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Jerome Powell Finally Talks Tough on Inflation
Happy Thursday and welcome to our new subscribers!
Some words of wisdom to start us off from noted quant Matthew McConaughey (via The Wolf of Wall Street):
“I don’t care if you are Warren Buffett or Jimmy Buffett, nobody knows if a stock is going to go up, down, sideways, or in circles.”
In short, don’t try to time the market.
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JPOW Talks Tough
Moments after I hit send on Monday’s newsletter, Fed chairman Jerome Powell struck a much tougher (and realistic) tone towards inflation than he had previously. “Inflation is much too high,” he declared, in a statement of the blindingly obvious.
He also signaled a new willingness to raise interest rates by 0.50% increments in both May and June. It’s about time.
This is probably music to Mickey Levy’s ears. Earlier this month, Levy (senior economist at Berenberg Capital Markets) took to the pages of the Wall Street Journal to put the Fed’s fecklessness on blast — and warn that MUCH higher interest rates will be needed to combat our raging inflation.
The biggest threat to sustained growth in coming years is high inflation. In every episode of rate increases in modern history, the Fed has raised rates above inflation. The Fed must not allow the trauma of Russia’s war to sidetrack normalizing monetary policy. Mr. Powell told Congress that the Fed won’t allow inflationary expectations to become unanchored as it did in the 1970s. It must now follow through on that promise. If the Fed moves too tentatively based on worries about the Russia crisis, persistently high underlying inflation and inflationary expectations will pose an even larger problem down the road.
The Fed must distinguish between what is beyond the scope of monetary policy and what it is capable of achieving. Unfortunately, it can’t implement a sound energy policy that would boost economic growth, ease inflation pressures and enforce national security. Nor can it alleviate the global disturbances that constrain supply and accentuate headline inflation. But it can normalize monetary policy and begin to rein in excess demand and underlying inflation. Doing so is imperative.
In a nutshell: Levy is saying, historically, that the Fed has raised interest rates above the level of inflation. Today, that would mean 8% interest rates or higher.
Obviously, not happening. But it does highlight the challenge facing the Fed — and casts the decision to wait so long to begin raising rates in an even more negative light.
A Lesson in Bravery from Sir John Templeton
In 1939, after Hitler’s blitzkrieg of Poland thrust Europe back into war, a young investor hoped to capitalize on all of the fear he saw around him. John Templeton (the Sir came years later) called his broker and instructed him to purchase $100 worth (or 100 shares, accounts differ on this) of every stock trading below $1 per share.
Including companies in bankruptcy.
While everyone else hastily unloaded their positions and investments, Templeton assembled a “WW2 Bargains ETF” of sorts filled with beaten down, out-of-favor stocks. And, in those days, lots of companies fit that description.
Templeton ran towards the fire, rather than away from it.
In all, he ended up with shares of 104 companies acquired at cut-rate prices. He actually borrowed $10,000 from a friend to finance this out-of-the-box investment strategy, making it all the riskier.
Templeton’s decision to buy this type of stock in the first place showed guts, but holding on through the many low points of World War II (the bombing of Pearl Harbor and the Bataan Death March, among others) took nerves of steel.
Finally, as the Allies gained the upper hand in 1944 and fear dissipated from the markets, Templeton cashed in his wartime bet. He earned a profit on 100 out of the 104 companies, quadrupling his money overall.
“When people are desperately trying to sell, help them and buy,” Templeton said later. “When people are enthusiastically trying to buy, help them and sell.”
So, as war between Russia and Ukraine roils markets worldwide, it’s important to remember how others handled similar situations in the past. And the very smartest are those who realize that bad times don’t last forever.
Intelligent investors don’t allow the ups and downs of current events to affect their moneymaking decisions. They don’t panic or succumb to negativity and pessimism.
Easier said than done, but it’s the truth.
Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.