How is inflation secretly stealing your money? | Making Sense with Ed Butowsky

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Welcome to Making Sense. Every week we take the top three headlines or at least headlines we think you might have missed, explain them and then talk about what you should do with your investment portfolio as a result, so let’s go. 

The omicron variant has peaked and COVID is starting to become less deadly. More and more businesses that have been hurt and shut down because of the virus are starting to do well. Remember stocks move six to nine months ahead of economic data. Buying into travel related companies is a great idea right now. Look at Carnival Cruise lines and American Airlines as examples. I realize there’s going to be some ups and downs but I believe there’s going to be smooth sailing in the future. A cautionary note, is fuel prices are rising and this is a major expense for both of these industry groups, so you have to make sure that the companies that you’re investing in, if you do invest in Carnival or American Airlines or Delta or Royal Caribbean, that they’ve actually hedged their energy prices so that doesn’t become a major negative to their earnings. But I do believe six to nine months from now that these are going to be really big winners in the stock market.

So there’s been a lot of talk about inflation and you’ve all seen the headlines, but I want to really focus on one part of that. The rise of inflation reached 7% in 2021. This means that the average salary of somebody making $50,000, you have to make $3,500 more this next year just to stay even. Another way to look at it is if you made 10 percent on your investment portfolio after subtracting taxes and inflation, you broke even. That means 10% eviscerated to 0. You should stay away from interest rate sensitive long-dated bonds, meaning that if a bond matures more than five years and they’re interest rate sensitive you should stay away from it. As an example, an interest rate sensitive bond that is paying 4% and rises and interest rates rise a hundred basis points that one percent rise would drop the value of your bond 4.4% and if you went out ten years that drop would be 7.9%. This is a very dangerous situation for anybody who owns fixed income right now so if you have interest rate sensitive bonds meaning the these are AAA rated, AA rated, A and BBB rated bonds and any kind of treasuries or municipals and they go out longer than five years you should lock in your gains right now.

We are in a global economy and the rest of the world needs to do well for the United States to do well. India has seen the greatest negative impact in terms of deaths in any country in the entire world have they’ve had over 5 million people die. But what’s even more important is that the economy prior to the pandemic was doing very well, they had a new government in place and the economy was starting to flourish. Then when the pandemic hit, you saw a tremendous number of people go below the poverty line. In fact, according to the World Bank $1.90 a day is the threshold for extreme poverty and 47% of the people were in extreme poverty in the rural areas in India and that was up from 5% this was during April 2020. So you can see that this has caused a tremendous problem but remember also stocks move six to nine months ahead of earnings and economic data. So this is a great time to be looking at I-shares for India. This is a I-share that’s put out by Barclays and the symbol is INDA, and I would be a buyer of it. You can already see the stock price has moved up in anticipation of things recovering so I think this is a great place to put a little bit of money.

This has been Ed Butowsky with Making Sense. If you want a complimentary portfolio evaluation please visit  www.edbutowsky.com or www.chapwoodinvestments.com, We do a very good job analyzing existing holdings and telling you if what you have is what you need. 

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