The Federal Reserve has finally become much more serious about controlling inflation. Inflation has gotten so hot by any measure, including core CPI, that Jay Powell can no longer keep his head in the sand. His Fed is pulling trillions in liquidity out of the market by reducing the size of its balance sheet and moving the Fed Funds rate up by 75 basis points to a range of 1.50% to 1.75%. And, there is more to come.

Powell now says that the July meeting will involve either a 50 or a 75 basis point increase in the Fed funds rate and that additional rate increases in 2022 will be warranted. The Fed’s own Fed funds forecast now puts the Fed funds rate at 3.40% by the end of 2022 and 3.80% by the end of 2023.

Historically, periods of extreme inflation are not necessarily appropriate times to be in cash. Real assets, like real estate and equities, can perform better as a means to maintain and store value.

This time is different. It is coming on the heals of a decade of Fed-induced real asset price inflation – and a bubble in speculative assets, including crypto – that has become especially exacerbated since the pandemic started in 2020. These bubbles are all going to need to be unwound as the Fed moves aggressively to normalize the economy and to protect it from continuing to be overcome by inflation. Perhaps it can be done without causing a recession (as argued by Ben Bernanke in today's New York Times). But, against the concurrent backdrops of an economy that is now dramatically slowing, Russia extending its war in Europe, an ongoing insurrection in the US, and a global climate crisis becoming a climate catastrophe, we may not see much in the way of other safe real assets that maintain value until valuations are fully reset.

Savings rates and CD rates are rising and these products seem like attractive places to sit for while.

I am old enough to remember October 1987. I was a college freshman then and I remember my floormates calling their parents to inquire whether they would be able to stay enrolled in college.

I also have vivid memories of 2001 and 2008 and 2009. In the 2000-01 period, I was working for a telecom venture capital firm in Europe where valuations on major carriers and CLECs were bananas.

What I am not old enough to remember is any time when the valuation of US stocks was so distorted from reality. In fact, Charlie Munger recently said basically the same thing and he has several decades on me.

If I learned nothing in two years studying equity valuations during my MBA, it is that there are only two or three ways to ultimately value an equity issue. One is its price to earnings (PE) and the other is its price to earnings to growth (PEG). A reasonable PE multiple is 12 or 15 or maybe 18 and not 100. And, a PEG multiple should be a lot closer to 1 than to 3 (or sometimes now 10). You can also use price to revenue, but that metric really only works if there is some sort of plan for the company to ultimately become profitable (I’d note that it is absolutely the valuation metric that you would have wanted to use when analyzing Amazon, Netflix or Spotify one or two decades ago).

But, as a whole, this just isn’t that complicated. Multiples on US stocks make no sense. They have reached this point from bringing interest rates to zero and flooding the market with liquidity. But, for a world where all of that is being withdrawn, they are just bonkers. Most smaller tech stocks, including virtually all that have recently been taken public, have no basis in valuation. Even many smaller companies that have been around for some time that have great and meaningful products, such as Exact Sciences or Box (where stock pundits have argued for Amazon, Netflix or Spotify-type valuations), may face market circumstances where they have no path to profitability.

The market has been led to these levels because of extraordinary growth that we have seen in companies like Apple and Microsoft, and super extraordinary growth in stocks like Marvell and Nvidia. Make no mistake, these are the companies that you want to own and that you probably should not sell (I am not selling them), but you need to have a very long term view because the valuations are now three times higher than where they were in 2015 or 2016. Apple was a great investment at 10x earnings less cash in 2016; it may still be a good long-term investment at 28x earnings (less cash) in 2022, but it may not move up from here quite as easily as it has for the last 25 years.

And, then there are cryptocurrencies. It is also difficult to predict the immediate trajectory of crypto. But, in spite of losing half of their value, crypto remains the biggest and most widespread Ponzi scheme in the history of mankind.

Take it from someone who can remember the not too distant past. I am not saying there is going to be a crash, and I am not saying that the stock market isn’t the best place to be for the long term. I personally will remain very heavily exposed to large tech, major pharm and European wind stocks, but these aren’t positions that I would be selling for the next 10 years.

I am just saying that everything is dramatically elevated. If you absolutely need to protect your wealth here, there is only one safe way to do that in 2022 and that is cash.

Compare the best online savings and money market rates here.

As interest rates have come down dramatically, following the Fed’s emergency response to the virus, savings and money market rates have become very unappetizing. As of this writing, all major online banks have dropped their online rates to 0.80% APY, with some having gone to 0.60% APY.

The Federal Reserve and Chairman Powell do not plan to raise interest rates for a long time. The talk about possible negative interest rates and concern over a stock market bubble has folks (myself included) thinking that we may be the new Japan. And, if we are, interest rates will not be rising any time soon and it make sense to lock into some yield – any yield whatsoever – on cash that we cannot afford to risk in the market, real estate, bonds, commodities, etc. And, the obvious way to lock in yield is to put your money in a CD or time deposit.

Three months ago, I suggested in this article that depositors look at No Penalty CDs and one-year CDs as a place to hide. At the time, you could still lock into a 1-year CD at 1.35% APY. Now, you cannot (although in certain states, rates at local banks and credit unions may be close to that level - check here and here). You can still get 1.25% APY in a 5-year online CD and perhaps even higher in a bank near you or a credit union near you, but that involves locking your money up for 5 years!

We’re basically two months from an election now. The election brings the possibility of a new Federal Reserve Chairman with a different policy (and less subservient to a President who wanted interests rates at zero even before the pandemic). While there is a lot of talk about asset deflation, all inflation indicators (CPI-U, etc.) suggest that inflation is picking up. It is very possible that we could be in a very different interest rate environment as soon as six months from now.

I could be wrong, but I think it is a good time to just grin and bear it, and stay with online savings and money market accounts.