Is inflation really happening? Depending on the source you turn to, some will say yes. Take a look at gasoline prices and the rising cost of lumber. Even the gold price today is resuming its steady climb. Although Powell continues to assert that inflation is not yet a problem, it does not seem that major companies are keeping calm. From Wells Fargo to BlackRock, it appears that companies are looking out for their own interests at this time. So, what does this all mean for the average investor? Can assets like gold and crypto help you?
ValueWalk's Raul Panganiban interviews Amit Anand, Co-Founder of INDF, and discusses his approach to investing and why India Financials are very attractive today. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with INDF's Amit Anand
On Wednesday, the US Labor Department reported that its PPI rose 1% in June, a stronger than expected rise. Meanwhile, economists predicted only a 0.6% increase. Producer prices rose 7.3% over the year, the biggest recorded advance in nearly eleven years.
Core producer prices also increased 1% in June, increasing from 0.7% in May. But, economists previously forecast a mere 0.5% rise in wholesale inflation. Producer prices are important to look at because companies usually pass off rising costs to consumers.
Today, Powell continues to downplay the growth of inflation, telling Congress that the central bank will continue its rather dovish monetary stance. In his opening remarks, he indicated that inflation may continue to naturally rise through the summer. However, Powell mandated that this is a temporary threat that will moderate later.
“Inflation has increased notably and will likely remain elevated in coming months before moderating. Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation. In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind.”
The central bank discussed tightening interest rates and pulling back on its monthly bond purchase program. But, Powell mandates that the Fed will not shift policies yet. Meanwhile, gold rises, and Social Security cost-of-living is getting a bump of 6.1%, the biggest jump since the 1980s. So why is Powell not taking a more hawkish stance to fight against inflation? It’s possibly because the Fed is seeing a different picture.
Social Security, Household Incomes, and Unemployment VS Inflation
Household incomes have expanded twice as fast as consumer prices since the February 2020 cycle peak. Although prices are rising, it is not yet pricing consumers out. Inflation competes with household incomes, and if it outpaces rising incomes, then the Fed may finally register that inflation is out of control.
This is especially true if those on unemployment return to the workplace and accept lower incomes.
The widespread impact of a lower household income could potentially tip the scales even further, especially because it appears these high prices are here to stay.
Wells Fargo Shuts Down Personal Lines of Credit
Wells Fargo announced last week that they are shutting down all personal lines of credit. This comes as a shock to the financial industry. This shutdown will damage all credit lines, whether you have a spending limit of $3,000 or $100,000.
This is not the first scandal Wells Fargo has to deal with, however. In 2016, bank employees fabricated millions of unnecessary accounts to hit sales goals. This was such an aggressive move that the Federal Reserve unusually stepped in to constrain the bank’s balance sheet in 2018.
The bank’s latest move has both Senator Warren’s and individual customers’ outrage.
Wells Fargo is yet to respond to Warren’s comments or disclose why customer credit scores will be penalized as a result of their actions. They only mentioned that they are working with their customers for the next 60 days to assist with their closing lines of credit. The bank stated:
“In an effort to simplify our product offerings, we’ve made the decision to no longer offer personal lines of credit as we feel we can better meet the borrowing needs of our customers through credit card and personal loan products.”
By eliminating personal lines of credit, Wells Fargo is affecting any and all customers who do business with them. This is also a strange move considering that the entire banking industry is looking to improve loan growth. Additionally, this sudden rug pulled out from under customers’ feet is costing Wells Fargo business as unaffected customers voice that they no longer trust the company.
This move calls into question if there’s smoke, is there a fire? Why does it seem like companies are setting up major defenses unless they see something the Fed doesn’t?
BlackRock Buys Up Real Estate
BlackRock, the biggest asset management company (AMC) in the world, reported a better-than-anticipated profit for the quarter this week. The company saw more investors buy in recently, and now its assets are now at a record $9.42 trillion. Last year, it was $7.32 trillion.
BlackRock has been buying up real estate in cash well over the asking price, outbidding individual buyers. The question is, why are they diversifying aggressively? Are they are trying to hedge against inflation that the Fed claims is not happening?
The price of an American home has skyrocketed 28% over the past two years. Pandemic demand and demographic changes also boost prices today. Additionally, you might need to worry about Wall Street pension funds now.
Analysts today suggest that new demand from Wall Street is not yet a major problem for average consumers. The amount of homes that mega-investors are buying is not enough to significantly impact the US market, mostly. That being said, these firms have a major structural advantage, which will continue to grow.
Normally, people take out a mortgage to help pay for their homes. This mortgage comes along with an interest rate between 2-4%. However, pension funds can buy homes and enjoy lower interest rates of around 1.5%. So, they can easily outbid the average consumer by tacking on thousands of dollars to the asking price. They then buy the house at the same cost that an average homeowner would, but with extra cash upfront and lower interest rates in the long term.
Offering in cash gives AMCs the most competitive advantage against average would-be homeowners. In turn, these pension funds can then rent out these homes and pay back their loans in about eight years, thanks to the low-interest rates.
US Debt and GDP
With the pandemic, the Fed has become notorious for increasing its balance sheet and increasing the money supply. Prices are now beginning to respond to the money supply, and many are looking for places to secure the buying power of their dollar.
Building up portfolios with more liquid assets could be a red flag that major companies are trying to hedge now. Although the Fed continues to mandate that inflation is not yet a concern, it seems that major companies are looking to majorly diversify and protect their holdings.
Source: Visual Capitalist
So if you cannot turn to real estate without being outbid by an AMC, where else is there to go?
First of all, stocks tend to react negatively to inflation. This is because it increases costs for borrowing, materials, labor, and damages standards of living. Additionally, real estate can be costly if you are the only one trying to buy. Now that AMCs are buying up homes, paired with the housing shortage, the competition is fierce.
Why Turn to Gold and Crypto?
One place that the individual investor might now turn to is gold and crypto. Holding both silver or gold and crypto offers investors a very easy way to help hedge their portfolios. You can even manage these assets yourself, without any middleman. You can store gold at home and buy crypto on your own computer.
But how do gold and crypto really help? Some people believe that just saving money is the best idea to hedge against inflation. But, if the dollar’s buying power falls, you may have just lost money by betting on cash alone. Low-interest rates also mean that savings accounts are seeing little-to-no growth at all right now.
On the other hand, investing helps you buy into various sectors and see a potential return on your investment. Because the stock market is negatively impacted by inflation, a safer place to invest are these alternative vehicles.
Gold and crypto tend to strengthen against rising inflation. Both assets are their own stores of value, so a depreciating dollar does not usually affect them. Having both gold and crypto gives individuals the opportunity to secure their financial security. Plus, gold and crypto can be sold at any time. If you time it correctly, you may enjoy a profit from your investment. That’s one reason why both gold and crypto have enjoyed a strong climb throughout the pandemic. This is why both industries are in a great position to continue performing well.
In addition to the Wall Street Silver movement, inflation is poised to continue supporting precious metals and cryptocurrencies as investors seek out safe places to invest. Now might be the time to diversify more than ever as major companies are on the defense against something.