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How Bad Will Inflation Become for Your Investments?

Depending on whether or not you include food and fuel in the consumer price index, prices in 2021 went up 5.5% without fuel and food or 7% if you include them. This is the highest level of price inflation since 1982 at which time inflation was coming down from its 1979 peak of 15%. Everyone is feeling the pinch at the grocery store and gas station but our concern today is how bad will inflation become for your investments? Do the tech giants have it in them to sustain the market’s ability to keep creating and increasing wealth?

How Inflation Affects Interest Rate Investments

How inflation affects investments depends on what your investments are. The investments that are traditionally the safest are US Treasuries, AAA bonds, and CDs. Bank deposits are insured by the FDIC, AAA bonds (Microsoft and Johnson & Johnson) are very secure, and US Treasuries are backed by the US government. So, your dollar amount is secure with these investments. Unfortunately, inflation reduces the purchasing power of every dollar. Thus the real earnings yield on these investments is negative in terms of purchasing power when inflation is high.

How Bad Will Inflation Become For Your Investments

How Inflation Affects Stocks

The effect of inflation on stocks is mixed. Inflation typically comes with a strong economy so many companies will be earning more money and their stock prices and dividends will go up. But, companies that have high labor and raw material costs due to inflation will often suffer instead of benefit as costs go up. In our current era of a seemingly unending pandemic, companies in the travel and hospitality sectors especially will typically be hurt more than helped by inflation. The big tech companies that prospered during the pandemic are, perhaps, the best equipped to weather the storm of higher consumer and production prices.

How Bad Will Inflation Become for Your Investments - Price of Gold

How Inflation Affects Alternative Investments

During the rampant inflation of the 1970s gold and other precious metals were seen as a refuge from the effects of inflation. When Nixon took the USA off of the gold standard for the dollar, gold was $32 an ounce. It peaked briefly in late 1979 at over $800 an ounce and then settled into the $400 per ounce range for the next 15 years. Today’s young investors are not in love with gold like their parents were but have fixated on today’s investment fad, cryptocurrencies. As bitcoin and the rest have no fundamental value it is unlikely that they will function as a hedge against inflation like gold did in the 1970s. Rather one will be betting on another flurry of activity in that market. The key word is betting.

How Long Will Inflation Last?

The consensus of most economists as well as the Federal Reserve was that we would see a brief inflationary surge as the economy emerged from the Covid Pandemic. It turns out that with a new variant or two we are still in the pandemic and the world supply chain is still bogged down. The cost of labor is going up and companies are raising prices. We will be seeing a move toward reshoring manufacturing to the USA which will need more skilled labor than factories in the old days. This will likely be an inflationary issue. However, as is often said, you can’t fight the Fed. And, the Fed is taping out of its stimulus program to be done in March. They will be lowering their balance sheet. And, we can expect at least two and probably more interest rate increases in 2022. They will be able to bring inflation down but the price of taming inflation could be a recession and years or higher unemployment. How long inflation lasts and the degree of success the Fed has in taming it will determine how bad inflation will become in affecting your investments.


Reshoring and Investments in America

American companies have been offshoring much of their manufacturing for decades. It seemed like a good idea to take advantage of cheap labor in places like China especially. But, the end results have been the decline of American industrial might and the rise of China as the world’s premier industrial power as well as a threat to US economic and military security. The Covid-induced supply chain nightmare has shut down production lines for lack of the computer chips needed to make cars these days and served as another wakeup call to American businesses to bring production capabilities back onshore. This has begun to happen and reshoring and investments in America will provide new opportunities.

Will Textile Mills Return to the American South?

According to the USDA the United States produces about 20 million bales of cotton a year and leads the world in providing 35% of all world cotton exports. The US South used to have textile mills where clothing and other cotton fabrics were produced but virtually all of that has gone away. As part of reshoring and investments in America, textile manufacturing may be coming back to the USA. The New York Times published an article about supply chain woes and efforts to revive US factories. They take a close look at America Knits in Swainsboro, Ga who make high-quality t-shirts for the likes of J. Crew. They also note that General Motors will spend $4 billion in Michigan to expand battery and electric vehicle production. Toyota is investing $2.3 billion to make batteries in North Carolina. And, Samsung plans to invest $17 billion on a semiconductor facility in Texas.

