Saturday, May 28, 2022

Stock Market News/Noise vs. Investing (FED, RATES, CHINA, DEBT CYCLE)

Good day fellow investors there is so much blah blah and noise in the investment environment and on this channel i want to clear out that noise and discuss what really matters when it comes to investing let me know in the comments below whether in this video i managed to clear the noise and if not what to improve let's start just a quick .

Example about the noise if we take the last 12 months the market is up 12 so much about crashes about this or that the market is still significantly up not even to mention five years look at this 88 up but of course there are so many topics that plague the news the environment especially youtube crashes .

Interest rates going up but what is it that really really matters let's dig into it and then see how it impacts the core fundamental of investing and that is owning businesses let's immediately start with inflation after years of low inflation we finally have significant even i would say high .

Inflation and we are reaching almost eight percent in february 2022 and now we also have the fed saying how they will have to increase interest rates six hikes forecasted for this year thus again an environment that changes significantly compared to what we have been used in the past and of .

Course this is even a better chart for inflation we are now at levels less seen in the 70s and the 80s so really inflation has been low for decades and now this is really a change in the environment and that's something one has to keep in mind but then again up to a certain level and as we said the fed is signaling six more increases this year .

Because inflation is too high the labor market is overheated and price stability is a precondition for the central bank as it tackles the hottest price pressures in 40 years and then interest rates interest rates higher interest rates lead to less economic activity as that's what powell is doing by curbing inflation and he says that the american .

Economy is very strong and well positioned to handle tighter monetary policy but what does it mean tighter monetary policy the projections are yes for rate hikes but six and then we are at two percent maybe going closer to three percent and that's about it but inflation is close to eight percent so that's already something that .

Is important here plus on what power says powell had been talking about inflation how it is just transitory or earlier how it will likely be how it hopefully will be two percent and i always told people that nothing will happen in a linear way so from two percent and .

Very low inflation we boomed two high inflationary environments and likely not more transitory as powell says but if we listen to what he had been saying and do what he is saying there is always what he has to say so of course he has to say that the economy is very strong because he influences also the economy with what he is saying but .

This is exactly what's important here powell and what he says is irrelevant because not even powell knows how will the environment be six months from now and not even talking about two years from now the fact is that despite wage increases still over the year the 2.4 wage cut because inflation was higher than the increases in wages that's a .

Fact wage cuts means also less consumption and now the question is how much will the fed be able to increase interest rates before it really starts to having a negative impact on the economy there is not a big difference between 0 and 2 inflation and two percent interest rates and seven percent inflation this .

Is still extremely stimulative for the economy so yes the economy is strong and if interest rates stay this low and two percent is low it's likely that the economy will remain strong because this is still highly stimulative and this is now the key question here of course the economy is strong while emphasizing the need for price stability .

And the question here is what if the fed doesn't have the power to stabilize prices what if they have to increase to five percent then then we would have stagflation so high inflationary pressures and a recession in the economy and that's something very very ugly and very difficult to get out of and despite the confidence that powell .

Has that is a risk from a monetary perspective but later we'll discuss investing and you'll see how despite that there are more important factors to consider when it comes to investing and this is a nice comment that i found from deutsche the history of being able to guide inflation down from 40-year highs with maximum employment suggests a .

Smooth landing is very very difficult to achieve said mateo luzeti at deutsche bank at some point they will face the trade-off between pushing unemployment higher or accepting higher inflation and that is a fact at some point the fed will have to say okay i am ongoing to 4 6 interest rates to curb inflation what vocaler did back in the 80s and save the .

Economy long term but now the debt is much higher so everything is different than back then and this brings us to ray dalio and his long-term debt cycles where at the end there is an end to the party of zero interest rates and printing money at will which then again leads to other fundamentals that we have to focus .

On and then again here are the fundamentals the expectations are that the current situation parting borrowing as much as you want so four or five percent budget deficits forever borrowing like you never need to return that money and like interest rates will be low forever that is something that might change in .

The next five to ten years and then again significantly impact investing and the fact is that nobody knows what will interest rates look like in 2023 there can be expectations but nobody knows powell can say what he wants to say what he wishes that will happen but the fact is that nobody knows .

And that's what we have to focus as investors it's easier to say i don't know i want to do good whatever happens and then already 95 of the noise out there is eliminated and yes the economy will get hit with higher interest rates there will be less spending and 68 of the economy is consumption if interest rates go up the government will also be .

Forced to lower spending less budget deficits etc so that might hit gdp and then we might see a recession which is again normal when it comes to investing if we check the chart for recessions the gray line here you can see that recessions have been there much more common in the 50s 60s 70s then less and less but bigger and uglier .

Recessions and then again the focus is for balance sheets to be trimmed but we have to see whether this will be possible or not as there is a myriad of factors impacting this and the key here to understand is that the environment is still extremely stimulative the real treasury yield is negative four percent now negative this means that if you lend .

Money to the us government like your pension fund does you are losing four percent of your capital four percent of your capital per year your pension fund has likely forty percent in bonds thus you are losing two percent of your purchasing power when you retire due to inflation and interest rates at the moment financially engineered .

