The Week Ahead

Jan 17

Investors,

Last week was the second straight losing week for stocks. Tech stocks and the once darling growth ETFs with outrageous valuations were sold off as another bad inflation report was dropped Wednesday morning showing that the consumer price index was up 7% year over year. This headline number is the largest increase since 1982. It should be noted that inflation numbers are likely higher.

I have been preparing for a higher inflationary environment for the past decade when I first started to learn about investing. The amount of debt in the system has always scared me and it appears that the only way to fix the amount of debt is to hyperinflate our way out of it.

If inflation continues to rage I expect bond yields will increase as investors sell off fixed income assets that yield less than the rate of inflation. This will lead to higher discount rates as the risk-free-rate of return increases and the cost of capital increases. Tech and growth stocks will be disproportionately affected as most of their value comes from cash flows discounted from 10 years into the future vs value where you get stable upfront cash flows.

This theoretical concept that tech valuations will get pounded is already being seen as show in the chart below.

The once great Ark Innovation ETF ran by the famous Cathie Wood has tumbled and fell.

Markets will likely continue to be volatile as inflation numbers increase throughout the year — which I wholly expect. In addition, we have a shorter investing week as the markets are closed today for Martin Luther King Jr. Day.

Stocks are so last year

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News Flow

Crude oil scores fourth straight weekly gain as worries mount over Ukraine: Crude oil futures rallied today to cap a fourth straight weekly gain, with rising tensions between Russia and Ukraine heightening the potential for a disruption to global crude supplies, while traders grow more optimistic over energy demand prospects. February WTI crude closed +2.1% to settle at $83.82/bbl, surging 6.2% for the week and within 1% of a multiyear high, as Russia began moving tanks and other military equipment toward Ukraine with negotiations over the crisis apparently stalling. Read More.
Biden emission reduction goals could triple reliance on electric grid: A "massive transformation" of the electric sector will be needed to meet President Biden's decarbonization goals, which could triple U.S. reliance on its power grid, says Daniel Brooks, the Electric Power Research Institute's VP of integrated grid and energy systems, according to Utility Dive. EPRI calculates ~20% of current U.S. end-use energy consumption is electricity, but that could rise to as much as 60% by 2050 as the country moves towards a carbon-neutral economy, which will cause a "massive increase in dependence on the electricity sector by society as we go forward."
If Inflation Stays This High, Stocks May Have A Long Way To Fall: The big economic headline last week was CPI data showing inflation rising 7% year-over-year in December, the highest rate since 1982. Economist Eric Falkenstein suggested on Twitter that it may be even higher, judging by real estate data. Let's suppose that the CPI reading is accurate though, and inflation is "only" running at 7% now. What might that mean for stocks? That depends on whether the inflation ends up being persistent. Portfolio Manager Meb Faber offered some words of caution in the event that it is. Read More.