When the Soviet Union collapsed when the world celebrated a triumph of capitalism over communism, the world stabilized and became ever more global with the us becoming the only superpower that set the new world order that drove prices down across the world, which kept inflation at around 1-3% for almost three decades.

In fact, in 2009, as a result of the housing bubble, we had deflation price stability, gave the businesses the confidence they need to invest in new technologies, built more effective supply chains and expand their workforce.

However, into 2020, the world was faced with a challenge and it wasn't ready for including the US that almost topped the economic, will which led many countries to pump trillions of dollars into the economy to save it from the catastrophe that it could face on top of that.

The United States global dominance was challenged by Russia which created the highest inflation in 40 years.

The consumer price index rose 8.6% in May from a year ago, the highest increase since december 1981 surging food, gas and energy prices all contributed to the gain with fuel oil up 100 and 6% over the past year.

8.6% might not seem a lot, but it's actually catastrophic.

Imagine you have saved up $100,000 over the years.

Even if you spend nothing out of that 100 K.

By the end of the year, they're going to worth $92.4000.

You might still see 100 K.

When you check your bank account.

But the real value is lower Now With $100,000, you might not be losing much.

But imagine investors who are sitting on a pile of cash that worth 100 million or a few billion dollars.

Imagine for a moment how much money they are losing tech apple for example, the largest company in the world, it holds more than $200 billion dollars worth of cash By the end of 2022, if inflation is going to be like 8% annually, then Apple is going to lose $16 billion $16 billion dollars is more money than some countries entire GDP.

That's why the Feds top priority now is to control inflation because if investors are going to lose confidence in the dollar, that could end way worse than anything we have ever seen.

Just take a look at countries where people lost confidence in the currency like Venezuela.

It's a nightmare that no one wants to witness.

But controlling inflation isn't going to happen overnight.

If it's going to happen by the end of the year, that will be great.

But the main question is if inflation is so high, why acid prices are falling, why stocks plummeted so much when inflation is above 8% and when they will finally recover will answer all of these questions and many more.

But before we do that, give this video a thumbs up.

And let's dive in.

When you think of a business, The most important part is the cash because generating a profit is any business top priority.

Of course it has other responsibilities such as delivering quality products or services and taking care of its employees.

But if the business is not making money, no one wants to invest in it, which means eventually it will go bankrupt sooner or later, the company needs to put cash on the table to prove that its business model is working.

Even if that means waiting for 20 years.

Like in the case of amazon or forever.

Like in the case of Uber at this point it seems like Uber will never turn a profit.

The sooner it puts cash on the table, the better because a dollar today is worth more than a dollar tomorrow.

If I would come out with two business ideas, the firm, This one let's say will generate $5 million $10 million $10 million $10 million dollars today, you can invest it and earn interest for example or reinvested back in your company and maximize your profit.

There are a gazillion number of things you can do with that $10 million $10 million $10 million dollars is worth today.

There is a pretty simple formula for that called DCF discounted cash flow.

The formula is one, divided by one plus the discounted rate to the power of the period where n.

Is the year.

For the sake of simplification, let's say that the interest rate is 5% which will be our discounted rate for the sake Of simplification.

Again, let's divide $10 million company B will earn $2 million $2 million 12 months from now is worth just $1.9 million.

The next $2 million.

Two years from now will worth 1.8 million.

The third one point 7/4 1.64 finally the fifth year is going to be 1.56.

All in millions.

By the way, if we add them up, we will have a total value of approximately $8.6 million.

So Company B might earn 10 million dollars.

But because it's five years from now, it is real worth is just $8.6 million.

So when the Fed raises rates, what happens to the discounted rate it rises which makes future cash flow less valuable than today, which pushes stock prices to plummet especially tech stocks that often focused on making a lot of money in the future.

After gaining market share than now, Let's take the example of Tesla.

Tesla is a great company.

It builds great cars, it's revolutionizing the industry.

It's led by a charismatic ceo but the company is burning cash, it's a money wasting machine.

But investors are not worried because the promise behind Tesla is that once the company builds its infrastructure, it is going to make a lot of money in the future.

Once it takes over the entire market, it will worth trillions of dollars.

The keyword is the future, but when the Fed raises the rates, the real value of the NPV of that, a lot of money in the future drops, making the company less valuable and leading the price of the stock to drop.

If you google any stock you will find out down below the chart companies p ratio which measures how much investors are willing to pay relative to how much its earnings per share.

If the Fed raises the race, future earnings suddenly become less valuable which lowers its P.

E.

Ratio and push the price of the stock to drop.

However, not all stocks suffered when the Fed raised the rates because the discounted cash flow rate doesn't just take into consideration the interest rate, but other factors that could influence the future cash flow such as inflation rate high, how easy it is for the company to get that cash, the opportunity cost, and so on.

All these factors increase the discounted cash flow rate, which means the future cash flow will be less valuable.

So if inflation rises, stocks plummets, except for those who are making money now, just oil companies, especially when oil prices have risen so much lately, there is no one metric to analyze talks.

You have to look at other analysis that just finding its price to earnings ratio, price free cash flow or price to book ratio.

None of these factories can tell you for sure how the stock will perform in the future, since there's so many factors that influences the price of the stock that the stock can fail even if everything looks perfect.

But the main rule of investing is sooner or later, the stock will rise or fall back to its true value.

So the challenge is to find undervalued stocks since in the long run they will rise back.

That's it for today.

Thanks for watching and see you in the next one.