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  • May 25, 2021

Is Inflation Imminent or Not?

Disclaimer - Read More

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

The opinions voiced in these presentations are for general information only and are not intended to provide specific advice or recommendations for any individual(s). The information provided herein is obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Statements and opinions are subject to change without notice. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Accordingly, you should not rely solely on the information contained in these materials in making any investment decision as the material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned in this presentation. Before acting on information discussed in this presentation, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment advisor. Prospectuses, investment objectives, risks, charges and expenses of any investment product should be reviewed carefully before investing. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Retirement Capital Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Tom Vaughan or Retirement Capital Strategies unless a client service agreement is in place. “Likes” are not intended to be endorsements of our firm, our advisors or our services. Please be aware that while we monitor comments and “likes” left on this page, we do not endorse or necessarily share the same opinions expressed by site users. While we appreciate your comments and feedback please be aware that any form of testimony from current or past clients about their experience with our firm is strictly forbidden under current securities laws. Please honor our request to limit your posts to industry-related educational information, comments and questions. Third-party rankings and recognitions are no guarantee of future investment success and do not ensure that a client or prospective client will experience a higher level of performance or results. These ratings should not be construed as an endorsement of the advisor by any client nor are they representative of any one client’s evaluation. Investment positions mentioned in these videos may be held in some of our existing portfolios. Tom Vaughan and Retirement Capital Strategies are unaffiliated and separate from those companies whose investment positions are mentioned and is not liable for their products or services.

By participating in any of these live streams, you agree that any questions submitted by you might be used by us in the future on this YouTube channel. We will not share your personal information.

If you have questions, please write to us at: asktom@talkmoneywithtom.com.

  • MoneyGuidePro®
  • Advent Software/Black Diamond Reporting
  • Riskalyze, Inc.
  • thinkpipes®
  • Right Capital
  • YCharts, Inc.

Transcript:

Tom Vaughan:

Hello, everybody, welcome to Tuesday, the S&P 500 was down .2%. Today, I really want to talk about I think the thing that we all should be focusing on the most right now, which is inflation. Is it going to happen, or is it not going to happen? Because it makes a really big difference on how you shouldn’t be investing in this market. And so let’s look at the pieces of inflation. So you’ve got kind of material costs and labor, the two big ones. And so if I forward, looking at kind of their process, they’re bringing in steel, and rubber and semiconductor chips and all these things. And so if the price of those continues to go up, either Ford’s going to keep the price of their cars at the same level, and make less money, which, of course, the shareholders won’t be excited about, or they’re going to pass that along to consumers, as a higher price, and that’s really what causes inflation.

So, when we look at the material side, you got to look at it from the standpoint is this a temporary situation, where materials are going up in price, or a permanent situation where materials are going up in price. And when you kind of go through one after another after another, you can kind of see that a lot of this is temporary. So, lumber which has been going up dramatically and increasing the price of homes? Well, we got lots of lumber in Canada, for example. But we have these big tariffs and this big tariff war that we had with Canada, if they can solve some of that we could get a lot of lumber and lumber has been coming back down. Semiconductors, right huge issue. And semiconductors are fascinating, because it’s not that easy to make a lot more. So that could be a quasi permanent problem. Because it takes a couple years to build a new plant. Well, one of the things that is happening is we’re getting more out of the existing plants as far as that goes. And then one of the chip plants in Japan burned down. And this was one of the ones that was providing a lot of chips to Ford, for example. But they’re expected to come back up on in July. So now it’s going to take two years to build a new plant like Intel wants to do for that section. And so, you know, the market does look forward.

Now, you’ll see lots of rockiness in the short term, but nothing that is going to significantly bring the market down for a long period of time for a short term problem. And so most of what we’re seeing in the material side is short term issues. And again, it has a lot to do with the fact that when you raise the price so much, all of a sudden, people figure out a way to get more lumber, because at those prices, they’re willing to go the extra mile to get that done. So that part seems to be transitionary. Now, it could be quite dramatic, though for quite a while here, because the economy is opening so quickly. And really just these companies aren’t ready for the amount of demand that’s coming through. So you’re looking at, you know, 3, 6, 9, 12 months, whatever that comes out to, until that comes through. But even that’s still fairly, short term, when the markets looking, six to 18 months, 24 months ahead. So the other part is labor, and much more interesting piece, because, last month, we had a million jobs that were expected to be announced. New jobs came out at 266,000. Wow, it was a really big deal. And dug into the numbers realized it wasn’t because there weren’t jobs. There was apparently about 8 million open jobs, but nobody was taking the jobs. And so people were worried about the virus or had a kid at home, or they’re getting an extra $300 a week and didn’t feel like it was worth it. Again, all of those three situations I just mentioned are temporary. And so those will mitigate themselves here pretty quickly. But we are seeing already an increase in wages. So for example, in April, wages went up .7%, which you keep doing that month, after month after month, you’re not going to be able to bring that back down, in my opinion very easily. So a lot of these situations will create some permanent inflation out of out of wages, although still fairly manageable.

