Inflation Nation

Inflation Nation

Pitchers and catchers are supposed to report to the Grapefruit and Cactus Leagues this weekend… But the baseball players’ union and ownership are barking over billions. So, we patiently wait and dig into stories that will impact your money this week. 

United Stated: The Inflation Nation

I try my best not to talk about inflation too much. It’s a topic that enrages a lot of people, and it’s a subject that makes a lot of people sad. Yes, it’s VERY frustrating and infuriating that the value of the money sitting in the bank is effectively worth 7% less than it was at this point last year. And it’s likely going to get worse. 

This Thursday, we’ll receive yet another update on our inflation nation. This is a nation that sits 15th out of 20th on a list of G-20 nations in terms of our inflationary pressures. 

The target level set for this week is 7.3% year-over-year. And month-over-month, economists forecast a 0.5% uptick. This week’s report is critical because it will provide an answer on how aggressive the Federal Reserve will be when leaders raise interest rates in March. 

According to CME FedWatch – a tool that shows the probability of rate hikes by percentage that is effectively priced into the market – the odds of a 25-point (0.25%) rate hike sits at 85%. 

However, the odds of a 50-point hike (0.5%) increase now sits at 15%. (The odds of no hike is effectively 0%). 

Last week’s jobs number shows that the Fed has reached its goal of maximum unemployment, one of the two pillars of its mandate. The other pillar – maintaining inflation – requires aggressive action to prevent runaway depreciation of the dollar. 

Simply put: We have too many dollars chasing too few goods. Especially in the middle of a supply chain crisis, a labor shortage, and a massive wave of wage growth. The question is how investors can address the Fed’s pending action and what aggressive hikes would generate.

The Simple Answer

I don’t want people to overthink this situation too much, so I’ll offer you the simplest two outcomes. First, if the Fed moves forward with a 0.5% rate hike in its first action, it will likely impact technology stocks. 

There are many, many stocks trading at price-to-sales ratios north of 20. In many cases these companies are barely (if at all) profitable. A change to the benchmark rate will impact valuations of all stocks as investors finally have a risk-free rate worth a damn. 

Just look in the technology industry alone. There are a few absolutely absurd stocks that are trading at PS ratios that are still north of… 100.

  • Nano Dimension (NNDM) is trading at a PS ratio of 161.
  • Focus Universal (FCUV) trades at a PS at 226.
  • MicroVision (MVIS) is at 209.

There are dozens and dozens of these companies… and the numbers make no sense. To justify a PS ratio of 209, Microvision would need to effectively give investors 209 years of its revenue as a dividend over a 209 year period. Just at a PS of 10, a company must provide 10 years of revenue (over a 10-year investment period) as a dividend to its investors… without taking into consideration ANY costs. 

PDF Solutions (PDFS) – which trades at a 10.3 Price-to-sales ratio – is an example. A large number of zombie stocks – which have come down hard since November 2021 – could see another round of selloffs. And price discovery for so many companies will be miserable. Be careful…

How To Make Money in an Inflation Nation

On the other side, I can tell you that community and regional banks have been waiting VERY patiently for a rate hike. Remember, lending is the bread-and-butter industry of banking. And when the Fed keeps interest rates artificially low, it’s hard for them to generate money. 

Now – I will note that lending has been very difficult for banks over the duration of the pandemic. However, there’s a major trend in the banking space – and a simple valuation trick – that provides ample upside for the industry. 

Tomorrow, I’m going to break down this trend further. I’ll give you a few stocks that will certainly benefit from the Fed’s action AND this 35-year trend that has produced incredible wealth for patient investors.

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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