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A Fantastic Jobs Report Adds Further Upward Momentum for Inflation. How to Protect Yourself.

By April 1, 2022April 13th, 2022Videos

 

We’ve got a new jobs report and an inverted yield curve. How is that going to change things this year? Hi, my name’s Paul Carroll, the CEO and founder of Avion Wealth, an elite wealth management firm here in Texas.

Yesterday’s jobs report announced a 3.6% unemployment rate. Now that’s remarkable in any time. In the United States, a large country, that’s just 6 million people unemployed. To put this in perspective, there are 11.3 million job openings in the country right now. What does that mean? That translates into what has proven to be a red hot job market, like nothing we’ve ever seen before.

Now interestingly, there’s another almost 6 million people who are out of work, but not looking. And if you do the math, the unemployed, the out of work not looking, and the job openings match almost perfectly. The challenge is getting them back, and a large part of the challenge is a lot of those unemployed are young mothers, young families, or other people who, for whatever reason, the economics just aren’t there. They don’t have the resources, or daycare is too expensive to actually go get the job. So that’s a political issue. They can fix that.

This red hot job market is causing significant upward pressure on wages, which of course is feeding into inflation. Also, we’re beginning to see the setting in of inflation expectations. So now the Fed has to get involved, and they need to tap the brakes. And when they tap the brakes, they raise interest rates. They raise them a quarter percent. But clearly they’re getting a little spooked because they have already announced in advance the next raise will be possibly a half percent.

This has driven the treasury yield curve inverted. What does that mean? Short-term rates are higher than long-term rates. It’s a fairly good predictor of a coming recession, but not perfectly reliable. An inverted yield curve has predicted nine of the last six recessions, and you can see the problem. They may be very accurate when they get it right, but they also predict when recessions don’t happen.

So we’re in a world now where inflation is at a 40-year high. It’s almost 8%. 8% inflation means the monetization of debt and not just government debt. This is where the transfer of wealth occurs from creditors to debtors. We saw this back in the ’70s and ’80s. A good example is a homeowner with a mortgage. The house goes up in value. The payments they make on the mortgage are deflated by inflation. There was an enormous amount of wealth, not creation but transfer, because whoever owns those mortgages is going to be losing money.

So this environment very much makes the case for holding what we call equity assets. A lot of people think when I say equities, I mean just stocks, but equities are ownership. Anything you own. So it could be your home. It could be a rental property, a vacation property, an expensive piece of art, gold, collectibles, cars. Anything you own is going to do just fine in an inflationary environment. Anything you own with a little bit of debt may get paid off just nicely by inflation.

Those of you who refinanced last year, you guys are in very sweet territory. Two-and-a-half percent 15-year mortgages are getting paid off by 8% inflation quite rapidly. The challenge with equity assets is they’re volatile. People who are risk averse and like cash are watching their cash go up in smoke nice and slowly, right now at almost exactly 8% a year.

So if you need help, you need guidance, be sure to give me a call, and we’ll talk about this some more. We wish you the best of investing success. Thank you.

 

 

Bloomberg.com, Bloomberg, https://www.bloomberg.com/news/live-blog/2022-03-25/u-s-employment-report-for-march ai=eyJpc1N1YnNjcmliZWQiOnRydWUsImFydGljbGVSZWFkIjpmYWxzZSwiYXJ0aWNsZUNvdW50IjowLCJ3YWxsSGVpZ2h0IjoxfQ.

Ward, Sandy. “What Is a Yield Curve and Why Are Investors Worried?” Morningstar, Inc., 29 Mar. 2022, https://www.morningstar.com/articles/1086193/what-is-a-yield-curve-and-why-are-investors-worried.

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