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Inflation and How We Got Here

Updated: Aug 16, 2022

Speaker 1 (00:00):

Welcome to the Redfish Healthy, Wealthy and Wise podcast. Our focus is to deliver information that helps you become healthy, wealthy, and wise. This podcast is sponsored by Redfish Capital Management, the views and opinions expressed here and do not necessarily represent the views and opinions of SCF securities, Inc, or any SCF related entity. This material is for general information only and is not intended to provide specific advice or recommendations for any individual securities offer through SCF securities, Inc. Member FINRA, S I P C investment advisory services offered through SCF investment advisories Inc office at 1 55 east Shaw in Fresno, California, SCF securities, Inc, and Redfish Capital management are independently owned and operated. SCF is not associated with other podcasts. And the messages contained within Brad Murrill and Redfish Capital does not offer legal or tax advice. This material is not intended to replace the advice of a qualified tax advisor or attorney please consult legal or tax professionals for specific information regarding your individual situation now for your host, Brad Murrill.

Speaker 2 (01:25):

Okay, good afternoon everybody. Hey, welcome back to another episode of the Redfish Healthy, Wealthy and Wise podcast. This is Brad and I have been in just a tad bit busy as you can imagine. So I haven't put up a podcast here and I think it's been 30 days at least. So I needed to put something up here and, and I wanted to talk to you about what's going on. Out there. Of course, everybody knows that this market has been getting pretty, fairly crushed. As, as I'm talking right now, the S and P 500 S down approximately 24, 20 5% from the highs. So as of, as of right now at that 24, let's call it 24%. That would make it one of the worst starts to the year since I believe 1970. So it's a pretty good little figure that we're, that we're able to quote here as far as the correction or now bear market is concerned.

Speaker 2 (02:25):

So I wanted to just come at you today and tell you a little bit about what's going on, why all this is happening. We can boil it down to one thing and that's interest rates and infl let's just call it not interest rates. Let's say inflation, we can boil this down to inflation. So what's happening out there is we are seeing increased inflation come about the CPI, which is the consumer price index, which is what many of us use to see as far as the gauge is concerned, how much inflation is out there? Well, the CPI Rosen made 8.6. That is the largest increase that we've seen in the CPI since 1981. So how did we get here? Cause it's come on fast. It's come on real fast. I think. Well, let me find my, my figures here. The okay. Let's take the, the five year treasury bond.

Speaker 2 (03:20):

So the real short treasury that yield right now is about 3.2%. And, and just not too long ago in 2020, the yield was 0.2, three. So you were getting 0.2, three with a five year treasury today. You're gonna get 3.2% is only about 178% higher. So it has been really, really fast. What's going on with interest rates. So how did we get here? It's a, it's a Marritt of different events. One of the really good blogs out there in my opinion is called the big picture. And it is written by a gentleman by the name of Barry Ritholtz. And I've always been a, a fan of Barry. Barry's you've heard me talk about it on this podcast and many of you in person before, I just, I like the way that he thinks and the way he goes about things.

Speaker 2 (04:16):

And he put out a great blog on yesterday and he listed 15 different items, which he thinks all kind of combined, if you will, to give us this interest rate scenario or inflation scenario that we're in. And one of the things that he points out is that in, in this blog, and I'm gonna get into some of the reasons for it. But one of the things that he points out is normally people love to have simple binary answers to complex questions. In other words, here's the simple reason why this is going on. And that's typically never, it's never, I don't wanna say never correct, but it's really hard to put something as large as the us economy and how it's moving into something. That's that oversimplified, if you will typically, where you're gonna see a lot of this oversimplification is in the political world, cuz people want to, if you're on, depending on what side of the aisle you're on, you want to cast blame on someone.

Speaker 2 (05:19):

And so that's what they're gonna be doing. And as you've heard me say before, if it's coming from a politician, I think you can just throw it out the window. It's not gonna make much sense because they're gonna tell you just in slogan terms something to get you to vote for them. But if you looked at it as a whole, there's several different things that were going on that are to cause of this inflation. And so what I want to talk about is kind of just a few of them. And I obviously this is, this is nothing extraordinary that I'm getting ready to say here, but the primary cause for all of this is COVID so doubt it, it is gonna break out into smaller sub sub subtexts, if you will. But the primary reason for all of this is COVID.

Speaker 2 (06:06):

So we, we get the COVID coming out and, and, and what happens is then we shut down the economy. And then as a result of that shutdown, we have people at home, we have people losing jobs, and then we have rates plummeting because we don't have, the economy is going to, it's not grinding to a halt, but it's coming pretty dang close to wanting to grind to a halt, to a halt. And so as a result, rates are plummeting, they're coming down, they're coming. And they were already pretty low coming out of the great financial crisis. So we were at these historical lows. It started to creep up a little bit, then we get COVID. And so what were some of the reactions to COVID number one, we had people staying at home and when people are staying at home and you have the work from home scenario going on, they're not going out into the economy and spending money on services.

