What to Expect from Inflation & Learning from Elon Musk

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What to Expect from Inflation & Learning from Elon Musk

In today’s podcast episode, we’re going to go rapid fire through several different economic updates you might be interested in including the latest with Elon Musk and where inflation might be headed. Let’s start with one of the biggest pieces of news last week – The Fed raised their short-term lending rate by .75%. That’s the highest rate increase in a single meeting since the 1990’s. They are serious about inflation, to say the least. Remember that short-term Fed rate increases affect the prime rate most directly. This is the rate that most commercial loans are tied to. CD rates are affected by what the Fed does, but this cycle may be a little different. Banks are awash in cash, so while CD rates are likely to come up, it may not be as fast or as high as it has been in the past. While the Fed has been raising rates on the short end, rates on the long end have also continued to go up in the form of higher mortgage rates are higher as well. 30-year mortgage rates are as high as 6.5% as of yesterday. Can you believe that we started the year at about 2.875%? That is a massive move in a short period of time, and I can’t imagine that it wouldn’t have, at the very least, a cooling effect on the housing market. There is a lot going on with rates, and we will continue to keep you informed on these moving rates going forward.

Moving on to some companies of interest, Netflix, at one time a darling for Wall-Street, lost subscribers for the first time in a decade back in the spring. Since then, its stock price has been hit hard. It’s down over 70% in 2022. Much like another pandemic high-flyer, Peloton, it bulked up its spending only to find that as people start getting back out of their houses, they are watching less TV. Additionally, Netflix is facing streaming competition from Disney +, Paramount +, Peacock, and HBO Max just to name a few. Streaming companies know that content is king – so the ones with shows that grab you are the ones you’ll keep subscribing to.

Speaking of companies in the news, Twitter has been in the headlines lately. Its board approved the $44 billion dollar bid from the world’s richest man, Elon Musk. However, some doubt was recently cast on the deal when Musk questioned the number of false users on twitter, called bots. Twitter claims that 5% of its users are bots and Elon Musk is questioning the validity of that statement request more access to their user data. He also stated today that there are some “unresolved matters” regarding the deal. Separately, Musk has indicated that Tesla will be laying off 3-4% of its salaried workforce. Like Netflix, he thinks they got a little heavy on their spending during the good years of auto sales and wants to make adjustments before the next recession hits.

A couple of takeaways for small business owners – remember that when times are good, it’s easy to staff up. But when business starts to wane, you don’t want to be put in a position to have to lay off workers. So no matter what economic environment you find yourself in, pace yourself.  Don’t base your assumptions on future business on the last couple of years. It is very likely over the next two years that we are going to see business waning and we may even see a recession. Remember that the race for the small business is a marathon, not a sprint. Take the long view and make decisions based on the truth that the business cycle always ebbs and flows.

Inflation continues to be the highest it has been since the early 80’s. For Gen Xer’s like me it has been a new experience. I was a child in the 1980’s, so this is the first I’ve seen of significant inflation in my lifetime. Higher prices have come and are coming to everything. I talked with a local restaurant owner, and he commented that for the first time in his career, chicken was costing him more to buy than fish. Imagine that. How are people coping? Right now, there are still a record amount of savings in bank accounts, so many people are slowly whittling away at their savings. Others on tighter incomes are substituting lower priced items for more expensive ones. Inflation will come down, eventually. But it will take time, and even then, it will likely remain higher than it has in recent decades for some time. What can you do if you don’t have enough money to make ends meet? You have two options, increase your income or decrease your spending. It’s not easy, but it really is as simple as that. If you are going to increase your income, you could grab a part-time job. Plenty of people are hiring right now, so you’d have no trouble finding additional work on the weekends or at night. The question is whether or not it is worth the extra time. To decrease your spending, you can reduce how often you eat out, what you buy when you eat out, and how much you travel this summer. You may not like either of those options, but as the cost of everything rises unfortunately our options are limited.

Supply chain snarls are causing many businesses to consider other options including vertical integration. Restaurant chain Wingstop, for example, is considering an acquisition of a poultry producer to supply their own chicken. Vertical integration means depending less on other companies to supply the things you need to do what you do. This is also moving many companies that are depending on others in the supply chain offshore to onshore, to supply from the US rather than overseas, especially with the geopolitical instability we have experienced recently. The war in Ukraine has caused a huge effect on the supply chain and has made many people realize how vulnerable they are or dependent they are on other countries to produce their supplies. You’ll see more “made in the USA” stickers. Unfortunately, this does not help with prices in the short-run. Less global competition means it will cost more to produce things. But many corporations figure it’s better to have more expensive stuff to sell than no stuff at all.

I mentioned earlier that interest rates have been rising. If you’re not happy with how quickly CD rates are rising, we’d invite you to contact us about fixed annuity rates. We’re seeing rates as high as 3.5% for 3 years and 4% for 5 years that we can discuss with you to see if it is suitable for your unique financial situation. Please keep in mind that fixed annuities are not FDIC insured, have no bank guarantee, and may lose value. If you are interested in finding out more, you can start your financial conversation with us today by exploring our website or contacting your local branch. If you’ve found this podcast helpful, we hope you will subscribe to it. You can subscribe on your favorite podcast app or share it with your friends and families on social media. And until next time, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on June 21, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.