Reshoring and Investments in America

Domestic Advanced Manufacturing

A primary reason for offshoring manufacturing years ago was that labor was cheap and most of the tasks involved low-skill workers. Over the years manufacturing has become increasingly automated and requires more and more skilled workers. Newmark highlights this fact in an article about U.S. manufacturing reshoring.

U.S. manufacturing reshoring, foreign direct investment (FDI), and domestic expansion are all accelerating. The domestic advanced manufacturing sector is the primary beneficiary of this growth as the number of firms and jobs in this sector proliferate; 60.5% of all new domestic manufacturing establishments to emerge between 4Q 2019 (pre-pandemic) and 1Q 2021 were in advanced manufacturing industries.

There is a pivot in manufacturing from “just in time” to “just in case.” As transportation costs go up and supply chains become suspect we can expect to see more and more foreign direct investment in the USA by foreign companies in order to be close to their North American customer base. A second feature of this move will be near-shoring to production facilities in Northern Mexico.

What Is Advanced Manufacturing?

Advanced manufacturing as defined by the US government is “the use of innovative technologies to create existing products and the creation of new products, including production activities that depend on information, automation, computation, software, sensing, and networking”. It is easier to understand what advanced manufacturing is by comparing it to traditional manufacturing. As noted in an information piece by Thomas, here is how advanced manufacturing compares to the traditional variety.

Traditional manufacturing needs a large supply of labor, most of it semi-skilled or unskilled. It works best for mass production of simple items. Workers are trained on the job and organization is top to bottom.

Advanced manufacturing features customer-focused customization with semi-skilled and technical workers. Workers typically have technical degrees from technical schools, colleges, or universities. In advanced manufacturing eighty percent of workers have high skill sets and the other twenty percent are semi-skilled.

While traditional manufacturing jobs include molding, casting, brazing, machining, and welding, advanced manufacturing includes 3-D printing, material deposition, powder bed, and additive and rapid manufacturing. Advanced manufacturing depends more on R&D and these businesses re-invest profits heavily into technological improvements.

Reshoring, Investments in America, Infrastructure

The Biden infrastructure plan passed by congress will also focus on “made in America.” Invest in American businesses as reshoring happens and invest for the future. As tensions ramp up with China both the USA and China have risks. China’s relative power will start to wane by the end of this decade. American reshoring of manufacturing will hasten this.


Ten Year Risk from China to Your Investing – China’s Goals and Risks

Fifty years ago China was an agrarian society and today it is the largest industrial power in the world. Fifty years ago China was preoccupied with walling itself off from the world and today it is seeking influence and power across the length and breadth of the world. The problem as seen from the viewpoints of many countries is that China seeks to dominate and control instead of working with other nations. The ten year risk from China to your investing has to do with China’s power peaking and the possibility that its aging leader, Xi Jinping, will believe that he is running out of time and will push too hard, causing an armed conflict as a worst case scenario or a total economic rupture as another devastating scenario. Less intense scenarios include the supply chain nightmare caused by outsourcing so much manufacturing to China and China’s control of so much of the world’s raw materials. We look at China’s goals and risks in regard to your ten year risk from China to your investing.

What Does China Want?

The Chinese Communist Party runs things in China and would just as soon run as many things in the world as it can. This includes, as noted in an article in The Atlantic, its wish to rule the world by controlling the rules.  The rules developed by the US and its allies after World War II were sufficient to prevent another world war. It is not clear that rules devised by China strictly for its own benefit would have the same degree of success. China does not work under sets of laws but rather uses laws to control their population and sustain the Communist Party in power. The bottom line for China is that it wants to dominate and control forever. The concern is that they will cross a line at some point that leads to global conflict and total disruption of the economic system taking your investments with them. Meanwhile they have come to dominate critical raw materials and manufacturing like lithium batteries and many strategic minerals.

