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Energy Up, Food Up, USD Up
Is now a good time to invest money in the market?
The headlines in today’s market conditions all point up. Peter Schiff, a prominent economist and active investor, is a widely-known critic of central banks and his belief is that the current reality of high inflation should be normalized. And he’s not wrong.
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USA vs Czech Republic Inflation Data
In the United States, inflation is 8.3% higher now than a year ago. US energy and food continue to see abnormally high costs, and monthly rent and vehicle sales should be stabilizing for the future. Since rent and vehicle sales are higher-priced items, the increase in these areas tend to be entrenched into the economy, thereby solidifying its stability. By removing the abnormal increases in food and energy costs, then the inflation rate from August 2021 to August 2022 is 6.3%. That is significant!
In Czech Republic, the inflation rate when including energy and food is 17.2%, and the rate removing food and energy — known as core inflation — is 14.7%. Even more significant!
Source: Czech National Bank | Link
Central banks around the globe share the standard target rate of inflation to be around 2%. As you can see from the image above, the expected inflation rate in 2023 and ‘24 in Czech Republic is 9.5% and 2.4%, respectively. In the US, we are suppose to see flattening and slight decreases in levels of inflation over the next two years, but not yet to achieve 2%.
I agree with Peter that inflation rates as determined by Central Bankers and their target rate of 2% will not occur. Furthermore, I fully expect an announcement before the end of 2024 that Central Bankers will speak diplomatically to the “natural” increase of a target standard inflation rate. Gone are the days of 2%. Core inflation as evidence of rising and entrenched prices of rent and vehicles will continue to remain at these elevated levels. The general populace may practically, but begrudgingly accept a 5%-6% inflation rate for the next 5 years. But, Central Bankers may compromise in their narrative and suggest that 3%-4% inflation rate is achievable over a 10-year period.
Is now a good time to buy stocks?
The international currency markets are yet another factor that is introducing different challenges to publicly-traded companies. Many companies are adapting to a stronger US Dollar, which translates into higher costs for non-US companies. For instance, 24.60 CZK equals 1 USD, and this rate is at one-year highs. Hence, it takes more money to buy less shares.
This is obviously not ideal. Money should be buying more, not less shares. So… no, it is not a good time to buy.
When is a good time?
Two factors to consider when there is a good buying opportunity are time frame and investment plan. Both of these factors carry equal weight in deciding if today’s market dropoff is a good time to buy.
If an investor is looking to earn investment income to buy Christmas presents or even a car by end of the year, then the time frame is short and the risk is high. Depending on the amount of the investment, an investor should exercise prudence whether or not the risk is worth the reward. This sounds obvious, but to make it real, an investor should be able to forecast the actual gain or loss of making such investments.
If an investor stretches their time frame to two years and longer, then today or this week presents a good opportunity to enter the market or load up on more shares in your current portfolio. The risk of investing now is lower and offset by the time horizon since any gain will not be realized until a time in the distant future.