Listen to the podcast at: https://soundcloud.com/american_dreams/the-danger-of-transitory-inflation-in-the-us
Aaron Olsen: Welcome to the show. We're here today with Robert Zuccaro. He is founder and CIO of Golden Eagle strategies. We've had Robert on several times in the past, and he has a wealth of knowledge in the investment community there. And Robert, today I want to talk to you about your recent article that you published and is called, is transitory inflation wishful thinking? Transitory inflation - that's a term I'm not quite familiar with. What exactly is transitory inflation?
Robert Zuccaro: Well, it's a view held by the Federal Reserve that the bump in inflation that we're going through will subside in the next few months, but it's wishful thinking for a number of reasons. Number one, even if the rate of inflation does subside, we are still stuck with permanently high prices. Since I wrote that article, which appeared in family office network in July. I've learned a lot more about inflation and how heavily entrenched it is into the US economy. Now, the federal government is not being forthright in reporting to the American people as to what the rate of inflation is.
Aaron Olsen: Now why do you feel that is why don't you think we are getting all the information?
Robert Zuccaro: Well, they're trying not to or the public, and they are understating the rate of inflation in part because they're trying to pass a $4.7 trillion dollar spending plan, which will only exacerbate inflation, which according to my work shows that inflation in the US is not running at a 5.4% annual rate, as released by the Department of Labor through 12 months and in August. It's somewhere in the vicinity of 12 to 15%. And as we speak, I will explain the reasons behind my deal.
Aaron Olsen: Woah, so you say is actually 12 to 15% right now. How do you think the markets are going to react?
Robert Zuccaro: Well, before that, I want to talk about the rate of inflation so your audience can understand this better because it is a big thing. A lot of your viewers go to the market their consumers and they know firsthand that inflation is running higher than 5.4%. Let's look at the cost of shelter, which was reported as being up 2.8% of the past 12 months. existing home sales have been running at a rate increase of 20%. Realtor.com reports that rent inflation over the past 12 months this morning at 8.5%. The federal government reports at running at 2.8%. The Apartment List reports a higher reading on rent inflation, and they show a 1.5% increase.
Now comes the really bad news on energy costs which were reported being up 25%. Gas prices in the past 12 months, and everybody's aware of this, are up 50%. Heating oil is up 68%. One third of the homes in the United States consume heating oil. Another third are heated by natural gas, prices which over the past this year alone in the first nine months, natural gas prices are up a whopping 175%. If you take gas and heating oil and natural gas and you give them equal ways in the price rise, these three components have risen on average 98%. And when we get into the winter season over the next month or so consumers will go into shock when they see their gas bills.
Food inflation is being reported at 4.6%. Meat, poultry, fish and eggs are up 10.5%. I'm a consumer and I'm an occasional consumer and I went to the market last week and ribeye steaks which were in the case for eight $18 a pound or up to $24 a pound. That's an increase of 33%because the cost of meat has risen by at least 20% since the summer, I've never seen this before. But the meat case in our local market is half empty now because there's price resistance to higher prices. Let's take a look at the UK. In the UK, the Food and Beverage foundation reports that inflation is running at a 14 to 18% in the UK in the month of August alone. Their Price Index jumped by3.2% which equates to a 38% annualized rate of gain. Now, you'll read in the media that inflation is bad for the stock market and that inflation as inflation rises, the stock market will go down. Let's take a look at the worst inflation period in the US over the past 100 years. In 1972. The CPI was going up at a rate of 3.5%. Eight years later in 1990, it crested at 13.5%. How did the stock market do? It went up 64% over this period. And corporate America is ingenious how it deals with all types of economic environments. Whether we have a strong dollar weak dollar, we have low interest rates or high interest rates, we have low inflation, high inflation. Corporate America is very astute and will make the adjustments during this high inflation period of eight years from 1972 through 1980. They made many adjustments and improve profits at a rate of 142%. The higher profits go the higher the stock markets go. That's always been the case and that will always be the case.
Aaron Olsen: So what you're telling me here that this isn't all doom and gloom that there could be an upside. So how do we take this negative situation here and flip it around?
Robert Zuccaro: What ultimately has to happen which is part of the business cycle. When inflation grows, typically the Federal Reserve takes action constrains the money supply and raises interest rates. That is not happening this time around, in part because the chairman of the Fed is running for reelection in February and he's being sympathetic, I'll put it this way, sympathetic to the current administration, which is trying to sell the American people on gargantuan spending of $4.7trillion. So the Fed is purposely keeping interest rates low as inflation spirals higher and higher in order to accommodate what the administration wants in the way of gargantuan spending.
Aaron Olsen: So, Robert, what type of action do you feel that people should be taking right now?
