How to handle an inflation shock that no one is prepared for
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Dear Readers,
How prepared would you say you are for a sudden spike in inflation?
If you haven't given it more than a second of thought, you're not alone. After all, the annual inflation rate for the US is sub-1% right now, and it's hovered around 2% for much of the past three years.
As it turns out, clients of Morgan Stanley are similarly nonplussed by the prospect of an inflationary shock. It's an attitude the firm says has been emboldened by the lack of inflationary stress seen following the 2008 financial crisis.
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But Morgan Stanley says to ignore the threat of an inflation spike at your own risk. It argues that conditions are vastly different now — especially as it relates to the expansion of money supply — and that a surge could occur. And to make matters worse, the firm says most investor portfolios are woefully prepared for such a shift.
Parsing Morgan Stanley's inflation wake-up call is just one example of the work being done by the Investing team at Business Insider. We're here to unpack the ever-changing market landscape during these unprecedented times. See below for our best stories of the week, including a wide array of recommendations, strategies, and tips for navigating uncertainty.
Thanks for reading!
-- Joe
How to transition from house-flipper to full-fledged real estate mogul
Mike Simmons started as a house-flipper, but shifted gears to a different strategy when he realized how much faster he completed transactions. Now he completes about 100 deals a year and rakes in over $1 million in profits.
And then there's Brian Burke, the president and CEO of Praxis Capital. He got his start in real estate after being enamored by a late-night infomercial touting financial freedom. Like Simmons, he implemented a sudden pivot in strategy in order to open up more profitable opportunities.
Read the full stories here:
100 deals and $1 million in profit a year: Here's how Mike Simmons made a simple change to his real-estate investing strategy that took him from small-time house flipper to full-fledged mogul
No money, no education, and no connections: Here's how Brian Burke went from a small-time house flipper to a real-estate investing magnate with over 750 deals and 3,000 units
A catastrophic scenario for the Fed
The Federal Reserve could become technically insolvent due to the risks embedded in some assets it has added to its balance sheet since the coronavirus crisis started, says Jay Bryson, the chief economist at Wells Fargo.
While the ultimate consequences of this are likely to be more political than economic, Bryson explores a possible scenario where the Fed's decision-making power is hamstrung in the future by the extreme measures the bank is taking today.
Read the full story here:
Wells Fargo lays out a plausible scenario where the Fed becomes insolvent — and breaks down the catastrophic effect that would have on the bank's ability to handle future crises
How to invest in the space race
Investor interest in space is skyrocketing, as companies like SpaceX, Blue Origin, and Virgin Galactic race toward a number of milestones.
In an exclusive interview, Morgan Stanley's Adam Jonas told Business Insider that interest levels may be getting too high, and concurred that space investing could see dot-com-style mania.
Read the full story here:
Morgan Stanley's top transportation analyst shared with us his playbook for profiting from the space-investing boom — and explained why SpaceX could be in a 'winner-take-all' position
Stock pick central
Seeking experts who are willing to name names? Look no further:
- JPMorgan says buy these 19 'diamond in the rough' stocks that have plunged from yearly highs, but are spring-loaded for huge gains ahead
- Investors are piling into socially responsible ETFs at an unprecedented rate — and Morgan Stanley says these 4 stocks are best-positioned to profit from the trend
- Tom Marsico's global fund has crushed its benchmark for 13 years — and returned 28 times its peers in 2020. Here's what he's been buying, and the beaten-down stocks he plans to grab after the pandemic.
- BANK OF AMERICA: Buy these 5 commodities now for profits into next year as pandemic uncertainty boosts their prices and lifts gold to $3,000
Chart of the week
Morgan Stanley points to the data plotted above — which reflects US money supply growth — as a leading indicator of inflation. As you can see, there's been a historic spike as the Fed has rolled out efforts designed to hasten a post-coronavirus economic recovery.
The firm qualifies this with another potentially damning observation: People just aren't worried about an inflation spike, nor are they positioned for one. Morgan Stanley sees this as short-sighted and potentially damaging.
Click here for more details
Quote of the week
"This is potentially more inflationary than appreciated which means back end rates can rise. Very few portfolios are prepared for such an outcome. Such shifts can happen quickly when they are so unexpected."
— Mike Wilson, the chief US equity strategist at Morgan Stanley, discussing the potential impact of further US money supply expansion