Interest rates and if they increase interest rates by two percentage points 200 basis points it's still negative you still lose money and that's something that is very important from a value-creating investing perspective we as investors have to be above the inflation rate so that whatever happens we are doing okay and .

This is also important the ecb will keep pumping money into the system and the fed will let's say stop and then even take out money into the from the system 2023 and forward but we'll see how will this be possible or not that's also a key ingredient there and if the fed tightens we'll see for how long will that be possible because .

The government is still borrowing companies are highly indebted households real estate whatever the economy is based on that so there will be limits and we will see when the fed will lose control and then the situation will be ugly now it's not ugly and that's why the market is still high and i reiterate myself here nobody knows what will the .

World look like in two years if you just go back two years and one month from now the world now is completely different than it was two years and one month earlier and therefore i like the quote from jim rogers how every 15 years the world looks much much different than it was we had the early 2000s then .

Came the financial crisis money printing higher interest rates in the early 1990s before that we had high inflation so we don't know what the next decade brings ahead but it will sure be different from the previous 15 years and i have really really enjoyed the video from ray dalio recently published on youtube about the changing world order it's a must-see .

Video so i'll put the link in the description below and really after watching this video go and check that video out because the world is changing significantly and at some point all these forces this drive the market that you hear itsy bitsy things on the news at some point things will change and the important thing again as an investor is .

To focus on investments where no matter what you will do well and you will see that given what's going on at some point the fed will lose control then we have currency issues we have this we have that we have higher inflation maybe we'll have high inflation for 10 15 years life will still go on but it will .

Be different and then on china i'm really amazed there was so much news over the last eight months a year that really destroyed chinese companies especially stocks traded on american exchanges but the news is one thing crazy news uh full of panic full of this but if you read what the chinese government has .

Been saying and now came they said okay these news people are really stupid we have to put everything like we are talking to kids in elementary school now they said this this this in the plant and then of course there were crackdowns but those was really really shady places and environments and now they said okay this .

This is what we will do but if you listened not to the news but what to what they had been saying you would have known that it is stable it is a stable system and it's projected for economic growth stability and the improvement of quality of life not panic mambo jumbo and now what can we do as .

Investors what do we have to focus on my message is we have to focus on investing in businesses there will be recessions in the future i can guarantee you that with 100 the environments will change and everything will happen and a lot that we don't know will happen that's a given so focusing on this short-term news doesn't .

Really matter if you focus on investing in businesses that is what is important let me show you an example if we check apple's stock price so let's go here 2012 then we had issues in greece europe and etc then it went up then we had issues in china and the world economy going down trade wars in china whatever but if .

You look at the stock price it is up eight-fold over the last 10 years despite constant issues and let's say that the price earnings ratio would be still at 10 then the stock price would still be up threefold so free eight-fold if it's really good and now if you invest in .

Businesses then the key is that you understand that nobody knows whether your long-term returns will be 10 or 15 or 20 or 4 but if your worst case scenario is 4 over a decade and then the next decade you do 12 you are still well off and that's the secret to investing nobody can predict .

Recessions nobody can predict markets but what you can focus is businesses of course you can check my apple stock analysis and all the sap stocks in the link in the description below and the key for us is to invest in businesses that will grow and that will be stronger no matter what happens with the economy with the monetary policy with inflation .

And what we have to focus on here is okay what is the risk there if you buy something with a price earnings ratio 30 and then we have higher interest rates it's much riskier because yes then it can get slashed by 50 if the market suddenly expects higher returns and then you have a problem but .

If you buy something at the p ratio of 15 then the risk reward is already much better because even if the market expects higher returns still getting down and down will give you higher dividends etc in that line i will discuss free stocks that are better than inflation bias now and that is starbucks 3m and verizon and i'll make a special .

Video for the stocks tomorrow but really point out the business perspective versus the noise market commentary perspectives subscribe for that video click that notification bell and i'll see you tomorrow for the stock analysis let's continue and now i want to finish with the outlook on the economy on how we are living and what will our lives .

Be like 10 20 years down the road i am extremely positive on that side because what's the alternative to not being positive first when it comes to stock market you always have to invest the money you don't need in stocks that's something that is the key rule then and that is the key rule that makes everything .

Easier first you have your house your home then you have your skills your job your education then you have a safety net so that whatever happens you're ready and then for the cherry on the cake then you have the stock market and stock market investment if you don't have it in this structure then you are on shaky grounds and then you worry .

About interest rates economy news etc and given the clicks the news gets a lot of you i assume are on shaky grounds and if things go south with the economy okay then we might lose some of that cherry on the cake but still that is life we'll have bad decades we'll have good decades we'll have 20 years of scrambling by but if you invest if you .

Build wealth and if you understand that wealth is built through ownership and businesses then you will do well over time and that's also what we focus here on this channel to do good no matter what check also another investment idea that i shared on my research platform and also check what i do on my research platform in this video about intel thank .

You and i'll see you tomorrow with free new stocks

RELATED ARTICLES

Most Popular