Robert Zuccaro: All right, in my view, the only place to be in the investment world. Historically, stocks have provided the highest hedge against inflation. And this means in good periods, good business periods, bad business periods, taking into account recessions which are inevitable and if you look historically, the rate of return on stocks has been 10%. The rate of inflation has been 3.5%. So in real terms, if you have money in the stock market, your real growth in spending power goes up by 6.5% every year which is more. It doesn't mean it's going to happen every year, but over a period of 10 to 20 years. Investors will do very well in the stock market. Now, Inflation reportedly is running at a rate of 5.4%. Treasury bonds are yielding somehwere in the viciinity of 1.5%. By holding treasury bonds, investors are losing money in real terms because what they make on coupon payments is not enough to compensate for a much higher rate of inflation. Stocks are the only answer historically they have been the only answer and going forward in my view, they are the answer. But not everybody shares my view.
Aaron Olsen: So is there a particular stock or industry that we should really be focusing in right now. Be it tech, blue chip, orthe commodity stocks?
Robert Zuccaro: Well, that's an interesting question. The stock market and the economy both have undergone profound change over the past 10 years. 10 years ago, two of the largest five stocks in the S&P 500 were tech stocks, comprising 4% of the overall index. If you look at the s&p Today, the top five stocks, which are Apple, Microsoft, Amazon, Facebook and Google comprise an unprecedented 22% of the overall index. Last year corporate profits because of the pandemic contracted by 15%. If you take those same five companies, they increase their earnings by 38%. They are less sensitive to economic cycles, they are market leaders. And for the first time in in history, you'll find that tech dominates the NASDAQ by comprising 60% of its overall index waiting whereas the comparable number for the S&P 500 in 33%.
Now what I'm about to say, is heretical to the way people think, but the old standard for passive investors has always been the S&P 500 in the S&P 500 you have Ford you have Xerox, which peaked in price in 1999. In 2000, AIG, General Electric peaked in price. I would argue that based on what has transpired in the stock market over the last 10 years where the Q's which was synonymous for the NASDAQ 100 composite have returned 538% the Q's have far outdistanced the S&P 500 or spiders coming in at a rate of improvement of 257%. For investors that use a passive investment strategy, I would strongly encourage them to transition out of the S&P 500 into the NASDAQ 100 And I think 5, 10 years from now, they will be very happy that they did so.
To receive more information, contact us here.
This transcript was generated by software and may not accurately reflect exactly what was said.
Please note, that the thoughts expressed in this podcast are those of the presenter. This is not, nor should it be considered an offer or a solicitation of an offer for investment.
Listen to the podcast at: https://soundcloud.com/american_dreams/the-danger-of-transitory-inflation-in-the-us
Aaron Olsen: Welcome to the show. We're here today with Robert Zuccaro. He is founder and CIO of Golden Eagle strategies. We've had Robert on several times in the past, and he has a wealth of knowledge in the investment community there. And Robert, today I want to talk to you about your recent article that you published and is called, is transitory inflation wishful thinking? Transitory inflation - that's a term I'm not quite familiar with. What exactly is transitory inflation?
Robert Zuccaro: Well, it's a view held by the Federal Reserve that the bump in inflation that we're going through will subside in the next few months, but it's wishful thinking for a number of reasons. Number one, even if the rate of inflation does subside, we are still stuck with permanently high prices. Since I wrote that article, which appeared in family office network in July. I've learned a lot more about inflation and how heavily entrenched it is into the US economy. Now, the federal government is not being forthright in reporting to the American people as to what the rate of inflation is.
Aaron Olsen: Now why do you feel that is why don't you think we are getting all the information?
Robert Zuccaro: Well, they're trying not to or the public, and they are understating the rate of inflation in part because they're trying to pass a $4.7 trillion dollar spending plan, which will only exacerbate inflation, which according to my work shows that inflation in the US is not running at a 5.4% annual rate, as released by the Department of Labor through 12 months and in August. It's somewhere in the vicinity of 12 to 15%. And as we speak, I will explain the reasons behind my deal.
Aaron Olsen: Woah, so you say is actually 12 to 15% right now. How do you think the markets are going to react?
Robert Zuccaro: Well, before that, I want to talk about the rate of inflation so your audience can understand this better because it is a big thing. A lot of your viewers go to the market their consumers and they know firsthand that inflation is running higher than 5.4%. Let's look at the cost of shelter, which was reported as being up 2.8% of the past 12 months. existing home sales have been running at a rate increase of 20%. Realtor.com reports that rent inflation over the past 12 months this morning at 8.5%. The federal government reports at running at 2.8%. The Apartment List reports a higher reading on rent inflation, and they show a 1.5% increase.
Now comes the really bad news on energy costs which were reported being up 25%. Gas prices in the past 12 months, and everybody's aware of this, are up 50%. Heating oil is up 68%. One third of the homes in the United States consume heating oil. Another third are heated by natural gas, prices which over the past this year alone in the first nine months, natural gas prices are up a whopping 175%. If you take gas and heating oil and natural gas and you give them equal ways in the price rise, these three components have risen on average 98%. And when we get into the winter season over the next month or so consumers will go into shock when they see their gas bills.