Global Control Through Debt

China pursues a two-track approach to building global infrastructure. It lends money to poor nations to pay for large projects like railroads, ports, and mining operations which are built by Chinese workers. China then benefits by getting the raw materials mined and using the infrastructure to complete goals like its belt and road initiative linking Chinese factories to markets across Asia and Europe. Meanwhile these nations sink into debt and increases vulnerability to Chinese dominance. A BBC article highlights the issue of unsustainable debt to China in poor nations with debt to China surpassing debt to the IMF, Paris Club government, and World Bank by 2017.

Ten Year Risk from China to Your Investing - Debt Owed to China

Limited Time for Chinese Global Dominance

At the end of the 1980s Japan seemed poised to dominate the world technologically and financially. Then the hidden debt that had helped finance Japan’s rise came back to bite them and Japan sank into a deflationary cycle from which it has never really recovered. While China exerts control through debt over poor nations across the world China faces a looming debt crisis of which we are seeing the first wave with the real estate sector crisis whose poster child is Evergreen.

Magnitude of Chinese Debt Problems

While the amount of debt owed to China by poor nations paying for infrastructure projects is approaching a trillion dollars the debt owed by China’s government comes closer to $7 Trillion (CN¥ 46 trillion) which is about 45% of their GNP. Chinese household debt runs at about $4.3 Trillion, of which most is mortgage debt. The problem with this debt is that should the Chinese real estate market collapse, like in the US with the Financial Crisis, the number of households “upside down” on their mortgages could run to many more than in the US a decade or more ago. But, Chinese corporate debt dwarfs both the government and household debt China coming in at $27 Trillion.

en Year Risk from China to Your Investing - indebted corporate sector in china


The possibility of China following Japan’s example from economic success to near-collapse is not lost on the Chinese government. Thus, Chinese leaders must confront the fact that their power is peaking this decade as other nations adopt an “anywhere but China” approach to manufacturing and build military alliances specifically to confront China.

Investing Fallout in Regard to China

How could all of this affect the average investor? Chinese stocks listed on US exchanges could disappear in a pivot away from Wall Street. A Chinese financial collapse due to their huge debts would send the entire world economy into a recession on top of the permanent Covid crisis. Investing in the US and especially in companies that will benefit from coming infrastructure spending stands out as the first defense of investors against the ten year risk from China to your investing.


Ten Year Risk from China to Your Investing – How China Got Where It Is

Over the coming decade China will pose a risk to Taiwan, neighboring countries in the South China Sea and the USA and its allies like South Korea, Japan, Australia, and India. An article in Foreign Policy describes the coming years as a dangerous decade of peaking Chinese power. In this regard, we see a ten year risk from China to your investing. How did this come about, what are the possible outcomes, and how can you adjust your investing to survive and profit.

How China Developed As an Economic and Military Power

China was largely isolated from the world when President Nixon visited China in 1972. Nixon’s strategy was to re-open relations with China after 25 years in order to gain advantage over the USSR which, at that time, was the “other” global power. Opening China to foreign influence was another goal as businesses looked at China’s huge population as both a source of cheap labor and an emerging market that would buy goods from abroad. Parts of this worked out for the West and parts did not.

Ten Year Risk from China to Your Investing - Nixon in China

Introducing Modified Capitalism in China

Premier Deng Xiaoping in the 1980s introduced market economy reforms in China. This provided incentives that previously did not exist. The Chinese economy moved from an agricultural base to a manufacturing base over the next decades. China passed other nations in manufacturing capacity one by one and the USA in 2010. China achieved this success by emulating parts of what Great Britain did to start the Industrial Revolution.

China’s Recipe for Economic Growth

The St. Louis Federal Reserve published an informative article about how China went from an agrarian society to an industrial powerhouse in only 35 years. In 1978 when he came to power after the death of Chairman Mao, Deng Xiaoping laid out a plan for a Chinese industrial revolution, the fourth try by China since the 19th century. Learning from past mistakes he set up these steps as detailed in the St. Louis Fed article.

