 Good day, fellow investors. I hope you're having a great weekend. Today's topic will be what's going on in the stock markets. We have seen the best S&P 500 week in the past five years since 2013. And then, of course, the topic of the week was inflation. So it's due that we see how inflation affects stocks from a longer-term perspective as we do on this channel. And then I'm going to finish with some foods forethought on real estate investing and interest rates, mortgage rates. So let's immediately start with what happened in the stock market last week. The S&P 500 has had the best week in the last five years, which is something amazing after the carnage we have seen in the last few weeks. So everything seems back to normal, which is good and also bad news, depends how you look at it and depends how invested you are in the market. If we look at what happened since the start of the year, we can see that the correction was pretty sharp. It had two bottoms and now things are looking as nothing has happened. Stocks are almost in positive territory for the year. So everything looks fine. The VIX index is a bit higher, has stabilized around 19, so people still expect some volatility that can happen. But those are options, you used 30 days options. So after 30 days, maybe the VIX will even get lower and people will quickly forget about this correction. What happened last week? Last week and in this week, the big banks started saying how these corrections are normal, how something like this is very normal in the market. It is a healthy correction and that usually in 12 weeks, 20 weeks after such a correction, the market reaches the levels previous to the correction and surpasses them later. Only in bear markets, the market stays lower for longer times on average. This chart is from Goldman Sachs and they have been saying how corrections happen within bull markets can be sharp, but they tend to be short lived. Such messages from most big banks really gave investors confidence to invest back into the market. If we look at corrections and bear markets from the past, we can see how most of them recover really, really quickly and all of them recover eventually. Only in January 73, 74, it took more than a year and something to recover, but that's also not long. So the notion from this data is that stocks will always recover. Everybody thinks that stocks will recover, so better to be invested as the stock market can go only up. That's the message that institutions are sending that everybody is sending about stocks. So that's the herd, will you trust the herd or not? That's up to you. We will definitely talk more about that on this channel, so stay tuned. Now today's topic was inflation and the news was that inflation has finally edged higher and that could have a lot of repercussions on the economy, on the Fed, on stocks. It's important to see how inflation affects stocks. Will stocks go higher or lower? There are three scenarios we'll discuss them all. Let's first see what's going on. As you can see, inflation has been anemic but has finally started to go higher and reach the target rate of between 2 and 3% that the Fed has imposed for themselves. Now they might even let inflation run a little bit higher in order to not hit the brakes too hard. However, what's important the stock market, as we have seen before, didn't really act to inflation. Everybody was buying the deep as the salespeople, sorry big banks and institutions came out with statements that it's all fine. So no effect from inflation yet. So let's see how inflation affects stocks. The scholarly model, inflation, yes, increases input prices but also increases output prices. So the margins, if there are healthy margins and if demand for the product is healthy, will increase a little bit and thus inflation, normal stable rate inflation, should be good. What's not good for stocks are huge spikes in inflation because then the business cannot transfer the prices to the customer that fast. If there are huge spikes in inflation and of course the Fed wants stability, they want a stable inflation rate so that it's easier to pay the debt. That's why you have inflation that makes it easier to pay the debt and makes those holding those debt suckers. So think about governments, treasuries and government debt and why it's better perhaps to be in debt than not. So saver, sucker or possibly in this environment also with inflation. Also what's very important, we have discussed in an old video, 99% of stock market returns from 1929 calculated have come from inflation and dividends. So inflation plays a huge part with investments. However that what happened the past and I wouldn't go into an academic analysis about what happened and how inflation affected stocks because there are millions of variables there and so nothing you can really hold on. The best thing to do I think is look at the common sense where we are now and what might happen and that's also what we're going to do. Before doing that just another important factor is the weaker US dollar which makes US imports and commodities more expensive but aids exports. Nevertheless the weak dollar increases inflation. So I already said that stocks should benefit from inflation as they can transfer higher prices to customers and increase their margins. That's one. However there are other things that inflation does. Inflation increases the required rate from bonds because you want at least to be protected from inflation when you invest in such investments. So as the Fed increases the interest rate to let's say stabilize inflation to keep inflation stable as interest rates for bonds go higher then the required yield in the long term, don't look at what happened this week, required yield also from stocks will have to be higher. So you have to see if those earnings improvements those earnings increases that the stocks can transfer on to customers will be enough to counter for higher yields coming from treasuries. We have seen the 10-year treasury already almost at 3% the 2-year treasury above 2% which are very very significant because now people will start looking at risk in relation to the yield. As long as stocks go up as long as everybody's positive the sentiment and the trend is strong. However when the trend when the risk changes we will see more sharp declines like we have seen last few weeks because it's all about risk balancing. Some people will oh look the 10-year treasury