All in certain types of industries, mainly in a lower pay industries, what we call consumer discretionary, for example, that could get hit the hardest with that. So we’ll see how that plays out. But, but there are, there are some other things that are happening on the other side with labor that show us that maybe long term labor might not be that big of a problem in terms of increased cost. Number one is we’re almost back to the same gross domestic product that we had prior to the pandemic starting, but we still have 8 million less people in the workforce. So that means we’re doing the same amount of business with 8 million less people. So a lot more productivity. Now obviously, once we start to continue to see the economy grow, we might get those people back into the workforce. But really it means more profitability for companies in the theory that long term, it’ll be less pressure on unemployment cost if they can bring up productivity. And we saw another report that came from Bank of America, and it looked back to 1986.

So okay, here’s the S&P 500 companies for every million dollars in sales, they had 8 people right in 1986. Now it’s 2.3 people to do a million dollars of sales. So 70% less labor required to generate a million dollars worth of sales, in that timeframe. And so, there’s all kinds of different pieces there. But really what’s happened is we’re seeing efficiencies. And one of the thing that’s happened, I think, during this pandemic, is that we’ve pushed companies, two, three years into the future in terms of the digital pathway. And that creates higher productivity. You throw on top of all of this kind of the global situation. So, where products are going to be coming from all of these different areas. And we still have slowness that’s happening. So although the US is hot, we’re not seeing that hotness, for example, in Europe and these different areas. And that will have some it mitigating factor on the overall inflationary situation, too. So, bottom line, what you want to look at here is, what does this mean for investing? Well, if you go into the broad market with everything you have, the broad market is mostly the growth side of the market, it dominates the broad market because most of its set up on a market capitalization basis. So the broad market could underperform.

If inflation does go for a period of time here. If you go into just the growth side of the market, well, that can underperform even more, if we start to see inflationary pressure. So the value side is the safest side if we see inflationary pressure. Now, the the issue that I see, though, is that I don’t think this is going to last forever, I’d say three to 12 months, we’ll see this kind of inflationary spike, that should be a better situation for value as a whole. And so but that’s the key, this is what you’ve got to watch. So like today, for example, growth did well, in fact, for the last week or so, growth has done well, because we’ve seen, the interest rates coming down inflationary pressure, the Federal Reserve has been running all around the place all kinds of interviews I’ve been watching, where they’re basically trying to talk the market down from a deflationary standpoint, they’re trying to manage inflationary expectation, which I think is a smart thing to do. Because they really don’t want to raise rates, they want to get back to full, full employment, and they don’t want that pressure. So really, this is the battle, this is what we’re going to be watching here to see. And really, you can watch the yield on the 10 year Treasury kind of tell you what you need to know, where is it? It’s up a lot. So far this year, I mean, a tremendous amount about 70% increase on the yield on the 10 year Treasury so far this year, expectations that, we’re going to have some inflationary situation here. Does that continue up or not? And what type of impact does that have on the markets?

I think, ultimately, we’re gonna get through this full cycle, we’ve got this whole pandemic, it forced us all into this kind of growth side of the picture with technology and genomics, and clean energy and those types of things. And now we’re kind of coming back around, and we’re getting the reopening. And then once that settles back down, I really, you know, maybe the end of the year or what have you, I expect that things will be back to kind of more of a normal investing environment, we do want to have a lot of broad market, and maybe just some targeted pieces for areas that you think might do well, for whatever reason, so. But this is an environment where again, just watching inflation, and watching what’s happening with inflation, is going to help you to understand, kind of what to do. So that’s, obviously, that’s what we’re working on all the time. So, anyway, great timeframe to be kind of learning about what’s happening with the market, really good environment to see what’s happening in total. And I look forward to talking to you tomorrow. Thank you very much.

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Disclaimer - Read More

Tom Vaughan is a Certified Portfolio Manager and CEO of Retirement Capital Strategies. Retirement Capital Strategies is a registered investment advisor located in San Jose, California.

The opinions voiced in these presentations are for general information only and are not intended to provide specific advice or recommendations for any individual(s). The information provided herein is obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Statements and opinions are subject to change without notice. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. Accordingly, you should not rely solely on the information contained in these materials in making any investment decision as the material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned in this presentation. Before acting on information discussed in this presentation, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment advisor. Prospectuses, investment objectives, risks, charges and expenses of any investment product should be reviewed carefully before investing. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Retirement Capital Strategies and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Tom Vaughan or Retirement Capital Strategies unless a client service agreement is in place. “Likes” are not intended to be endorsements of our firm, our advisors or our services. Please be aware that while we monitor comments and “likes” left on this page, we do not endorse or necessarily share the same opinions expressed by site users. While we appreciate your comments and feedback please be aware that any form of testimony from current or past clients about their experience with our firm is strictly forbidden under current securities laws. Please honor our request to limit your posts to industry-related educational information, comments and questions. Third-party rankings and recognitions are no guarantee of future investment success and do not ensure that a client or prospective client will experience a higher level of performance or results. These ratings should not be construed as an endorsement of the advisor by any client nor are they representative of any one client’s evaluation. Investment positions mentioned in these videos may be held in some of our existing portfolios. Tom Vaughan and Retirement Capital Strategies are unaffiliated and separate from those companies whose investment positions are mentioned and is not liable for their products or services.

By participating in any of these live streams, you agree that any questions submitted by you might be used by us in the future on this YouTube channel. We will not share your personal information.

If you have questions, please write to us at: asktom@talkmoneywithtom.com.

  • MoneyGuidePro®
  • Advent Software/Black Diamond Reporting
  • Riskalyze, Inc.
  • thinkpipes®
  • Right Capital
  • YCharts, Inc.

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