them exact transaction data). Square also has the payroll data of many companies across industries and geographies through the Square Payroll product.
This robust, real-time data set is highly compelling when compared to the CPI data set and calculation methodology. Square likely has a much more accurate understanding of the true inflation numbers across the US.
There is a strong argument that the US government, the Fed, and Treasury should all ask the payment and fintech companies to help them determine the real inflation rate, rather than continuing the charade of CPI.”
While it’s doubtful these companies will actually release the data due to business practices and privacy, it’s interesting to think we may be sitting on a much more accurate depiction of real-time inflation data not being considered.
For the CEO of a $100+ billion company that is ranked as one of the 400 largest companies in the U.S. to come out publicly and insinuate that his data is showing inflation significantly higher than the official numbers is crazy.
Jack Dorsey isn’t the only CEO to jump into the debate though. Among many others, the world’s richest man, Elon Musk, also recently added comments further fueling the reality of the situation.
Who is the more likely better allocator of capital; government officials with increasing spending deficits and rampant insider trading or entrepreneurs and CEOs of profitable billion-dollar companies which continue to grow and provide technological advancements to society?
Do your own research and think logically about what is going on behind the scenes.
Taper on the Table
With inflation running amok, we are now approaching forced action by the Federal Reserve to ease pressures. The first order of business is to begin reducing monthly asset purchases of $120b/mo. in an effort to reduce to net zero by mid-2022 and normalize their balance sheet.
The official announcement on their plan should come on November 3rd during their policy meeting. Many are anticipating a reduction in roughly $15b of purchases a month to begin in November or December at the latest. The bigger question for the market though is when interest rate hikes will occur.
Currently the market is pricing in a 100% chance of a quarter-point hike by October 2022. I can all but guarantee that's too aggressive and won’t happen. I also strongly believe their intended tapering reduction to a net zero will be slower than most anticipate. Keep an eye out for clues from the Fed. The impact of their actions may not be immediately obvious until sometime down the road.
The markets are drunk on easy money and may react strongly to the downside to an aggressive approach by the Fed but ultimately, I believe the Fed will be forced to keep the charade up and the liquidity pumping. If that’s the case, equity markets, home prices and other assets can continue to rise.
Keep in mind though, as that happens those that are not invested in assets will be left behind and see the cost of living continue to go up and the goal of a good life get harder and harder as the middle class is continued to be squeezed out.
Protect & Grow Your Wealth Through Provable Scarcity
With inflation, monetary policy and government spending eroding your purchasing power, individuals need a sound way to protect and grow their wealth.
In the past gold was looked at as a hedge against inflation but if you run the numbers, you can see gold has offered basically a zero-percentage return over the past decade, as shown below. In addition to that, we are continuing to see record outflows from gold ETFS. The gold narrative is dead. Younger generations are absolutely not looking at gold as a solid long-term investment.
What about bonds? They are supposed to protect your cash and offer a small return, right? Not exactly…bonds yielding anything under 5% when inflation is over 5% is actually a negative return. You’re losing money in bonds, not protecting it. I don’t see any place for these in a portfolio, especially for trying to grow your wealth.
Stock market and real estate are both at record highs. Home prices have continued to skyrocket and the market acts like it isn’t allowed to go down. Although the returns have been great, keep in mind the following: the Federal Reserve is basically propping up markets and home prices with their massive liquidity injections into the system and near zero interest rates. As these injections ease through tapering, the gains may be limited or reverse. I expect 2022 to start showing signs of this through an aggressive Fed policy shift.
Of course companies can continue to grow their earnings and revenue, but the way in which they are valued by investors may become more stringent overtime and thus suck out a lot of the frothiness out regardless of increased revenue and growth.
As the Fed progresses with their tapering through 2022 and moves closer to any interest rate hikes, keep an eye out for markets to become salty and throw a fit over the tightening of the loose monetary policy.
Same with home prices. There’s only so much land for sale. Prices are frothy but long-term real estate investments are substantially better than sitting in cash or renting. However, real estate also comes with a lot of re-occurring costs that are often overlooked. These include basic upkeep, renovations, utilities, insurance and of course, ever increasing property taxes.
Although still a worthy long-term investment, the explosion in home prices is unfortunately keeping a large majority of willing participants out of the market through the ability to raise the proper amount of funds for purchase.
So, this brings me to the hardest and most sound investment currently out there to protect your wealth against eroding purchasing power of the US dollar, Bitcoin.
Its value is derived from a few things, of which is its provable scarcity (unlike gold), its decentralized network properties free from government or individual intervention, its supply/demand output configuration and its immutable network security and uptime.
Bitcoin is based on mathematical code, vastly different from monetary policy framework set forth through compromised data sets, greedy government officials and politicians so old that the movie “Jurassic Park” brings back childhood memories.
