Is Inflation As Bad As 1980? Plus: Our Expert’s Best Advice (And Biggest Current Winner…)
I’m going out on a limb and calling it now.
I think we’re going to see a 1% rate hike later this month when the Federal Reserve meets.
The reason is simple. We learned earlier this week that the Consumer Price Index rose 9.1% on a year-over-year basis in June. The consensus expectation was for 8.8%.
The White House was quick to claim that those figures are already “out of date”. They also pointed out that energy accounted for nearly half the increase. It’s a familiar refrain, and gas prices have indeed retreated off of all-time highs. (They now merely reside in nosebleed territory.)
But the Fed can’t afford to play the wait-and-see game.
Last month, I raised doubts about the emerging view that inflation had “topped” and wondered aloud whether the Fed would raise rates by 0.75% instead of a half point. And as it turns out, it hadn’t topped, and the Fed did raise rates by a larger amount.
With CPI running even hotter this time around, I think Fed Chair Jerome Powell is willing to cause a recession if that’s what it takes to tame inflation. It’s that big of an issue.
Consider this… As Bloomberg recently reported, a group of economists including former Treasury Secretary Lawrence Summers claims that inflation is just as bad today as it was in 1980. They backed this up by recalculating historical CPI numbers by modern standards and found that the “current day” reading on the CPI in 1980 would be 9.1% (compared to the reported 13.6% back then).
Summers is not part of the tinfoil hat brigade. He is about as establishment as it gets. And this suggests a Volker-style regime of relentless rate hikes may be what’s called for in this situation.
Of course, we’ll stay on top of what happens with the Fed and the markets. In the meantime, I turned to my colleague Nathan Slaughter for some timeless guidance. Our exchange is below…
You recently told your followers about an underappreciated indicator that we could be headed for a recession. Care to elaborate?
If there’s a canary in the retail coal mine, then it can be found in the shipping manifests. So instead of reading the same press releases at Yahoo Finance and other mainstream outlets, I’ve been scouring supply chain trade publications such as Freight Waves. And frankly, the news is a little disconcerting.
Until recently, the shipping market was enjoying an unprecedented boom amid soaring demand and tight capacity.
But according to their research, the bottom has fallen out of the market in recent weeks, with spot rates to move a container from China to Los Angeles plummeting by nearly 40%. Other trade routes are similarly affected. In their words, inbound container volume hasn’t just weakened, but “fallen off a cliff”.
It is estimated that Walmart imports 893,000 containers worth of goods from China, Taiwan, and other trading partners annually. Given the huge inventory glut that’s made headlines from retailers like Target, it’s natural to expect some degree of shipping deceleration from the firm’s logistics department.
The trouble is, there are many other names on that list of retailers aggressively canceling some of their orders.
The depth and length of this slowdown remain to be seen. But this industry is known for its violent whipsaws, and investors are in a sell-now-and-ask-questions-later mood.
Over at High-Yield Investing, we added some exposure to the shipping industry from a few different angles. And those names profited greatly from the reopening of global trade. But I’m glad we placed some protective stop-losses on our positions and were able to get out with the bulk of our profits intact.
What’s the best advice you would give to an average investor just starting out?
The best advice I could give to someone starting out (or anyone for that matter) is this…
We tend to make investing more complicated than it should be. This can be true whether you’ve been in the markets for six months or 35 years. There are thousands of choices out there: Stocks, options, cryptos, mutual funds, REITs, ETFs, you name it…
Don’t get overwhelmed. Just start simple and go from there.
To give yourself the best chance for wealth, invest systematically and gradually over time. Look for excellent companies with wide moats that generate a substantial return on capital. Make sure management is dedicated to sharing its surplus free cash flow with its co-owners. That’s you.
Take a page from Warren Buffett’s book and think of yourself as a part owner in these businesses and hold on to them dearly.
So stop chasing after the latest market fad. And don’t try to make trades or speculative bets until you have the foundation of your portfolio in place. We all had to eat our vegetables first as a kid before we could have dessert. Same goes here.
Your latest report talks about “bulletproof” dividend payers. Can you tell us about this idea and why it is important?
Companies that have built a track record of paying bigger and bigger dividends often end up delivering the best total return over the long run. It’s the surest and safest way I know to build serious wealth.
Income investing still works. Compound interest is magical. The sooner you realize this, the sooner you’ll reach financial independence.
That’s why I went searching for picks in my latest report that have proven themselves to be so strong, so reliable, and so generous… that I believe they can be counted on, no matter what happens with the economy.
You can buy the stock, relax, and watch your dividends pile up. In my opinion, holding these five income stocks is the best “no brainer” way to build wealth.
I know you don’t like to give away picks, but can you give us an example?
Sure. In fact, I’ll tell you about our biggest current winner in the High-Yield Investing portfolio.
If you pumped gasoline or diesel fuel this week, there’s a good chance that Magellan Midstream (NYSE: MMP) helped make it possible.
The company owns 9,800 miles of refined products pipelines (the largest network in the U.S.) that connect with roughly half of the nation’s refineries, along with 54 terminals used for storage.
Magellan doesn’t take possession of any oil or other liquids – it just gets paid for storing and transportation services. So the company has little exposure to fluctuating commodity prices. Instead, it collects tariffs and fees (often under long-term contracts) based on the volume of oil and refined products flowing through its networks.
In fact, nearly 90% of the firm’s cash flows are fee-based in nature. As a Master Limited Partnership (MLP), most of the income is immediately returned to stockholders.
You can almost set your watch by Magellan’s regular dividend hikes. Since the IPO in 2001, the company has raised the distribution about 76 times (almost every 90 days). Along the way, yearly dividends have marched ahead by 690%, rising to the current $4.15 per unit.
At today’s prices, that equates to a lofty yield of 8.5%. In fact, has just raised its full-year forecast and now expects distributable cash flow (DCF) to top $1.09 billion for 2022 – good for a coverage ratio of 1.24.
Over at High-Yield Investing, we’ve owned MMP since 2005 and are sitting on a total return of more than 460% (that’s more than twice the market average, by the way). You can see how our dividends have grown with each passing year in the chart below…
Editor’s Note: As Nathan just explained in our interview, anyone can create lasting wealth in the market. And it’s not too late for you to get started, either…
All it takes is a solid foundation of picks that you can depend on no matter what the market has in store. And that’s where Nathan’s list of “bulletproof” income payers comes in… Each of these picks have proven themselves to be strong, reliable, and generous… that they can serve as the bedrock of your portfolio.
Each one pays a market-crushing yield and has provided fantastic long-term returns (and growing dividends) year after year.