  1. Maintain political stability at all costs;
  2. Focus on the grassroots, bottom-up reforms (starting in agriculture instead of in the financial sector);
  3. Promote rural industries despite their primitive technologies;
  4. Use manufactured goods (instead of only natural resources) to exchange for machinery;
  5. Provide enormous government support for infrastructure buildup;
  6. Follow a dual-track system of government/private ownership instead of wholesale privatization; and
  7. Move up the industrial ladder, from light to heavy industries, from labor- to capital-intensive production, from manufacturing to financial capitalism, and from a high-saving state to a consumeristic welfare state.

He ignored advice of Western economists (unlike Russia in the 1990s) and started very gradually, adjusting the approach as results dictated.

China’s Access to Foreign Markets

China’s biggest trading partner by the 1980s was the USA. Its cheap labor attracted foreign businesses that set up manufacturing in China and then exported back to the rest of the world. China studiously copied what these businesses did, insisted on trade secrets for the “right” to work in China and then developed their own businesses. Entry into the World Trade Organization in 2001 was a key step in China’s rise to economic power as it gave access to previously closed markets.

Ten Year Risk to Your Investing From China

China has not risen to its current stage of power without costs. China has a huge amount of debt to deal with as evidenced by the problems in its real estate sector. The one couple one child policy has now left China with a demographic disaster as workers are retiring and there are not enough to replace them. Meanwhile, they have gotten more aggressive in terms of maintaining political stability (first rule in their plan) and asserting control over adjacent areas like Taiwan and the South China Sea. Their power is peaking this decade and will taper off as more and more nations follow an anywhere but China approach to their supply chains. This situation, as we will explore further, is fraught with risk for investors in the USA and everywhere.

Ten Year Risk from China to Your Investing - Chinese Aircraft Carrier

Electric Vehicle Battery Issues

The supply chain nightmare has been a wakeup call for many companies. Add to this the increasing tensions between the USA and China and what should a temporary problem caused by Covid could result in permanent issues for American and European companies. Electric vehicle battery issues came to mind as we read a recent article in The New York Times about Tesla’s efforts to secure a supply of nickel for its batteries. Nickel is added to lithium batteries to enhance performance at lower cost according to the Nickel Institute.

China’s Dominance of the Lithium Battery Supply Chain

China produces 80% of all lithium batteries. They also dominate in raw materials, both from mining in China and buying up mines across the world. So, even as Western companies develop their own sources of raw materials (lithium, nickel, cobalt) for electric vehicle batteries, they end up sending the ore to China for manufacture of batteries. The USA and Europe are scrambling to secure raw materials and to ramp up non-Chinese manufacturing. We have written about sourcing raw materials from Greenland and Bolivia. And now we see that Tesla is working to secure its nickel supply chain with a share of a mine in the South Pacific. From an American perspective, it is reassuring that Australia is the second largest producer of lithium after China.

Manufacturing Lithium Batteries Anywhere but in China

As Western companies rush to build up supply chains for nickel, cobalt, and lithium that do not depend on China they are also working to ramp up manufacturing in the USA. The current leaders in US lithium battery manufacturing are Tesla, Panasonic, LG Chemical, Duracell, and Samsung. From the US perspective it is good news that South Korea is the second leading lithium battery manufacturer and the US has moved up to fourth place. The US Department of Energy, under marching orders from President Biden, is leading the charge in efforts in increase lithium battery manufacturing capacity in the USA.

National Security, Essential Minerals, and Batteries

The Allied Powers won WWII largely because of America’s industrial and agricultural capacity. Food from the heartland fed soldiers fighting in the Pacific and European theaters as well as Russian soldiers on that front. The USA,  with its industrial heartland safe from German and Japanese bombing out produced the Japanese and Germans putting more ships, tanks, and planes to work while destroying production capacity in those countries. A third world war would likely to be short and extremely intense with the ability to resupply with troops and materials a critical factor in who wins. The fact that the West has outsourced so much manufacturing offshore and particularly to China has worried US strategic planners for years. The Covid crisis helped act as a wakeup call. Thus the Biden administration pushed through the infrastructure package and is helping lead the efforts to beef up US industrial capacity across the board and especially for the raw materials and manufacturing of items critical to continued economic and military dominance which, in the end, is what has helped avoid the next world war.