No joke though, the current American Senate body is the oldest in American history. Should these people be making monetary and spending decisions that will affect so many younger generations or does an uncompromisable set of mathematical code make more sense in the digital age?
Bitcoin is a serious contender for world reserve currency because of its hard properties, but that’s not to say it’s going to happen any time soon. The dollar will be the world’s reserve currency until bitcoin replaces it, sometime over the next few decades.
Part of my conviction about Bitcoin is that its rise will take decades, not years or months. It’s still extremely early for the world’s first cryptocurrency, currently valued at a little over a One trillion-dollar market cap, comparatively to gold which sports about a 11 trillion-dollar market.
Interesting enough, Bitcoin just so happened to celebrate its 13th birthday on Halloween.
The internet has been mainstream for over 20 years and is still slaying industries. Looking at network growth, Bitcoin adoption is occurring much faster than early internet adoption. The dollar won’t succumb to Bitcoin over the next ten years because it is far too entrenched in every aspect of the global economy, but it will certainly continue to grow into the role.
Bitcoin will eclipse the dollar not strictly because of those who cross over, but more because of a generation that will have a bitcoin wallet on its phone instead of a commercial banking checking account. This takes time. Its value will continue to go up overtime using this thought process in addition to many other valuation metrics.
Some other advantages of BTC usage outside inevitable price appreciation are:
One, Bitcoin users have comprehensive control over their reserves. Traditional fiat currencies are subject to several restrictions and risks. Banks, for example, are tied to economic booms and busts. As has happened in the past, these circumstances may sometimes result in bank runs and crashes. This implies that consumers do not have complete control over their funds.
Two, there are no costs associated with Bitcoin transactions. Bitcoin users are not subjected to the invocation of conventional banking costs associated with fiat currencies. While fiat currency exchanges impose so-called "maker" and "taker" fees, as well as deposit and withdrawal fees, Bitcoin users are not subject to these fees.
This allows for no account sustaining or minimum balance fees, no overdraft costs, and no returned deposit penalties.
Three, for international payments Bitcoin transactions offer minimal transaction costs. Fees and currency charges are expected in standard wire transfers and international transactions. Transacting via the Bitcoin network is typically cheaper than bank transfers since there are no intermediate organizations or governments involved.
This may be an essential benefit for tourists or remittances from workers abroad to families back home. Furthermore, bitcoin transfers are instantaneous, bypassing the hassle of usual permission methods and delivery times.
Fourth, Bitcoin transactions are entirely safe. Bitcoin is not physical money. As a result, robbers will be unable to physically steal it. Hackers may steal a person's cryptocurrency if they have access to the wallet's private keys but, stealing bitcoin is theoretically impossible with adequate protection and industry-standard practices. While there have been many allegations of cryptocurrency exchange hacks, bitcoin transactions from peer to peer have remained unaffected.
These are just a few advantages among many others, but you get the point.
What Should YOU do?
At the end of the day, there are plenty of ways to grow your wealth. Everyone’s investment goals, risk tolerance and capabilities are different and that’s OK.
As an individual you need to determine what works best for you and supports your lifestyle and what you are ultimately optimizing for long term. Whether it’s the stock market, real estate, private businesses, a 401k, gold, or crypto, time in the market is better than trying to time the market.
I always hear “once we get a dip I’ll buy” or “once the market comes down 10%, I’ll buy”, but chances are when that is happening most are too scared to pull the trigger and end up staying on the sidelines and ultimately missing out. Getting invested into appreciating assets upfront and staying invested for the long term is the key to wealth appreciation.
Markets will go up and markets will go down but when you zoom out things always seem to go up over the long haul. There are certainly areas that make a lot more than sense than others, but again its up to you as an individual to research and act on what makes sense to you.
Always pay yourself first, then spend what is left over. That means you are making an investment in your future through asset purchases first, then using the remaining funds to fuel your lifestyle, pay your bills and live your life. Let the snowball effect and your money work for you. Again, even a $10 a month consistent investment into something can pay off in the long run.
Final Thoughts
Uptober…I mean, October was a great month for financial markets. Traditional markets went up over 6% and Bitcoin skyrocketed over 40%. Crazy times. November and December are historically strong months for equities, so continued upside may be in the cards as long as the Fed or government doesn’t throw a wrench into the mix. As earnings season winds down and investors have a cleaner picture of the outcome into 2022, markets can see the gains train keep moving.
The U.S. monetary policy remains one of the key factors for the market’s direction as we head into 2022. A strong jobs recovery, easing of supply constraints and a successful tapering plan would be a healthy thing for the market’s durability.
We live in an age where education and information on anything we want to know is accessible at our fingertips through the internet. You owe it to your future-self to become educated in money management.
By signing up for this newsletter you have already taken steps to accomplish that. Stay consistent on your journey and don’t stop learning.
Catch ya later!
Bryan Craig
Lefty Group Capital Chief Investment Officer
(P.S. if you like what you read here, please share with your friends and family!)