The Reality of Inflation

by | Nov 16, 2021 | Archives

How can we profit from inflation?

We have been warning about the ravages inflation has on purchasing power at this site for over a year.

All the economic pieces for inflation appear to be in place and the Consumer Price Index rose 6.2 percent in October 2021 from a year earlier. That is the sharpest increase since 1990.

We need to answer this question (How can we profit from inflation?) because all the factors that cause inflation have been with us some time and are expanding now.

Last May 2021 in a message titled “Reality of Inflation”  we looked at how prices were rising for food, clothing and shelter.

However don’t go to far out in inflationary expectations as last week’s Economist  article “A handful of items are driving inflation in America” (1) explains  that inflation might tamp down in the months ahead.

The article says: Our new measure shows that this portends lower inflation—but not enough for the Fed to lower its guard.

Consumer-price inflation has risen to 5.4% in America, the highest in 30 years. On November 3rd the Federal Reserve said it would taper bond purchases, a step towards higher interest rates. Most economists say that this bout of inflation is a result of temporary disruptions caused by covid-19, and that it will pass. But some think it presages a longer-term trend.

A leading argument by inflation doves has been that just a few items have caused a large share of total price increases. In the quarter to August used cars, hotel rooms and airfares made up less than 5% of America’s consumer-price index, but together accounted for the majority of overall inflation.

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The Economist did an inflationary statistical analysis that gave less weighting to products (such as car rentals, petroleum and used cars) and call this an Uluru inflation study. They claim this is a better predictor  of inflation and projects about a 4.4% rate for the next year.

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One clue on how to profit from inflation from that message is don’t buy the things were inflation has accelerated the most.  Car rentals, petrol, car insurance used cars have skyrocketed for example.  This might be a good time to sell an extra car for a higher price as you cut back on car insurance and gas.

Eggs have skyrocketed too, but in an earlier study I did on inflation, eggs were the  least inflated product from 1945 to now… so maybe it was just time for a catch up for egg producers.  Good news I guess if you love omelettes!

That Economist message also looked at a way to spot profit in inflation by checking out the BIg Mac Index at the Economist.

The Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of dozens of academic studies. For those who take their fast food more seriously, we also calculate a gourmet version of the index.

This index shows another way to profit from inflation… invest in undervalued currencies.

Here is the latest Big Mac calculation.

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Earlier this week I sent Purposeful Investing (Pi) subscribers a list of Top Value stock Markets that are denominated in undervalued currencies according to the Big Mac Index.

The developed markets include: Singapore and Britain.

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These emerging markets include: Brazil, Czech Republic and South Korea

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One way to invest in these markets is with iShare country stock market ETFs.

The Singapore stock market ETF is the iShare Singapore msci ETF (symbol EWS).

The United Kingdom stock market ETF ishares msci United Kingdom (symbol EWU) .

The Brazil stock market ETF ishares msci Brazil (symbol EWZ)

The South Korea stock market ETF is the ishares msci South Korea (symbol EWY)

There is no Czech country ETF for American investors at this time.

Inflation is bound to continue, maybe high, maybe low. If you have not already been thinking “How Do I Protect Purchasing Power”, it’s time to do so now, but with caution.

Gary

Don’t Envy – the Stress

Investing has become more stressful.

Central bankers have made savings a real chore. You can invest only in the volatile stock market or property, which is not how things used to be.  These assets, have risen so high that they will tumble back into better value at some stage.

The process of keeping purchasing power up with inflation is filled with stress.  This is counter productive because stress causes disease and disease in the modern world is expensive!

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Stress is a killer and high-stress situations – whether they carry high or low investment risk – will always carry a high risk to one’s health

I can upon a great article, “Stress and Investing: A 20-Point Checklist” (1) by Safal Niveshak that I suggest you read.

The article says: You’ve heard of Peter Lynch, right? Apart from authoring two wonderful books (Beating the Street and One Up on Wall Street), Lynch is known as one of the best fund managers of all time.

In 1977, he was named the head of the then-obscure Magellan Fund at Fidelity which had US$ 18 million in assets. Thirteen years later, in 1990, Lynch resigned from his job but not after his fund had grown to more than US$ 14 billion in assets. From 1977 until 1990, the Magellan fund averaged a 29% annual return and as of 2003 had the best 20-year return of any mutual fund ever.

Lynch was just 46-years old when he retired from his top job, and at the peak of his game. He may have calculated it that way because his father had died of cancer at this very age of 46.

When asked for the reason for his quitting by Barron’s in 1990, Lynch replied –

I am just missing so much of it. I went to a soccer game with one of my daughters and I think they lost seven-to-nothing, and I had a great time. I went to one soccer game; I missed seven. I will tell you how bad things are. I used to read a book every two weeks. I haven’t read a book in the last 18 months.

“…a world class workaholic,” Barron’s wrote of Lynch, “he wryly confessed that he found himself setting new records for long hours in recent years, especially the last 18 months. And, in the process, he cheated himself of the pleasures of hearth and home.”

