In the month of April, both equities and fixed income at a global level suffered losses. In the case of equities, this was a brake on the upward trend since the beginning of the year, and in the case of fixed income, which was torn between losses and gains, it finally succumbed and ended up falling by 1.56% (Bloomberg Global Aggregate Bond Index).
The Chinese market rebounded after falling 47% from June’s highs due to problems with the real estate sector and this year has begun to improve its growth, but with doubts because the Chinese government’s debt-based support for this sector has left a leverage of 300% of GDP, a very high level that will take time to decrease to the detriment of growth.
The main reason for the falls in equities and fixed income is disillusionment on the part of investors that a rate cut is becoming less and less likely. Together with comments from members of the FED (US Central Bank) that there is no urgency to lower rates, in January, the market was discounting a 1.70% drop in 2024 and today it is only 0.40% and some are even discounting increases.
Why are rates rising? Inflation has picked up and it is very difficult for it to return to a level of 2%, which is the central banks’ target. The Fed’s Beige Book, which is something like the minutes of the Fed’s meeting in which the most important points are collected, highlighted an expanding economy with companies that were finding it increasingly difficult to pass on to the end customer the increase in costs and therefore negatively affecting margins. The reading is of a central bank that is not thinking of lowering rates any time soon.
The evolution of prices is captured in an index called CPI which is a benchmark of what the cost of living is at different stages. The risk of this type of index is to believe that a 3% increase in the CPI means that the prices of all goods and services will increase by 3%, a mathematical marvel used by politicians to show their good management. But if this is not the case, who determines that I consume one product more than another or that I have the same habits as the rest of the people? Since ancient times, people have tried to put us all in the same bag in order to “manipulate” us, that is to say, to manage us better. For example, a hauler who has to fill his tank often does not have the same expenses as another person who works at home, but contracts that have some kind of adjustment to inflation (wages, rents, etc.) are made with the same number. It is a reference, but nothing more, i.e., he is a good servant, but a bad boss like money.
On the other hand, if I show you this graph, you will ask me: Who is the “mastermind” that calculates this index?
Cumulative inflation over the last 10 years in the US was 31% but subway prices went up 39% and Mcdonald’s prices went up 100%. Ask someone who has to eat every day at Mcdonald’s and who has had their salary raised year on year since 2014 adjusting for inflation, would they be happy? I recognize that this is a very simplistic and a bit forced example, but it does not only happen with food but also with other products and services that are more or less common.
In this image, you can see the evolution of prices since 2000 in the United States in several categories.
The price index has risen 74% since 2000, similar to housing and food, but there are essential expenses in families that have risen much more, such as medical services above 100% or university tuition above 150%.
Therefore, if we have idle money and we do not want it to lose value and, very importantly, it is not going to be needed in the short term, the most prudent thing to do, and I mean the most prudent thing to do, is to invest it in tangible goods that we believe will increase in price above inflation levels. For example, if we had $100,000 that we were not going to need in the short term, we could do two things:
1) Leave it under the mattress because I don’t trust the stock market or “speculators”. At the end of the period, we would have the same $100,000 and prices have risen 74%. If in 2000 I could have bought a house for $100,000, in 2024 I could not because it would be worth $174,000. He had lost real money due to the effect of inflation.
2) Invest it in an index such as the S&P500 (500 most representative companies in the United States) and in the period it would have risen, including dividends, by 440.94%. That is to say, today I would have 540,000 €. Simply by investing in an index that I have been given, I would have covered the purchase of the house, and the rest I would have an equity of (540,000 $ – 174,000 $) 366,000 €. I could buy two more houses.
This is why it is so important to take inflation into account. One of the alternatives to avoid the effect of inflation is to invest in companies because they produce tangible things, have property, etc. They indirectly protect, but another alternative is to have gold.
Today gold is at a maximum, why?
1) Purchases by central banks as China has been doing lately. A central bank buys gold when what they print is banknotes, how strange, can it be that they do not trust their paper money so much? This happens all over the world, therefore, they give us paper with a man’s face printed on it telling us that it has value, but a value that we have to trust and that they give him so that we can pay taxes with those bills.
I ask myself a question, if I must have liquidity for a long time without investing, which do I prefer to have banknotes or gold? The second point can help us.
2) Perception of possible inflation spikes in the future. Since I do not want my money to devalue, I prefer to have something that will maintain its value over time, and one alternative is gold. Let’s imagine that we live in the United States and my currency is the dollar, therefore, as the dollar is the world’s reserve currency and I live in a country with legal security, market freedom, and an army that allows us to protect and defend ourselves, the dollar will be a safe asset that will hardly lose value. Well, don’t be so sure, look at this graph. It represents the value of an ounce of gold in dollars from 1920 to 2024.
One ounce of gold was worth $20.58 in 1920. Today it is worth $2,321. The dollar has lost 99% of its value measured in gold. If we had converted our dollars into gold and kept it, we would have no purchasing power.
Let’s take the example of the house. Suppose that in 1920 a house was worth $20,000, so in ounces of gold it was worth approximately 972 ounces of gold. Instead of buying the house, I keep that gold. Along comes 2024 and my grandchildren turn to the gold I had saved for them to buy a house. According to US Inflation Calculator[1] data, $20,000 in 1920 would be $312,332 today, but my grandchildren have 972 ounces that at today’s price (early May 2024) are worth $2,304,000 (972*2,371). If that $20,000 is kept under a mattress, in 2024 we would have $20,000, if we invest it in something that at least hedges me against inflation, I would have $312,332 but if I buy gold and keep it, I would have $2,304,000.
Curiously, this graph begins when the FED was created. Was the FED created to solve problems in the financial system? Or to subtract income from the population via inflation for its own purposes?
Inflation is an unspoken tax and the battle begins with investing.
You can access the previous month’s market commentary here.
[1] Inflation Calculator | Find US Dollar’s Value From 1913-2024 (usinflationcalculator.com)
