~ Persistent High Inflation (PHI) ~
Babe Ruth was dynamic to baseball in that, with unparalleled frequency he would change the score with a swing, and in any ballpark. His presence meaningfully changed the game. Hakeem Olajuwon, a former soccer player, and the greatest shot-blocker in NBA history, changed the game with his presence in the paint. This week the U.S. Bureau of Labor Statistics released CPI index data showing a .5% increase in prices for December, and a 6.4% increase over 12 months, as opposed to the widely expected .4% and 6.2% respective readings.¹ Persistent high inflation (PHI) changes the landscape and forecast for both the U.S. economy and financial markets, and due to the following implications, must be on your financial radar:
Rising prices diminish the purchasing power of cash savings. While fiscal responsibility requires emergency savings, inflation nibbles on the kitty, and PHI consumes it! Avoid excess cash savings, and maximize earned interest (without assuming solvency risk). Use excess savings to pay down high interest debt, and to thoughtfully pre-purchase future necessities at today’s lower prices.
PHI disrupts normal business valuation metrics due to its effect on cash flows, and redirects investment. Inflation places a premium on present, and discounts future streams of income. Don’t get caught chasing growth in a high inflation environment! Fight PHI with interest, dividends, and rents.
Due to the redirection of capital and the general inefficiencies of the market system, PHI causes increased market volatility. Vigilance is required! Never chase prices higher; rather, hunt like an alligator with limit orders. Focus on bullish industries and sectors. Favor dividends. Dollar cost average constantly. Have an exit plan on all non-forever holdings from the date of purchase, and follow it judiciously.
PHI exposes central bank fallacies and induces major policy errors. When fighting PHI, ‘the Fed’ has never failed to raise rates sufficiently high to cause economic recession. Don’t expect this to be the lone exception! The financial markets are forward looking, but recessions are identified in hindsight, so don’t get too bearish, either. Portfolio cash should exist to capitalize on ‘Fed’ blunders, but don’t forget PHI is consuming it while opportunity delays.
PHI is a life-threatening foe to those in every class of wealth. The second essential principle (to establishing streams of income) in fighting PHI is strict budgeting. Every dollar not spent frivolously can be used towards the higher price of necessities. Shopping is fun, but financial peace is far superior. Choose financial peace, and get busy cutting unnecessary expenses. Be creative, and exchange ideas with others.
Think about it. Shaun
“Unequal weights and unequal measures are both alike an abomination to the Lord.” ~Proverbs 20:10
“Inflation is the most universal tax of all.” ~Thomas Sowell
1 CNBC, “Inflation is higher than expected at 6.4%, with the ‘most important’ measure remaining elevated”, February 14, 2023 https://www.cnbc.com/2023/02/14/inflation-higher-than-expected-in-january.html
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. Investors should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not insure a profit and does not protect against loss in declining markets.
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