Four years ago, I had the amazing opportunity to go to the Masters golf tournament with my wife Melissa. This past weekend, the 86th annual Masters golf tournament was hosted at the Augusta National Golf Club. Being a self-described economics nerd, I started to think to myself, wouldn’t it be fun to compare prices of commonly purchased Masters merchandise today compared to four years ago? I thought this was a good idea because I was wondering just how bad inflation has become.

Four years ago, a Callaway Rogue golf driver cost about $250. Today that same club is $550.  Four years ago, a Masters Pin flag, which I have hanging in my office, cost $50. Today they are $60. Four years ago, a green logo ’ed Masters hat cost $50. Today they are $80. Amazingly, the one thing that has not increased in price is the legendary Pimento Cheese Sandwich. Four years ago, the famous sandwich cost $1.50. Believe it or not, this year the sandwich will still only cost $1.50. Don’t we all wish the goods and services we buy remained the same price as four years ago? Unfortunately, that’s not the case. 

It's not only golf equipment that has had large price increases. Energy is up 25.6% from a year ago, used vehicles are up 41.2%, new vehicles up 12.4%, food up 7.9% and housing up 4.9%. So, why is this happening? I believe there are 3 main reasons 1) the war in Ukraine 2) the Federal Reserve 3) Covid-19. 

Our hearts and prayers go out to the people of Ukraine. The attack by Russia on a free, democratic country is completely unacceptable and should be stopped immediately. The global effects of this war are profound. Russia is the 3rd largest producer of oil and gas. By cutting off their supply to the world through sanctions, the price of oil and gas has exploded. This action has worldwide ramifications.  Oil is the life blood of the global economy and when you increase its cost, you increase the cost of all goods that need to be shipped.

The second reason why inflation has been soaring in the Federal Reserve. The Federal Reserve oversees the money supply. They decide how much money should be circulating throughout the system. When they are accommodative, like they have been for the past few years, they pump money into the system. When they are restrictive, they take money out of the system. Inflation occurs when there is too much money chasing too few goods and services. As I mentioned before, the Federal Reserve has been accommodative for a long time. I would argue they have been over accommodative. From 2020 to 2021 the money supply increased 27%. To put this into perspective, that is the biggest jump in the money supply in America’s history. That is bigger than the Financial Crisis of 2007-2008 (10%), bigger than World War II (18%) and bigger than FDR’s stimulus to fight the Great Depression (10%)*. And this money-printing binge has now created the worst inflation in 40 years. Inflation destroys the purchasing power of the dollar, and it destroys the purchasing power of labor denominated in dollars.

The final reason why inflation is soaring is the aftereffects of Covid-19. When Covid-19 initially hit, the world economy came to a screeching halt. Business stopped, people quarantined in their homes and the purchase and sales of goods and services stopped. Fast forward to today, and people are making up for the last 2 years by buying cars, homes, motorhomes, boats, remodeling homes, traveling etc. This pent-up demand once again explains the backbone of inflation. Too much money chasing too few goods and services. 

My dad always says there are two things that move the markets in the short run. The Federal Reserve and taxes. The Federal Reserve has realized inflation is way out of control and they need to act. They have signaled their intentions to change their accommodative policy strategy to a more restrictive policy. This means they are going to start taking money out of the system. Typically, when the Federal Reserve decides to become more restrictive, the markets do not react favorably. There is an old adage, “do not fight the Fed.” We believe a storm is starting brew in the stock and bond markets as a result of this change is policy. So, how do we react to this upcoming storm? Batten down the hatches of course. If you know you are going to need money from your investment accounts soon, let us know so we can start raising cash. If you have money on the sidelines waiting to invest for the future, be patient and work with us develop a shopping list of great companies you would love to own. That is what we are doing here at the office. Waiting for amazing companies to go on sale so that we can purchase them for the long run at discounted prices. 

Thank you all so much for being a part of our team. We truly appreciate it.

Craig Rosenblatt, CPA

Financial Advisor

California Insurance License #0E18620

*Wheaton College- Understanding the Money Supply published 2021

Author Edmond C. Moy

The views stated in this newsletter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results. All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing