Hi! Welcome back to the MSI weekly newsletter. In this edition, I will focus on inflation, and how recessions start.
The week that was:
The term inflation is all over the news lately. Inflation is when the cost of products and things we use in our everyday lives increases gradually. Inflation can be caused by many things such as high oil prices, increase in salaries, high demand and low supply of products, etc. For example, a few years back, a virus affected chickens and caused a shortage of eggs. Because eggs have high demand and supply was low, the cost of eggs went up threefold!
Recently, many companies have been experiencing supply chain issues due to Covid. Because of the pandemic, companies were losing many employees, and had to increase salaries to retain them. Companies had to increase prices of their products to meet the salary increases. All of these factors have caused inflation to increase greatly over the past few years.
The Russian invasion in Ukraine is also contributing to inflation. Russia is one of the biggest oil producers in the world. Most European countries, including many NATO countries, rely on Russia for their oil and energy. The war and sanctions imposed on Russia have caused oil prices to increase rapidly, and contribute to inflation.
So why can high inflation be dangerous? When inflation rus high, companies have to spend more money to make their products. So they have to pass along the price increase to their customers by increasing the prices of their products. When prices are higher, less customers are attracted to the product. That causes the company to start losing business. That is called demand destruction. When a company loses business, they start laying off employees. Recessions start when too many employees are laid off from many companies. High inflation can be the root cause of a recession.
For example, Chipotle's burrito bowl is very popular. It costs around $8.25. If Chipotle raises the price to $20, many people will not want to buy it because it is too expensive. If a Chipotle location employs 5 cooks, and they start losing customers, that Chipotle will no longer need 5 cooks. They would have to lay off some of their cooks. This would be the case for most of the Chipotle locations. When this happens for many different companies and businesses, there would be a lot of unemployment.
When inflation gets too high and businesses are experiencing demand destruction, they have to get their customers back. The best way they can do it is by starting to lower the prices. That is the opposite of inflation: deflation. However, that is not a very effective solution to inflation. Businesses might gain a few customers, but many customers would have lost interest and will never return. Their profit margins will also be lower because they are selling products at a lower price.
In short, inflation was already high and the war has added to it.
Bought 10 BROS at $45.5
BROS is a promising company that I expect to do very well in the future. I added to my position because they had good results, and BROS does not have any exposure to Europe. Because of that, Dutch Bros will not be affected the way that same other companies that have exposure to Europe have been affected.
Bought 2 BURL at $187.37
Burlington Stores recently announced poor results. That caused the stock price to go down a lot. I used the opportunity to add to my position.
Bought 2 DIS at $140.21
Due to the recent market conditions, the stock price of Disney went down, so I added to my position.
Bought 5 UL at $45.10
Adding to my position in Unilever is not the safest thing at the moment, because UL is a global company and it has exposure in Russia. But UL pays a high dividend, and since they sell essential products, the company will not be affected badly in a recession.
Sold 10 PHG at $31.3
PHG is a good company, but it is stuck in a tough situation at the moment. There are lawsuits against them because of the ventilator problem. PHG is also a European company, so naturally they have a lot of exposure in Europe. All these problems will take time to resolve.
What I am watching out next week:
I am watching out for any peace talks between Russia and Ukraine. If they make peace, the stock market will temporarily go up, but it will not solve the problem of inflation. After a few days, the focus will shift back to inflation.
On March 15, the Fed are expected to announce an interest rate hike by 0.25%. I will wait to see if they increase it by a quarter, or if they change their mind due to the war. I still have a high cash balance and I hope to buy some blue chip stocks at good prices in this market environment.
Thank you for taking time to read my newsletter! See you next week!