Welcome to the third month of the year, originally named after a type of military walk.
A lot has been said about this month such as March comes in like a lion and goes out like a lamb.
Beware the ides of March!
March 15 marks the day when ancient Romans murdered their emperor for taking all the credit for inventing the salad.
How is your path to mastery? Stay with it! Remember on average, it takes more than 2 months before a new behavior becomes automatic — 66 days to be exact.
SURFACE PRESSURE
(EDITOR’S NOTE: THIS ARTICLE CONTAINS SPOILERS)
If you have children and even if you don’t you have probably seen the film Encanto.
If you have children you have likely watched this film three times a day for the past month, but it is also highly likely that you have only watched part of the movie or song on loop. Watching only part of a film makes it difficult to grasp, but after many partial viewings, I finally understand the plot of Encanto.
The film appears to be about a familia known as the Madrigals who run a sort of magical cartel. This cartel operates a serious enterprise no mickey mouse business as a result the Madrigals like most “familias” operate with a hierarchy.
At the top is Abuela Madrigal who “runs the show”. Abuela leads all of the Madrigal’s business affairs, providing magical favors and protecting the townspeople in exchange for labor and gifts.
Her son Bruno, the Michael Corleone of the family is not spoken of. After he crossed Abuela, she disappeared him. All we know is that Bruno has a seven-foot frame with rats down his back.
Abuela keeps her family close even employing her granddaughter Luisa as muscle.
When another granddaughter Mirabel searches for what is causing issues with the family’s magic. Abuela shrugs Mirabel off, essentially threatening Mirabel that she “will sleep with the fishes” if she gets in the way of Abuela solidifying her empire. Abuela plans to further consolidate power by marrying off another granddaughter, Isabela, to a rival family the Guzmans.
Again I have seen this movie 50 times, but I still haven’t watched the whole movie. I just hope Encanto Dos: Mas Encanto features a helicopter scene as an homage to Goodfellas.
I will gladly pay you Tuesday for a hamburger today
Seemingly everywhere you turn these days inflation is hiding. So much so news about inflation has overinflated.
What is inflation?
In short, inflation is too much money chasing too few goods.
Is inflation here for good?
Unfortunately at least for the medium term. Prices tend to be sticky upwards and what was once transient can become permanent.
How do we calculate inflation?
The Consumer Price Index (CPI) measures the average change in price over time of consumption goods and services by following the prices of a representative sample of consumption items in the retail establishments that sell them.
What is the current inflation rate?
Currently, CPI is at 7.5%, the highest reading since the 1980s
Costs have increased way more than the inflation rate, how accurate is this number?
CPI might be severely undercounting inflation due to something called hedonic quality adjustments. This is a method of adjusting prices whenever the characteristics of the products included in the CPI change due to innovation or the introduction of completely new products.
If the price of a shirt had been $20 and that of the replacement shirt is now $30, rather than using a $10 increase in price for that sample observation, if the quality is better than previous the price difference captured by CPI the is a hedonic quality adjustment for that benefit. Rather than a $10 increase in CPI, recorded inflation may only increase by only $0.16!1
What causes inflation in the first place?
The real cause of inflation most of the time are maladjustments within the wage-cost-price structure: breakdowns between wages and prices, between prices of raw materials and prices of finished goods or between one price and another or one wage an another.
These changes removed the incentives to produce or have made it actually impossible for production to continue.
Not until these maladjustments are corrected can full production and employment be resumed.2
What does that mean en inglés?
Inflation means you are paying more than you used to for goods and services. That is if you can even find them.
One inflation “positive” is you might receive a raise, however that salary increase likely only makes you feel rich. Just because you make more money doesn’t mean you are now wealthy, on the contrary thanks to inflation your purchasing power has likely decreased.
WON’T SOMEBODY THINK OF THE CHILDREN
The Federal Reserve is the central banking system of the United States of America which operates monetary policy under the so-called dual mandate:
To promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.
The Fed hopes to keep prices stable and control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.3
To counteract recent inflation, the Federal Reserve plans to raise interest rates up to 7 times this year, which could equate to a fed funds rate of at least 1.00% - 1.25% by the summer up from 0.00%-0.25% currently.
Most of those in political office, quite understandably, are firmly against inflation and firmly in favor of policies producing it. (This schizophrenia hasn't caused them to lose touch with reality, however; Congressmen have made sure that their pensions - unlike practically all granted in the private sector - are indexed to cost-of-living changes after retirement.)
Discussions regarding future inflation rates usually probe the subtleties of monetary and fiscal policies. These are important variables in determining the outcome of any specific inflationary equation. But, at the source, peacetime inflation is a political problem, not an economic problem. Human behavior, not monetary behavior, is the key. And when very human politicians choose between the next election and the next generation, it's clear what usually happens.
-Warren Buffett4
Remember a few months ago thinking 2022 New Year, New You! It’s quite possible that “2022 You” might currently be much less well off than the “2021 You” and that “New You” is likely very interested in making back that money.
simple rules for identifying market cycles
There are three ingredients for success when investing —aggressiveness, timing and skill—and if you have enough aggressiveness at the right time, you don’t need that much skill.5
Market tops are relatively easy to recognize. Buyers generally become overconfident and almost always believe “this time is different.” It’s usually not.
There’s always a surplus of relatively cheap debt capital to finance acquisitions and investments in a hot market. In some cases, lenders won’t even charge cash interest, and they often relax or suspend typical loan restrictions as well. Leverage levels escalate compared to historical averages, with borrowing sometimes reaching as high as ten times or more compared to equity. Buyers will start accepting overoptimistic accounting adjustments and financial forecasts to justify taking on high levels of debt. Unfortunately, most of these forecasts tend not to materialize once the economy starts decelerating or declining.
Another indicator that a market is peaking is the number of people you know who start getting rich. The number of investors claiming outperformance grows with the market. Loose credit conditions and a rising tide can make it easy for individuals without any particular strategy or process to make money “accidentally.” But making money in strong markets can be short-lived. Smart investors perform well through a combination of self-discipline and sound risk assessment, even when market conditions reverse.
— Stephen A. Schwarzman, What It Takes: Lessons in the Pursuit of Excellence
For more on Steve Schwarzman see RatLinks October 2019: “Statistically Speaking”
Remember to buy when others are despondently selling and sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.
It is hard to be contrarian but not impossible.
A simple mental model to take action is “to travel into the future and look back.”
In 2023, do you think you’re more likely to say, “Back in 2018, I wish I’d been more aggressive” or “Back in 2018, I wish I’d been more defensive”? And is there anything today about which you’d be likely to say, “In 2018, I missed the chance of a lifetime to buy xyz”? What you think you might say a few years down the road can help you figure out what you should do today.”
― Howard Marks, Mastering the Market Cycle: Getting the Odds on Your Side
Howard Marks