Electric Vehicle Battery Issues

Manchin Stock Market Crash

Are we seeing the beginnings of a Joe Manchin stock market crash? In case you missed the news, the stock market took a pre-Christmas hit when Senator Joe Manchin announced that he could not support President Biden’s Build Back Better plan when he spoke on a Sunday Fox News broadcast. Coupled with news of the rapid spread of the Omicron Covid-19 variant across the globe this news drove stocks down everywhere. Why did the market fall and, if it keeps going down, will this become known as the Manchin Stock Market Crash?

Democrats Unable to Agree and Govern

Joe Biden took the White House from Donald Trump and Democrats swept the two races for Senate in Georgia to gain 50 seats. With Vice President Harris breaking ties this gave Democrats control of the White House and both houses of Congress. Unfortunately for the Democrats, it seems like every time they have a chance to be in charge they start fighting amongst themselves and generally fail to advance their overall agenda. This time around the fly in the ointment is a “centrist” Democratic Senator from West Virginia, Joe Manchin. He has said that he cannot support the second part of Biden’s agenda, the Build Back Better Plan. A reduced infrastructure bill squeaked through Congress but Manchin has acted as a one-man veto to keep the Democrats from getting the social spending parts of their legislation passed into law.

What Did the Market Expect?

The market expected that the Democrats would be able to deliver on a whittled down version of their promise to increase taxes on high earners, provide child care for working women, give a child tax credit to bring poor families out of poverty, offer paid family leave, and fund projects to promote clean energy. Aside from the fact that many agree with taking back at least a part of the Trump tax cuts, cleaning up the environment, and giving poor folks a break, the rest of the Build Back Better plan would pump more money into the economy and most likely result in both a healthier economy in the near term and, along with the already-passed infrastructure package, a prolonged economic expansion. Yes, inflation has been a concern, but the market had already factored in the assumed benefits of the rest of the Build Back Better plan even in a whittled down form. That was until the possibility of a Manchin stock market crash emerged.

Why Does Joe Manchin Object to Clean Energy?

What we hear from Senator Manchin is that all of Biden’s agenda would cost too much, drive up inflation, and pull the nation farther and farther into debt. Thus, he would have us believe that if you “follow the money” you will get his point. However, there is another aspect of “follow the money” in this case. Back in September 2021 Business Insider wrote that Joe Manchin collects $500,000 a year in coal stock dividends. While the good Senator from West Virginia worries about his investments in the coal industry, the total market cap of stocks in the S/P 500 took a $1.2 Trillion hit on the news that he will not support the rest of build back better in any form. (The total hit for all US stocks came to about $1.8 Trillion.) If a true Manchin stock market crash occurs the total hit could run to about $12 Trillion in US stocks not to mention the losses as markets across the globe follow suit.

Investing for an Uncertain Future

People generally expected that the Covid pandemic would be bad to terrible and would be over in a year or so either because everyone had caught the disease and established immunity or got their antibodies from one of the many vaccines. What the market is now starting to price in is the prospect of years of this pandemic. Investors had also assumed that Biden would be able to get much of, but not all of, his agenda passed as his party theoretically has the votes in both houses of Congress and Biden would be willing to negotiate to bring at least some Republicans across the aisle to vote for things that are generally good for the country. At the moment, we may be in trouble on both fronts and that is what has scared the market. Since the market only cares when it cares, we will have to wait to see how this all works out. In the meantime, those invested heavily in the tech sector are concerned about the Fed raising interest rates and are rotating some of their money to different sectors that will be less interest rate sensitive.

Manchin Stock Market Crash

Manchin Stock Market Crash – Slideshare Version

Price of Taming Inflation

Pent up demand, broken supply chains, disruptions in the labor market, and high energy prices have all conspired to send the cost of living up. As inflation raises its ugly head, the Fed has declared its intent to speed up quantitative easing and raise interest rates in the coming year. Investors are hearing the 1970 to 1980s term, stagflation and the general consensus seems to be that higher rates to tame inflation is probably a good idea. What we would like to consider is the price of taming inflation and how that will affect peoples, work, investments, and lives in the coming years.