is 3% I'm happy with 3% for the next 10 years no risk. If you invest in stocks you are maybe we'll get in the next 10 years 5-4-5% but the risk is 50-70% and so when you look at it from a risk reward perspective there is a lot of things that could change. Don't look just at short-term sentiment and short-term positioning and short-term what the banks are saying. So be careful there. Look at what's your goal and your investment risk reward from this perspective. The point is that doesn't really matter what happens in the next few months. The point is the long-term risk reward. If the Fed increases interest rates another three times perhaps four times if inflation picks up this year then we will see the 10-year treasury perhaps at 4% in 2019 if there are further expected increases in interest yields and then you will see suddenly a quick shift and the impact on stocks. So inflation higher interest rates, higher expected yields, higher expected returns from stocks, higher discounts for future cash flows in stock valuation models which push stock values lower. So be careful about that and think a little bit in the long term not just what happens this week because the market is usually short-term oriented and myopic. Remember that. Further inflation might be the first sign of an overheating economy so of an economy where demand is higher than what the economy can produce of the potential signaling overheating economy signaling to the Fed that they have to push the brakes which inevitably as it's very difficult to carefully balance that leads to a recession somewhere down the line. So inflation also signals higher risk of a recession in the next one, two, three years that's also very important. So we have one positive increased revenues, increased earnings and two negatives higher expected return and higher possibilities of a recession which then pushes earnings down and valuations down and stock prices down. So two negatives, one positive and it's important to see how those balance out. Also what's very interesting is to see which stocks will do well and which stocks will do badly. So stocks like dividend stocks that cannot transfer higher prices on customers but have created a stable perspective but will be affected by higher yields will go down. So because you will see okay this dividend is 3% now the yield on the treasure is 3% this stock is much riskier this has no risk and of course you need 5% from this for the same risk reward or even 6% and then the stock price drops 50% because that's the 3% to 6% yield if the company cannot transfer higher prices. So you have to see also about the company can they increase prices without affecting demand that's the key when investing with inflation. Further companies that require a lot of debt constant refinancing will find refinancing difficult or at higher cost plus if they have low returns on capital that increase in debt costs might destroy their earnings. So you might soon find a company that has let's say high price to earnings ratio now at no earnings at no potential and no no positive outlook and then such companies will be in trouble thanks to inflation because inflation is a game changer it will change the economic environment however there will also be stocks that will do very good those who have a lot of debt very long term debt with fixed interest rates that they got now we have mentioned BERIC that has most of the debt after 2032 I don't know it's fixed or volatiles have to recheck that however such stocks will do good and take advantage of the past debt of the maturities that they have gotten at very low interest rates so that's also something to see REITs those who have very long maturities will do well those who have very very short maturities with the need of refinancing won't do that well so very interesting how that evolves and how every stock will be affected differently so therefore the reason such rule okay stocks will be doing good with inflation or bad it all again depends on each stock also stock that have a lot of value a lot of producing assets that have some return that can increase their prices thanks to inflation will do well however we have seen how book values have been completely deteriorated which again is something different than what we have been seeing in the past so again you cannot look at what happened in the past and what will happen now because everything is different companies do a lot of buybacks that lower the book value and the money is spent on something else so there is also a question if companies will have the assets to protect for inflation as it has been the case in the last 90 years also who does well in the late part of the economic cycle with inflation commodities commodities prices go up as there is demand and commodity producers with fixed let's a relatively fixed cost to do very well here i want to finish with something very important this is what happened to mortgage interest rates in the last few months that they have spiked from 3.8 below 4 to 4.4 and 4.6 for the 15 year and the 30 year fixed mortgage this makes buying a house much more expensive this makes mortgage payments much more expensive which could lower demand for houses which is also a sign how inflation impacts the economy it really puts pressure on that on a lot of things that involve huge investments and huge debt decisions so it's very interesting how inflation is really a game changer signaling the late part of the economic cycle the Fed and everything they will try to balance around that so that it doesn't put the economy into recession but eventually the economy is cyclical and we will see a recession perhaps next year perhaps this year perhaps in three years but be careful and expect that so it's all about risk reward it's all about your personal risk reward your personal perspective and what you can tolerate so be sure to analyze the risk what's going on in the markets what are the probabilities of a crash of a recession now inflation has increased the probabilities of a recession in the next year two years so we are going to see how that evolves continue watching the channel i'm going to constantly update you on what's going on in the markets and how that reflects your financial position and how you can see how protect yourself or take advantage of what's going on in order to reach your financial goals thank you for watching looking forward to comments i'll see you in the next video