Food inflation is being reported at 4.6%. Meat, poultry, fish and eggs are up 10.5%. I'm a consumer and I'm an occasional consumer and I went to the market last week and ribeye steaks which were in the case for eight $18 a pound or up to $24 a pound. That's an increase of 33%because the cost of meat has risen by at least 20% since the summer, I've never seen this before. But the meat case in our local market is half empty now because there's price resistance to higher prices. Let's take a look at the UK. In the UK, the Food and Beverage foundation reports that inflation is running at a 14 to 18% in the UK in the month of August alone. Their Price Index jumped by3.2% which equates to a 38% annualized rate of gain. Now, you'll read in the media that inflation is bad for the stock market and that inflation as inflation rises, the stock market will go down. Let's take a look at the worst inflation period in the US over the past 100 years. In 1972. The CPI was going up at a rate of 3.5%. Eight years later in 1990, it crested at 13.5%. How did the stock market do? It went up 64% over this period. And corporate America is ingenious how it deals with all types of economic environments. Whether we have a strong dollar weak dollar, we have low interest rates or high interest rates, we have low inflation, high inflation. Corporate America is very astute and will make the adjustments during this high inflation period of eight years from 1972 through 1980. They made many adjustments and improve profits at a rate of 142%. The higher profits go the higher the stock markets go. That's always been the case and that will always be the case.
Aaron Olsen: So what you're telling me here that this isn't all doom and gloom that there could be an upside. So how do we take this negative situation here and flip it around?
Robert Zuccaro: What ultimately has to happen which is part of the business cycle. When inflation grows, typically the Federal Reserve takes action constrains the money supply and raises interest rates. That is not happening this time around, in part because the chairman of the Fed is running for reelection in February and he's being sympathetic, I'll put it this way, sympathetic to the current administration, which is trying to sell the American people on gargantuan spending of $4.7trillion. So the Fed is purposely keeping interest rates low as inflation spirals higher and higher in order to accommodate what the administration wants in the way of gargantuan spending.
Aaron Olsen: So, Robert, what type of action do you feel that people should be taking right now?
Robert Zuccaro: All right, in my view, the only place to be in the investment world. Historically, stocks have provided the highest hedge against inflation. And this means in good periods, good business periods, bad business periods, taking into account recessions which are inevitable and if you look historically, the rate of return on stocks has been 10%. The rate of inflation has been 3.5%. So in real terms, if you have money in the stock market, your real growth in spending power goes up by 6.5% every year which is more. It doesn't mean it's going to happen every year, but over a period of 10 to 20 years. Investors will do very well in the stock market. Now, Inflation reportedly is running at a rate of 5.4%. Treasury bonds are yielding somehwere in the viciinity of 1.5%. By holding treasury bonds, investors are losing money in real terms because what they make on coupon payments is not enough to compensate for a much higher rate of inflation. Stocks are the only answer historically they have been the only answer and going forward in my view, they are the answer. But not everybody shares my view.
Aaron Olsen: So is there a particular stock or industry that we should really be focusing in right now. Be it tech, blue chip, orthe commodity stocks?
Robert Zuccaro: Well, that's an interesting question. The stock market and the economy both have undergone profound change over the past 10 years. 10 years ago, two of the largest five stocks in the S&P 500 were tech stocks, comprising 4% of the overall index. If you look at the s&p Today, the top five stocks, which are Apple, Microsoft, Amazon, Facebook and Google comprise an unprecedented 22% of the overall index. Last year corporate profits because of the pandemic contracted by 15%. If you take those same five companies, they increase their earnings by 38%. They are less sensitive to economic cycles, they are market leaders. And for the first time in in history, you'll find that tech dominates the NASDAQ by comprising 60% of its overall index waiting whereas the comparable number for the S&P 500 in 33%.
Now what I'm about to say, is heretical to the way people think, but the old standard for passive investors has always been the S&P 500 in the S&P 500 you have Ford you have Xerox, which peaked in price in 1999. In 2000, AIG, General Electric peaked in price. I would argue that based on what has transpired in the stock market over the last 10 years where the Q's which was synonymous for the NASDAQ 100 composite have returned 538% the Q's have far outdistanced the S&P 500 or spiders coming in at a rate of improvement of 257%. For investors that use a passive investment strategy, I would strongly encourage them to transition out of the S&P 500 into the NASDAQ 100 And I think 5, 10 years from now, they will be very happy that they did so.
To receive more information, contact us here.
This transcript was generated by software and may not accurately reflect exactly what was said.
Please note, that the thoughts expressed in this podcast are those of the presenter. This is not, nor should it be considered an offer or a solicitation of an offer for investment.
Manager of the Golden Eagle Growth Strategy