Speaker 2 (07:04):

Like typically we do in this economy. So the us economy just in general consumer spending makes up about 70% of all of the economic economic activity in this country, 70%. And so when you take away a lot of the consumer spending and we didn't take it away, it kind of divided it. So what we saw is all the consumers spending was on stuff, not services. So the different services are gonna be travel restaurants, entertainment, vacations, different things of that nature. And it was all about stuff. It was pelotons computers, furniture, cars, boom, boom, boom, boom, boom. And that created a supply imbalance. If you will, towards a lot of the goods out there that are used to measure inflation, go back to COVID. What did COVID also do? It also disrupted the supply chains. So now you no longer have the ability to create the goods, transport the goods, get them to the store, even though the stores are shut down, the internet was still working and get them into people's homes.

Speaker 2 (08:25):

So we have this backup in the supply chain, which by the way, we still have. And so that is again, putting more and more pressure on the demand side of the equation as the supply is dwindling, which is of course jacking up prices on a lot of the different goods that we have. Then you have Washington DC. So what Washington DC did as a result of everything that was going on is they started throwing money into the economy. So I, I we're gonna break it out here. So in the, the, there were the cares act. So there's cares, act one cares, act two. And the American rescue plan, which is really as, as Barry calls, it cares act three. So I I'm gonna do it just because that's what he was doing as well. So we have three cares act. The first cares act was put in by president Trump in March of 2020 $2.2 trillion injected into the economy.

Speaker 2 (09:30):

Then in December of 2020, another $900 billion injected into the economy. Then in 2021, we had oh my gosh, I forgot to write down how much was in that one. 1.9, I believe it was 1.9. I'm going on memory here, trillion dollars that was injected into the economy. So 2.2, two nine, I'm sorry, 2.2 trillion 900 billion, 1.9 trillion that by the way, was seven times the amount that president Obama put into the economy as a result of the great financial crisis seven times. And do you remember all the kicking and screaming that the Republicans were doing at that time for the amount that we were putting into the economy, this was seven times more. Now, granted, it's a little, it's a different situation. And so I'm not getting into the right or the wrong. I'm just looking at the data. That's a lot of money that's going into the economy.

Speaker 2 (10:33):

So you have all of that going on. You have the consumers who are buying as a result. That's what us consumers do. And, and you've heard me say this in other podcasts, when Americans get money in their pockets, they spend it. That's what we do. You can count on that. Like you can count on taxes, it's gonna happen. So we're getting money and they're spending money at the same time it comes in and it goes out, but where it was going was towards, I had mentioned the goods much more than it was the services, because the services just weren't available. We didn't have them. There was a demand wipe out. So you've got all of this money being spent. You've got the the supply chain that's being shut down. And then little later on what you get is the Russian invasion of Ukraine. So now you look at crude oil prices.

Speaker 2 (11:26):

Let's just talk gasoline to gasoline. Now on average, I think is about $4 and 85 cents a gallon. That's the national average. And then so crude goes from $67 a barrel to, I think, a high did we? I'm not sure if we hit one 30 or not, but I know it got 1 29, pardon me? So if we get to 1 29 coming off of 67, that is a massive, so now we have gasoline prices at $4 and 86 cents. And so here's where I start laughing at the politicians is everyone's trying to point the blame and say, well, this is, and you've seen these little stickers or this is Biden's fault. And they put it on the gastric and then the Biden administration's going, this is, this is the fault of of the Crumlin. This is Russia. This is Putin's gas hike, and everyone points fingers.

Speaker 2 (12:22):

Cause that's what politicians do. You know, here at red, you know, at red fish, we're just looking at the data. I don't care the point, the, the finger or blame anyone. I just wanna see the data. So the data says, we've got all of this inflation. What tends to happen when you get this type of inflation is the federal reserve gets together and they start to raise the interest rates. So now we're seeing the interest rates going up rather dramatically. We just got finished with a rate hike of 75 basis points. They've signaled that the next time they get together is gonna be another 75 basis points. They're trying to raise rates up to keep people from spending to prevent people from borrowing. So if they're not borrowing money, they're not spending money. Then the supply should in theory, increase, the demand gets crushed because of the fed.

Speaker 2 (13:19):

And then the inflation rate tends to come back down. So that's kind of the goal of what the Fed's trying to do. So they're trying to, to thread this needle, if you will. And the needle that they're trying to thread is that they do not want to go into a recession. So an economic recession just by definition is two consecutive quarters of declining GDP. So they're trying to prevent us from going into this recession and what that's called. And you've heard this being banty about is a soft landing. So they're trying to create a soft landing where they can raise the rates, reduce the spending, reduce the rates, but not so much as to drive us into a recession. So I'm on the, the TV and the news the other day at at they were at the white house and Biden was saying, you know, it's not necessarily that we're gonna go into a recession because remember any time that we're coming out of a recession, whoever is the political party in charge, we'll lose votes.

Speaker 2 (14:22):

In fact, you remember, if you remember one of my past podcasts before the last presidential election, I said, I don't know the results, but no sitting president has ever survived a recession in their last term and been re reelected. None it's never happened. So there's really good odds that the, the party in charge right now, they know the, these stats. And so they're trying to put it out there. Hey, it's not necessarily, we're going to recession, don't say the yard word, but the data suggests the probability is that we will, the probability is that we're gonna see lower earnings from various companies in the markets that are going to slow. So that means you continue to see a sell off in the market. You continue to go into this recession. Now we're already down about 25%. We are already into this bear market. We're already seeing rates high.