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…stress should figure in one’s investment strategy, much more than it does, perhaps, even more than financial risk, because stress is a killer and high-stress situations – whether they carry high or low investment risk – will always carry a high risk to one’s health. In fact, one can now measure how many years of one’s life is cut short by being exposed to a high-stress life.

The article says:

…people who look too closely at randomness burn out, their emotions drained by the series of pangs they experience. Regardless of what people claim, a negative pang is not offset by a positive one (some psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one); it will lead to an emotional deficit.

…people in lab coats have examined some scary properties of this type of negative pangs on the neural system (the usual expected effect: high blood pressure; the less expected: chronic stress leads to memory loss, lessening of brain plasticity, and brain damage). To my knowledge, there are no studies investigating the exact properties of trader’s burnout, but a daily exposure to such high degrees of randomness without much control will have physiological effects on humans (nobody studied the effect of such exposure on the risk of cancer).

…wealth does not count so much into one’s well-being as the route one uses to get to it.

Constant fixation on the randomness of the stock market is what burns most people out, says.

Avoid:

  • Checking share prices minute by minute (or even daily),
  • Trading stocks believing you can beat the market and everyone around you,
  • Leveraging investments in equities especially when you have done well recently (thanks again to randomness),
  • Derivatives trading that creates more randomness

These are all ways you can add tremendous stress to your life.

And then there’s the biggest offender of all – the envy of seeing others getting richer faster. Oh, nothing beats this one in taking our emotions to the cleaners! It is indeed the quickest route to self-sabotage.

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Enjoy life instead. Get out in the dawn.

Instead of daily watching the stock markets, once a month I review the Keppler Asset Management valuations of 43 equity stock markets around the world.

These numbers are a far cry from reality but the math grounds me from the hype, the conjecture and outright deceit that the establishment throws at us every minute, every hour.

I don’t even look at the value of my portfolio.  Instead I look at the value of stock markets around the world.

For example, in November 2021 I know that my Developed Top Value Portfolio is paying 2% higher average dividend than the MSCI World Growth Index and 1.42% higher average dividend than the MSCI USA Index.

KEPPLER 11-21

 

I know that the good value markets (where I am invested), as defined by the MSCI Index are selling for less than a third of the US market.  My portfolio has about a 1.50 times book price (and a 2.69% average dividend). The US is selling for five times book.  The US average dividends is less than half at 1.27%.

Here are the nine top value developed markets I am invested in using iShare country ETFs.

KEPPLER 11-21

I also know there was no change in the top value country ratings this month. The Top Value Model Portfolio continues to hold the nine “Buy”-rated markets Austria, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom at equal weights.

So this month I had no sweat, no bother and this gives me extra time to enjoy life more, not to mention make it easier to keep my blood pressure at a healthy level.

According to Keppler’s analyses, this equally weighted combination of these markets is not only stressed less, but also offers the highest expectation of long-term risk-adjusted performance.

Seeing this math helps me see reality a bit better and in a very short time.  This allows me for the rest of the month to see what’s really happening in life so I can  better accept and adapt.

Gary

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The stock market has always been the best place of places to protect and increase wealth over the long haul.   Yet it’s also been the worst place to lose money, a lot of it, quickly.

There are only three reasons why we should invest.  We invest for income.  We invest to resell our investments for more than we had invested.  We invest to make our world a better place.

The goal of investing should be to stabilize our security, bring feelings of comfort and the elimination of stress!

We should not invest in social networked protests that guarantee loss.  This is like burning our houses down in protest.

If we want to change the world, we should invest in good equities that bring profit and use the extra wealth to create something beneficial for mankind.

We should not invest for fun, excitement or to get rich quickly. We should not divest in a panic due to market corrections.

This is why my core stock portfolio consists of 16 shares and this position has hardly changed in five years.  During this time we have been steadily accumulating the same Top Value ETFs  and have traded only a few times.

The study below shows how a value based model portfolio that dates back to 1969 has outperformed almost every stock market in the world.

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The US market has not been even close to the top performer over the long term.

The DQYDJ Dow Jones Industrial Calculator (1) shows that an investment in the Dow Jones (with dividends reinvested) has risen at an average of 10.74% over the last 50 (51 actually) years.

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That’s 10.74% is pretty good, but an analysis of 51 years performance of all the developed stock markets shows that (using country indices as hypothetical investments) investing in the top value (not top performing) markets would have returned 12.5%.

The chart below shows the analysis.

 

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An annual return of 12.5% compared to the 10.74% US return is a 1.76% per annum difference.  This may not seem like much,

In the long term the difference is huge.  Calculations from the investor.gov site (2) shows that $10,000 invested at the 10.74% compound rate turns $10,000 into $1,817,734.62 in 51 years.

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Wow, that sounds pretty good until you look at the results of the 12.5% rates.  $10,000 grows to $4,062,362.22!

Investing in the top value (not the top return) markets earned $2,244,627.60 EXTRA!

