If you've been around the block and traded, some stunts you've probably heard a lot of talks about inflation and interest rates in the news lately or you've probably seen this guy around. He holds a meeting and opens his mouth to talk every couple of months and the stock market goes bananas seriously, and here i thought that elon tweets were the only things that traders have to worry about as traders or investors in the stock market. It's extremely important for us to understand inflation and affects decisions regarding interest rates and its effect on the stock market. So before we start, please do me a huge favor and inflate the like button to at least seven percent more okay.

Thank you very much. I really appreciate it now that you've inflated the like button. We must discuss what is inflation in the simplest terms, inflation is just a way of saying it takes more of your money to buy the same things you always bought. Essentially, it means your purchasing power is declining.

Let's look at this 100 bill, for example. Now, yes, this is the canadian dollar bill. Look at this is so much prettier and more colorful than the american dollar bills, but don't let this fool you, this 100 canadian, is probably worth only. I don't know somebody do the math like 20 in us dollars.

What you can afford with this 100 really depends on your purchasing power, and that is determined by this scary word called inflation more than 50 years ago in 1960s, 100 is enough to buy you a washing machine, guess how much you need to purchase a brand new Washing machine now, in 2022, you could still buy a washing machine with 100. As long as it looks like this before you make fun of my very own, washing machine, hey, i'm a millennial. Okay, this is what we call vintage anyways. Nowadays, a brand new washi machine cost you 700.

on the low end and over 2 000 on the high end. The point being 100 does not get you as much today as it did 60 years ago, and that's because of inflation. That same amount of money is just worth less than what it was a long time ago, or even just two years ago, before the pandemic. In 2020, inflation is the rate of increase in prices of goods and services and the cost of living over a period of time.

There are many causes of inflation and they could get quite complicated and make you and i want to fall asleep, but the basic idea is that if the amount of money in circulation goes up, you have inflation as a result, and why would monetary supply go up? All the sudden well you've got the federal reserve to thank for that. While there has always been a bit of inflation, going around averaging about 3 percent a year more recently, that's more than doubled to almost 8 in february of 2022 because of all the free stimulus money the government gave out to people because of the pandemic. When the once every 100 year global pandemic hit the united states in early 2020 events, restaurants and many services are forced to shut down, many people were left unemployed and those who still had a job were forced to work from home. This series of events triggered a global economic slowdown in order to limit damage caused by the pandemic.

The federal reserve stepped in to create money out of thin air in order to stimulate the economy. It is estimated that about 80 of all u.s dollars in existence now were printed in the last 22 months. Totaling around 16 trillion dollars were printed out of thin air. Slowly but surely there's a bunch of excess money lying around in the economy and if people have too much money sitting around, they might just buy something crazy.

Like a lambo or a bunch of meme stocks at gamestop and amc, you can learn more about meme stocks and my other video or check out the humble trader community down below. Basically, when that excess money gets released into the wild prices, go up and your purchasing power goes down and then boom you have inflation. While some inflation in the short term can be okay, it could have some negative long-term effects if prices of goods and services just keep on going higher and higher, but average people's salary remain. The same things would just start costing a lot more, but now you and i can no longer afford them at this point.

You must be wondering okay. Well, what can be done about inflation before it becomes a runaway train, enter player 2 interest rate interest rates? Are the amount you pay in order to borrow money, whether this is for a car loan, a home mortgage loan or going a margin to buy gamestop? Basically, whenever you're borrowing money from a lender, they charge you interest, lending out, money to people always involves risks, and that's why banks and brokerages charge you interest rates in order to borrow money and the amount of interest they could charge. You is determined by interest rates. Generally speaking, when interest rates go down, people spend more money because money is cheap or sometimes free to come by, like during 2020 and 2021, when the fed dropped interest rates to almost zero percent, it was essentially free to borrow money.

This also means that, when interest rates go up, people spend a lot less money, because now you have to pay to play right. It makes sense if all of a sudden, your credit cards didn't charge you anything to borrow money. You would just spend like crazy. However, if they charge you 20 interest, well, i'd never borrow anything from them.

Now, how does this interest rate get determined? This all goes back to our good old friend, papa powell federal reserve. They tell us what the interest rate should be and the lenders use that as a guideline. Okay. So now we have player 1 inflation and player 2 interest rate.

What exactly is their relationship? If you remember from earlier inflation happens, when there is more money created in circulation, your purchasing power goes down as goods and services rise in prices, interest rates and inflation. They tend to have an inverse relationship. When interest rates go down, people tend to spend more with excess of free money and inflation rises, but when interest rates rise, people spend less and inflation slowly goes down well, hopefully fast forward. Now, two years after the pandemic first started, inflation is now at 40 year.

High and my 2003 corolla actually went up a lot in price. Like i said, lamborghinis are too overrated, with inflation now at 7.8 percent. This is the reason. The federal reserve is increasing interest rates in order to slow down and reverse the current rate of inflation.

On march 15th of this year, the federal reserve increased interest rates by a quarter percentage point. This is the first rate hike we've had in more than three years and the federal reserve actually further signaled, potentially six more rate hikes to come by the end of 2022. Now, what does all this inflation and interest rate talk have to do with the stock market? Generally speaking, low interest rates encourages speculation by investors, as they are more likely to throw excess money at speculative growth stock opportunities. Some example of these growth stocks are snow, lucid nicola and even the king of volatility tesla stock and, of course, let's not forget the meme stocks and the wall street bets movements in 2021.

It's the same thing: in the crypto market, we had crazy rallies in dogecoin, followed by shiba inu coins. All these hype was only made possible because of the low interest rate environment and the stimulus checks. Remember when interest rates to borrow money are cheap, the risks are lowered, so speculation in all sorts of markets was cheap and, let's be real fun. On the other hand, high interest rates encourage prudence from investors when interest rates are high.

Investors are less willing to take out high interest loans to fund risky investments. That's also one of the many reasons growth stocks are not in favor in the current market condition, as investors are looking for a safer haven to park their money and we're not just talking about the most speculative stocks we mentioned earlier. We're talking about tech giants like nvidia, facebook and even amazon. All these growth stocks, though they are incredible, profit machines.

Their share prices have been undergoing a lot of pressure in the current market. The upside is that investors are once again forced to pick investments that have sound fundamentals instead of speculation wow. I have to say that is very refreshing to hear. With all these fears going around.

There are a couple of common ways: investors like to hedge against inflation. Generally speaking, stocks are often considered to be the best hedge against inflation, because when inflation occurs, stock prices rise along with it, and the negative effects of inflation are negated. When it comes to investing in a stock market, people tend to look for value stocks with good long-term fundamentals like reits or even dividend. Aristocrats like coca-cola m, among many other boring stocks, some other common assets to consider for diversification or inflation.

Hedge are real estate, gold or even digital gold, which is bitcoin, i think, after all, the ups and downs we've seen in 2020 and now 2022, with all the factors we mentioned in this video pandemic, interest rates and inflation. We can say this: the stock markets are unpredictable. That's why diversification and risk management are there to protect you in the stock market. If you are looking for more resources feel free to check out some links below, including my free weekly watch list for stocks.

I send out every single sunday and if you are interested in learning more about risk management and my day trading strategies feel free to check out the humble trader community down below. Thank you guys so much for watching. As always, i'm the humble trader and i'll see you guys next time you.