Why Is There Inflation?

The European Central Bank offers a concise explanation for why we are seeing inflation. As they note, the the economy is opening up again with a lot of pent up demand. The pandemic has changed what we buy including more electronics and the supply chain is not keeping up with things like computer chips. Shipping container shortages have made things even worse. Because car companies cannot make enough cars due to chip shortages people are buying more used cars and used car prices have skyrocketed. Part of today’s inflation is likely temporary and based on these factors. Part is probably long-term and based on a re-shuffling of the labor market as workers seek to make up for decades or relatively stagnant wages.

Raising Interest Rates to Curb Inflation

As noted by the Cleveland Federal Reserve, the Fed raises interest rates to curb inflation because doing so slows the economy which typically brings inflation down. The dual mandate of the Federal Reserve is to maintain maximum employment and stable prices. The business of raising and lowering interest rates to “adjust” the economy has often been likened to walking a tightrope. If the Fed raises interest rates too fast and high it can cause a recession and if it waits too long inflation gets out of hand. And, the longer inflation rages, the more difficult it is to reduce it without damaging the economy. In other words, the price of taming inflation may be worse than inflation itself.

The Price of Taming Inflation

In an opinion piece in The New York Times, the Nobel Prize-winning economist, Paul Krugman, wrote about a potential hard landing for the economy as the Fed raises interest rates to fight inflation. He notes that when Fed Chairman Paul Volker drove rates up in 1981 to kill inflation it worked but then unemployment peaked to 11% and did not return to the 1981 level for seven years! The price of taming inflation was seven years of increased unemployment.

Price of Taming Inflation
1980s Unemployment Response to Quelling Inflation

Those who have been wondering why the Fed seems to have been so hesitant to raise rates may be getting a better understanding of their thinking by considering the unemployment fallout from the inflation-busting “miracle” of the Fed’s raising rates in 1981.

The Price of Taming Inflation for Your Investments

Nobody likes the idea of a negative real earnings yield on their investments as inflation negates gains in the stock market or interest-bearing investments. But, what happens to your investments if the Fed overshoots on raising rates and drives the economy into a recession. Or even worse, what happens if you lose your job during that recession and need to rely on your now-diminished investment portfolio to get by? A real concern is that many of the factors that are causing inflation today do not have to do with the economy coming back and pent up demand. High used car prices are an example. Prices are up because they are not making enough new cars and they are not making enough new cars because there are not enough chips. And, part of the reason there are not enough chips is because the Covid-19 variants keep coming so that we may have a semi-permanent situation in which some prices are skewed indefinitely and will not be fixable by raising interest rates and driving the economy into a recession. Likewise, the stock market may remain skewed for some time to come with stay-at-home, work at home.

Price of Taming Inflation – Slideshare Version

Are You Missing Out on Emerging Market Investments?

The world is a big place with potentially good investments almost everywhere. The world’s emerging markets account for about 38% of global domestic product and about a fourth of stock market value. Many times over the years markets around the world rise as US stocks fall (and vice versa). Perhaps the best argument for investing in emerging markets is that they have a lot more room to grow than those in North America, Europe, or Japan. There are also lots of potential pitfalls when investing offshore. So, are you missing out on emerging markets or are you best off simply ignoring them.

What Are Emerging Market Investments?

In this case we are not talking about foreign direct investment like we discussed years ago. Rather we are looking at how the normal retail investor can allocate part of their portfolio to areas that are likely to outpace the USA and growth over the next years and decades. North Americans can invest in emerging markets via funds that include stocks from throughout the world. And, one can invest in foreign stocks with ADRs or American Depositary Receipts. Either way you don’t need to deal with a foreign stock broker, speak a foreign language, or deal directly with foreign currency exchange rates.

What Are the Emerging Markets?

