Update - September 13, 2022
Stocks Plunge as the “Peak Inflation” Goes Bust
Go figure… The latest inflation figures came in hotter than expected this morning.
Stocks are plunging once again because of it.
From this time last year, prices are up 8.3%. And from last month (you know, when inflation was supposed to have peaked), they’re up another 0.1%.
It’s no surprise.
The so-called Inflation Reduction Act is so blatantly mislabeled – and so blatantly misleading – that it’s criminal. It pumps hundreds of billions of dollars into the economy at a time when money should be getting sucked out of it.
For example, I heard a snippet of news on the radio yesterday on my way home from the office. It was about a new school spending program. Some $21 million will be spent locally… and the money is coming from “leftover” COVID-19 relief appropriations.
In other words, much of the $4 trillion-plus that was printed in the spring of 2020 has yet to be spent… and now we’re spending hundreds of billions more.
It should come as zero surprise that the prices of things remain on the rise. The easy-money free-for-all is still in progress.
It’s not good news.
It means the Fed will become increasingly hawkish. It means more folks will need to lose their jobs. And it means the economic pain is likely to get worse before it gets better.
The yield on the 10-year Treasury surged after this morning’s pricing data was released. This, too, should come as no surprise. With inflation on the rise and more rate hikes to come, investors are demanding more for their cash.
It’s also no surprise, then, that we’re starting to see big chunks of money move around.
It hits at the core of the theory behind our Modern Asset Portfolio. We study real interest rates. It’s no secret that folks move their money to where it will be treated best – where it’ll give them the most return for each unit of risk.
When rates are low, speculative assets reign.
When rates rise, money flows out of those assets (just as we’ve seen) and into safer assets that – because of rising rates – now offer higher returns.
It’s exactly what we’re seeing in the banking sector.
Just today, The Wall Street Journal detailed a huge slug of cash leaving banks. Depositors are pulling their cash and are putting it to use where it will get a better return – like in CDs, Treasurys and even dividend-paying stocks. They’re also using it to pay their bills as times get tough.
Overall, this is good news for banks and for the Fed. It’s the way the system should work. It’s pulling excess liquidity from the markets.
It’s also good news for the latest addition to our portfolio… Prudential Financial (PRU). Since we got into the play last week, shares have risen about 5%.
It makes sense. The company’s bottom line depends on the spread between its deposits and the income derived from them. A hawkish environment will treat it well.
I won’t rehash it all here. You can read the latest issue online.
Bottom line… We’re not out of the woods yet.
The Fed has more tightening to do. The economy will shrink even further. And the folks who are blind to it will get hurt.
Fortunately, we’ve been ahead of the game for quite a while… and our portfolio proves it.
Note: We’re having a lot of fun in Alpha Money Flow. We’re shorting some of the most overvalued stocks and locking in some big gains. Our last three plays all resulted in strong, double-digit wins. More on that strategy soon.