You don’t run your gas tank down to “E”… ride your credit cards to their max limits… or rip around the highway on-ramp as fast as your car can go.

The reason why is obvious… When you’ve exhausted your margin of safety, one unexpected issue can spell disaster. A traffic jam, a sudden expense, or a few pieces of loose gravel could put you in harm’s way.

The Federal Reserve and our fiscal planners failed to heed this simple logic.

They ran the economy hot, trying to take that curve at max speed.

It started as early as the 2009 financial crisis. The Fed dialed interest rates down to zero… and kept them low for roughly a decade. Then, its quantitative easing strategy kicked into high gear with the COVID-19 crisis…

The Fed backed new kinds of bonds, and Congress released massive stimulus packages. Still, by the end of last year, it looked like we might escape economic disaster…

The supply chain was righting itself – though it still had some work to do. And the Fed had primed the market for a series of rate hikes. The maneuver would be tricky to pull off, but it looked like the Fed could bring inflation back to manageable levels without tripping a full-blown recession.

Then, we hit the gravel.

Today, I’ll share what’s happening in the world and what I expect as a result – specifically, when it comes to inflation…

First, the war in Ukraine has roiled financial markets – in particular, commodities. Supply chains were already weak, and they’ll only get weaker from the mix of war in Ukraine and the resulting efforts to punish Russia economically.

We don’t have to tell you about the soaring prices of oil, wheat, and other commodities. It’s front-page news… And you don’t even need the newspaper to know prices have soared at the gas pump or the supermarket.

The Fed tried to walk a path too narrow, without room for error. The war threw it off course.

But more trouble is brewing…

China has locked down Shanghai, a city of 25 million people, in an effort to contain a COVID-19 outbreak. It only recently ended lockdowns in Shenzhen.

China has stuck to a COVID-zero policy that imposes major quarantines to prevent the virus’s spread. That includes stopping manufacturing and any other businesses considered nonessential.

The market does not yet understand the severity of what’s happening…

China is in for trouble. The Omicron variant is driving its current wave – and as we know from our own experiences with Omicron in the U.S., it’s much more contagious than previous variants. China has ineffective vaccines and a population that has been largely unexposed.

If China continues to fight COVID-19 with lockdowns, the problems with the supply chain have just begun…

Just recently, shares of Apple (AAPL) fell on news of the Chinese shutdowns. Its manufacturing partner, Foxconn, had to halt operations at its Shenzhen locations.

We’ve already seen car prices soar due to a shortage of computer chips. If China locks down, it’s going to get worse.

Take a look at the Global Supply Chain Pressure Index, a tool created by the New York Fed…

We’re learning the supply chain is not a simple thing that will quickly return to equilibrium. The longer the trouble lasts, the more it seems like the trouble will last longer.

Now, add Russia’s war and China’s lockdowns, and the already-dated talk of “transitory inflation” sounds like a punchline…

Inflation expectations (measured by the five-year breakeven rates) have already risen sharply, surpassing even the levels that raised inflation fears in 2021. Take a look…

And those breakeven rates move faster than the official data.

The inflation statistics reported yesterday showed the Consumer Price Index (“CPI”) up 8.5% in March – another new high for our modern bout of inflation. Take a look…

As a result of all this, my team and I are blowing out our inflation outlook. Specifically…

We expect to see a double-digit print on the CPI within the next three months.

Importantly, that doesn’t mean it’s time to sell everything…

I’ve shared this idea before in DailyWealth, in a 2018 essay. And it’s still true today…

The best way to minimize losses and stress in most market downturns is through asset allocation, diversification, and stop losses… not changing your entire portfolio based on what might happen in the next month.

We’re going to keep investing. We just need to find the right stocks and the right assets to keep us safe while also providing us with income and capital gains.

Nothing is guaranteed… But the truth is that if you own businesses that create value for shareholders – and pay a reasonable price – you’ll do well over time.

You just need to prepare – and align your portfolio with the opportunities the market is giving you.

Here’s to our health, wealth, and a great retirement,

— Dr. David Eifrig

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Source: Daily Wealth