Forty years ago economists talked about developed economies when describing the USA, Canada, the UK, Germany, France, Italy, and Japan. Sometimes Taiwan, South Korea, and Israel were added to the mix. Others were less-developed. This seemed condescending and when someone suggested emerging markets as an alternative everyone adopted the label. However, not all “emerging markets” are always emerging. A prime example would be Venezuela which went from being an economic leader in South America to an economic basket case under Chavez and now Maduro. The best way to think of emerging markets are those countries with development potential and thus the potential for your investments there to make money. As time goes by countries will move into the “emerged” market category or fall off the bottom list.

The Biggest Emerging MarketsNext Level of Emerging Markets  
ChinaVietnam
IndiaSouth Africa
BrazilEgypt
RussiaNigeria
IndonesiaBulgaria
MexicoCzech Republic
ArgentinaColombia
Saudi ArabiaThailand
TurkeyChile

Are Emerging Market Investments Safe?

The answer is no, many are not. Two of the top ones for investing opportunities, China and Russia, are prime examples of the risks when investing in emerging markets. Russia might invade Ukraine and end up with crippling economic sanctions and China’s political issues could lead to all sorts of issues with the rest of the world, not to mention a pivot away from Wall Street and delisting of many of their stocks on US exchanges. In both cases, shareholder rights are pretty much non-existent. Turkey is suffering from crippling inflation and its president insists on cutting interest rates making the problems worse. Investors discovered years ago that when you put all of your investment eggs in one foreign basket that country’s government could nationalize the company and you lose everything. One of the ways around this is to invest via a fund that does the research and hands-on investing for you.

Are You Missing Out on Emerging Market Investments

Funds for Emerging Market Investing

People invest in emerging markets because they think that over time those investments will outpace investments made at home. Unfortunately, issues like those with China, Russia, and other countries can make it difficult. And, then there are issues like China using forced labor in factories in its Western region. A useful approach in selecting profitable emerging market investments that are not risky, don’t get you in bed with tyrants or murderers, and the like, is to go with a fund that follows ESG policies in selecting stocks. This gives you some assurance that governance is OK, social policies are acceptable, and that they are not going to trash the environment on the way to making you a profit.

The following funds were listed in an informative article about emerging market investing in The New York Times.

iShares ESG Aware MSCI EM ETF
SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF
Vanguard ESG International Stock ETF

Actively managed funds include these.

GS ESG Emerging Markets Equity Fund, Goldman Sachs
JPMorgan Funds-Emerging Markets Sustainable Equity Fund

Many experts are suggesting that you avoid emerging market investments in the coming years as Covid variants raise havoc with economies far and wide. We think this is an ideal time to consider the intrinsic value of such investments over the long haul and invest while prices are cheap and dollar is strong as the Fed raises rates.

Are You Missing Out on Emerging Market Investments? – Slideshare Version

Investments If Russia Invades Ukraine

With more than 100,000 troops and heavy artillery massed on Ukraine’s Eastern border, Russia is threatening to attack based on their concern about Ukraine joining NATO. What happens to your investments if Russia invades Ukraine will depend partially on what your investments are and in part on the global economic ramifications of direct conflict between Russia and NATO forces. If Russia does invade, NATO will not only beef up its forces on Ukraine’s borders but could conceivably enter Ukraine to create a buffer between a Russian-controlled Ukraine and NATO members Poland, Hungary, and Slovakia.

Threat of Sanctions if Russia Invades Ukraine (Again)

With the looming threat of an invasion, President Biden spoke directly with Vladimir Putin threatening massive sanctions if Russia invades. NATO leaders echoed these threats. A problem with this approach is that when Russia invaded and took Crimea from Ukraine and backed Russian-speaking separatists on Ukraine’s Southeastern border with Russia the West imposed sanctions which had no effect in changing Russia’s behavior. Today the EU is heavily dependent on Russian natural gas and Russia is heavily dependent on getting paid for that gas. What will more likely deter Putin is the fact that Ukraine is today better prepared to fight back and even though they will lose in an all-out conflict the massive casualties on Russian soldiers will remind Russians of when they invaded Afghanistan and their boys came home in body bags. That experience is part of why the old USSR fell apart!