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$4,062, 362.22 means you would have $2,244,627.60 MORE by investing in good value markets versus $1,817,734.62  earned investing in the US market.  That almost 125% more money!

Here are the best value developed markets at this time (as of end of March 2021).

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No matter how we look at it, over time, value investing always wins!

Our portfolio is built around a strategy that’s taught in my Purposeful Investing Course (Pi).  I call these shares my Pifolio.  The course shows how to use the value analysis of Keppler Asset Management to create a portfolio of ETFs that cover undervalued stock markets.  I have combined my 50 years of investing experience with the study of the mathematical market value analysis of Michael Keppler, CEO of Keppler Asset Management.

In my opinion, Keppler is one of the best market statisticians in the world.  Numerous very large fund managers use his analysis to manage billions of dollars in funds.  However because Keppler’s roots are in Germany (though he lives and operates from New York) all of his funds are registered for the European Union citizens, Americans cannot normally access his data.

I was lucky to have crossed paths with Michael over 25 years ago, so I am one of the few Americans who receive this data so I can share it with Pi subscribers.

The Pifolio analysis begins with Keppler’s research that continually monitors 46 stock markets and compares their value based on current book to price, cash flow to price, earnings to price, average dividend yield, return on equity and cash flow return.  Keppler looks at these numbers and takes market’s history into account.

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Michael Kepler CEO Keppler Asset Management.

Michael’s analysis is rational, mathematical and does not worry about short term ups and downs.  Keppler’s strategy is to diversify into an equally weighted portfolio of the MSCI Indices of each good value (BUY) markets.

This is an easy, simple and effective approach to zeroing in on value. Little time, management or guesswork is required.  You are investing in a diversified portfolio of good value indices.

A BUY rating for an index does NOT imply that any one stock in that country is an attractive investment.  This eliminates the need for hours of research aimed at picking specific shares.  It is not appropriate or enough to instruct a stockbroker to simply select stocks in the BUY rated countries.  Investing in the index is like investing in all the shares in the index.  You save time and gain incredible diversification because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pifolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that track an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund so they provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2021.   There have been no changes since.

70% is diversified into Keppler’s good value (BUY rated) developed markets:  Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in Keppler’s good value (BUY rated) emerging markets: China, Brazil, Chile, Colombia, South Korea, Malaysia and Taiwan.

There is one trick Pi subscribers learn about China which is different from the rest of the funds.

iShares Country ETFs make it easy to invest in each of the MSCI indices of the good value BUY markets.

For example, the iShares MSCI Germany (symbol EWG) is a Country Index ETF  that tracks the investment results of the MSCI Germany Index. The fund invests at least 80% of its assets in the securities of its underlying index that primarily consists of all the large-and mid-capitalization companies traded on the Frankfurt Stock Exchange.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for every market in our Pifolio.

This year I celebrate my 53rd anniversary of writing about global investing. Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades. This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

How you can create your own good value strategy.

Stock and currency markets are cyclical.  These cycles create extra profit for value investors who invest when everyone else has the markets wrong.  One special part of your course looks at how to spot value from cycles. Stocks rise from the cycle of war, productivity and demographics.  Cycles create recurring profits.  Economies and stock markets cycle up and down around every 15 to 20 years as shown in this graph.

The effect of war cycles on the US Stock Market since 1906.

Bull and bear cycles are based on cycles of human interaction, war, technology and productivity.  Economic downturns can create war.

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The chart above shows the war – stock market cycle.  Military struggles (like the Civil War, WWI, WWII and the Cold War: WW III) super charge inventiveness that creates new forms of productivity…the steam engine, the internal combustion engine,  production line processes, jet engines, TV, farming techniques, plastics, telephone, computer and lastly during the Cold War, the internet.  The military technology shifts to domestic use.  A boom is created that leads to excess.  Excess leads to correction. Correction creates an economic downturn and again to war.

Save $124.50 If You Act Now

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking that down to $174.50 in this special offer.  Plus I am reducing annual renewals from $299 to only $99.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (PI).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You get this course when you enroll in our Purposeful Investing program (Pi) with a triple guarantee.

Triple Guarantee

Enroll in Pi.  Get the 130 page basic training, a 46 stock market value report, access to all the updates I have sent in the past five years right away, plus numerous updates over the next year. 

#1:  I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

#2: I guarantee to send you monthly updates that are based on a study of every share in 46 stock markets around the world.  These updates will show the values, the earnings of all these markets and categorize each market as Top Value (buy), Neutral Value (hold) or Poor Value (sell)

#3:  If you are not totally happy, simply let me know. I guarantee you can cancel your subscription within 60 days and I’ll refund your subscription fee in full, no questions asked.:

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last five years so you can back track if you desire.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

Subscribe to a Pi annual subscription for $174.50 and receive all the above.

Your subscription auto renewal will only be $99 a year from now, if you renew, but you can cancel at any time.

Gary

(1) www.safalniveshak.com/stress-and-investing-checklist/

 

(1) www.economist.com/graphic-detail/2021/11/06/a-handful-of-items-are-driving-inflation-in-america