Speaker 2 (15:15):

So I'm not gonna talk to you today about the stock market, what you should be doing. Many of our clients here at Redfish, you know, we have a pretty large cash position right now, larger than normal. For many of you, we've been buying a lot of different bonds. We were able to pick up some very short term treasury bonds getting a yield of 3% or better. Which is I think fantastic how much risk is there in ING, a treasury bond, according to the good faith and credit of the United States. There it's, it's one of the lowest risk investments that you can make. And so by buying these, we know what we're gonna get, as opposed to then going into something, just to get a dividend that still might go up or down the point being is that rates have been rising rather dramatically.

Speaker 2 (16:06):

It all has come as a result of COVID. And then you gotta throw the Russian invasion of Ukraine. On top of that. One other thing that we'll put in there is that let's look at the home shortages out there. We've seen home prices, soaring. That's now starting to reach an apex to where people with interest rates going up and mortgages rates going up, they're unable to go out and get a mortgage to then take some of the they're taking some of the demand out of the game. So it looks like that may be peaking a little bit. It we're seeing that semiconductor, that's a supply chain issue. There is an act in Congress right now, and you'll have to forgive me cuz I forget the name of it, where they're trying to make it a lot easier for American companies to build and manufacture semiconductors here.

Speaker 2 (17:00):

And if they don't get that passed, it's gonna be a, I don't wanna say a death now death song for the semiconductor manufacturers here in the United States, but it, it certainly won't be very good. And so they're trying to get that passed, but because of the supply situation regarding semiconductors, again, because of COVID much of this is in Asia, much of Asia's been shut down as a result of COVID because over there they're treating it a little bit different than we are here. They're just completely shutting down the economy. There are no semiconductors and you've had this demand increase from everything like automobiles that are pretty much now they're electric, not electric vehicles, but there's so much electric components that are used in automobiles and trucks, that there is this massive shortage for semiconductors. And so we just can't manufacture them enough. We can't get them here quick enough to produce the goods.

Speaker 2 (17:55):

At some point it will turn over by turnover. We'll start to see this slow down. That's what the market's trying to price in right now is a slow down. And how much will it be? Like I mentioned, we're off to a really, really rough start. One of the worst starts to the stock market or the S and P 500 since 1970. But this is probably this not is probably it is because of what we're looking at with interest rates and what they're doing. So what we need to keep an eye on is a very close eye on is just the economy as a whole. Are we going to go into a recession? I don't know. The odds tend to favor the data tends to say that we will. I'm not gonna tell you yes we are as a result, but they tends to lean in that direction.

Speaker 2 (18:45):

I tend to lean on the data. The data tends to say every time that we've been in a, a period like this of rising rates, it has followed up with a recession. Remember recessions aren't called until after we've had them. So we could be in one right now. We could be in it. And then after they call it a recession, we could be on our way out, keep that in mind. But I wanted to come on and give you an update. I it's, it's been a while. I wanted to do it quick. I've managed to stay under 20 minutes. Which for me is pretty dog on. Good. As you know, I can get a little bit long winded, tell you what I'm seeing out there and just want to remind everybody that we play the long game here at red fish capital we always have right now, we've got a little bit more cash than usual.

Speaker 2 (19:34):

Great. I'm glad to have it. When it gets really dicey is when we really want to not as much take action as sometimes in action is the best action that we can take. And so that in action, we're already in cash, so I'm not piling back in the market. Okay. We're down. Let's go pile in. That's probably not the best idea. I wanna wait and start to see if this starts to go up a little bit. If the market can start to go up a little bit. If we start to see some signs that the economy is recovering, then you're gonna start hearing from me more and more about saying let's put some of this money to work in, in some of these great companies that we believe has a good earnings forecast by that. I mean that we can pretty much guesstimate that the company's going to do pretty good based on the history of the company that they should continue to do well, even in bad times as they are in good, don't get caught trying to be too cute by saying, well, now I'm gonna move all to utilities.

Speaker 2 (20:32):

I'm gonna move all the staples. I'm gonna move all that game's been played, have a plan invested wisely, something you hear me say often. So that's what we do. And we have good times and we have bad times during the good times. We're low. We want to have as much as we can working for us during the bad times. It's a little bit less, but I never go all to cash. I never have, and I never will. We're gonna stay in the game. We're gonna continue to collect the dividends where we collect them. But I did want to give you a little heads up, tell you what I was thinking, tell you what I'm seeing out there. And as always to invite your phone calls, invite your emails. I know I'm getting a lot now, but I do like that. And, and I tell every one of you that when I talk, I would much rather talk to you and trade emails back and forth and talk about what's going on with you than I would to parse data economic data. Sometimes that's like going to the dentist. It's something that you have to do, but you not always enjoy it. So anyway, it's been great talking with you. I'm about to lose my voice already. It's been my 20 minutes. I wanted to give you a heads up. Again, thank you for all your business. Look forward to talking to you soon.

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