Economic Fallout of a Russian Invasion of Ukraine

If the USA and its allies follow through with more aggressive sanctions than previously imposed they could include Russian banks, shipping companies, the rest of their energy sector, insurance companies and their mining sector. Because so much of Russia’s gas and other natural resources end up going to Europe and China these are where direct economic repercussions might be felt. The worst effects would be in Ukraine itself followed by Russia and then throughout Europe. An extensive rundown of economic effects in and around Ukraine can be found in a publication by Econstor.

Investments If Russia Invades Ukraine

Ukrainian Army’s 25th Airborne Brigade Patrolling

The effects on your investments if Russia invades Ukraine are already being felt if you are invested in US defense stocks. Congress just passed on to the President the bill for military spending in the year to come and it includes more money that the president had requested. If Europe ends up getting cut off from Russian oil and natural gas (whose pipelines pass through Ukraine) look to see prices go up on the world market as Europe has to buy from the Saudis or if US energy companies are allowed to export their production from fracking. If the US truly ramps up sanctions that make it hard for Russian energy companies to do business, we could be looking at higher oil and natural gas prices across the board over the longer term. This is the sort of thing that affects the broader economy. Add such a situation to a world economy still trying to come out of the persistent Covid crisis and you may have ripple effects across multiple investment sectors.

Investments If Russia Invades Ukraine – Slideshare Version

Real Earnings Yield of Your Investments

The bull market that started in the depths of the Financial Crisis and survived the Covid Pandemic Plunge has been driven by historically low interest rates and persistently high earnings in the tech sector. Unfortunately, not all companies in the S&P 500 have stellar earnings despite the index reaching new highs. In fact, the real earnings yield of the S&P 500 is now minus 3% which is the lowest since 1947. What is the real earnings yield of your investments? Is it comparable to saving today with negative real interest rates?

Real Earnings Yield of Stocks

The real earnings yield of a stock is its return on investment adjusted for the current rate of inflation. Investors put their money in stocks based on their assessment of long term profit potential using the intrinsic stock value approach.  Or, they invest based on hope that the “story” of a stock will work out or that a rising market will simply keep going up because, in their brief experience in the market, it always has gone up. A company that embodies both the intrinsic value approach and the “story” is Tesla which today has a negative 5.2% real earnings yield. Previous times when the S&P 500 had a negative real earnings yield were in 2000 prior to the Dot Com crash and twice during the stagflation of the 1970s and 1980s.

How Does the Real Earnings Yield of a Stock Get Better?

This depends on what you think the problem is. Is it inflation driven by a supply chain nightmare making things like computer chips scarce and thus driving up the price of things like cars? If that is the case, inflation will get better as production and shipping get straightened out. Or companies can raise their prices which will raise profits, assuming that high prices do not drive away business.  Unfortunately, higher prices contribute to higher inflation so while it could help one company in your portfolio it could hurt the rest. Or, the market could correct or crash bringing stock prices down to where the real earnings yield is positive.

Real Earnings Yield of Your Investments

Will the Negative Earnings Yield Become the New Norm?

The Covid-19 pandemic and the k-shaped recovery have created a unique situation. While many in society have been hurt badly and are still hurting, many are sitting piles of cash and savings as they are still making money and have had no place to spend it. This seems to be part of the reason for the market going up and up. Until the Fed raises interest rates higher bonds and treasuries offer negative rates. And, despite almost continuous predictions of a market correction or crash that has not happened with the exception of the Covid-10 Crash and that was not due to an overpriced market but rather the near-complete shutdown of everything. Now that society is learning to live with more Covid variants and a potentially permanent Covid pandemic we may see investors being willing to accept the risk of pouring money into overpriced stocks as they believe this to be the best of a set of poor choices for investing their money.

Stocks with Strong Real Earnings Yields

Interestingly, a stock that we mentioned in our article about investing in fertilizer companies has an excellent earnings yield. Mosaic Company, which sells potash and phosphate fertilizers, was touted in a Yahoo Finance article about high earnings yield stocks. This brings us back to the intrinsic value approach for picking stocks with long term potential more so than exciting story stocks that tend to get overpriced.

Real Earnings Yield of Your Investments – Slideshare Version


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