Cash flow is king in a world smitten by nosebleed valuations and unsustainable spending
The Fed’s commentary around potentially increasing the Fed Funds Rate in 2023 vs. 2024 reminds me of the equity analyst who would base his valuation case on a P/E multiple applied to an earnings estimate that was five years in the future. Much can happen that could significantly change P/E multiples and earnings figures five years out. In the case of the Federal Reserve, that variable is price inflation. Import and Export prices continued to climb as reported by yesterday’s U.S. Import and Export Price Indexes Summary which details double-digit percentage price increases in both Imports (11.3%) and Exports (17.4%). Sure, some elements driving price increases may be “transitory”. However, to dismiss almost all price inflation as transitory rings of a Federal Reserve positioning statement rather than an honest conversation based on reported numbers and real life experience. Let’s not forget, we have had asset price inflation since April 2020 as a result of the the Fed’s loose monetary policies. It is only over the past few months that consumer goods and services have also experienced price inflation. The Fed will not be able to dismiss price inflation in perpetuity and will eventually be required to tighten policy (yesterday hardly qualifies as a “tightening” of the Fed’s stance). When the Fed ultimately does take action, equities will have a long way to fall. Thus, cash flow yield and other profit-related valuation metrics are at the top of my screening tool list.