Read this Periscope for our insights about the current inflation situation, what we are doing about it and what you can do too!
Inflation means increasing costs for the goods and services we purchase. Economists largely agree that the more money there is in the world, chasing a finite supply of goods and services, the more likely we are going to experience rising costs—inflation.
As we all know, last year the US Federal Government, and most of the governments around the world, created an unprecedented amount of new money. Most of that money is sitting in various banks, in sovereign notes, not being spent. This is very esoteric stuff—but it means that, as of now, inflation is not yet a problem.
The truth is, for the essentials of life, for much of history, the costs of almost everything we buy, every year we live, usually increase. Technology changed that, recently, and numerous costs have come down. But nothing like they did last year.
Inflation Last Year
A year ago we were in the thick of the pandemic. We were in the throes of the deepest, fastest economic collapse since the 1930s. Because very few people bought very many items, the prices of many, many things declined last year. Companies hoarded cash and held onto it. People paid down debts.
But today, the prices of many things are higher than they were a year ago. To some extent, this is to be expected, right? The prices declined from two years ago and bottomed last year. So any increase, even if only back to where we were two years ago, would be inflationary.
Now we are coming out of the Covid cash and we are ready to spend our money!
Some clients are telling us about the big, tremendous purchases they want to make. Other clients are telling us about going on dream vacations. As a sign of our crazy times, in many cases, rental cars cost more than plane flights!
As we wrote about in a previous Periscope, inflation “may be” rising. And as Dr. Howard discussed in his April investment seminar, inflation is not yet a problem for the investment markets. We will not know whether or not we truly have inflation until after the fact. Inflation does not predict good or bad equity markets. It usually does mean bad bond markets.
As inflation signs start blinking their warnings, equity markets keep rising. How can that be?
Inflation in History
We have not had seriously dangerous inflation since the 1970’s. The effects were dramatic and many of us have clear memories of tough economic times. Perhaps we can recall the President asking us to turn the heat down. Gas shortages and lines at the pump, these were lasting images of the last time we had “runaway inflation.”
The differences between then and now are huge. Today, interest rates are low. The 10 year treasury has a long term average rate of about 6%. Today, it is more than 1% and less than 2%. This allows more money to be leant and spent, which keeps inflation low.
In fact, these low rates are one of the main reasons equity markets are doing so well. As I have discussed in recent Periscope blog posts, TINA: there is no alternative.
During periods of rough economic times, equities do what equities do. They rise more than they fall. Too bad we cannot time it! Instead, we can use common sense. We could invest in treasuries that currently pay less than the current inflation rate, and assure ourselves of a loss. Or we could invest in equities.
Equities are a Great Answer to Inflation
Over long periods of time, equities provide a rate of return in excess of inflation. In fact, over many periods of time, it was by far the best asset class at providing a rate of return that would exceed the rate of inflation. See further, Jeremy Siegal, Stocks for the Long Haul.
In other words, hang in there.
What are We Doing About Inflation?
We are changing some of the investments in some of our portfolios. Your advisor may reach out to you to explain that. But from the high seat, you want to have a little more in equities than bonds during an inflationary time.
If you have a worry about inflation, call your advisor. You may want to make sure you have enough equities in your portfolio to soothe your nerves.
So Should You Worry About Inflation or Take a Vacation?
The title of this week’s Periscope is, in some ways, a joke. Because you can do both: you can worry about inflation and still go on vacation. As long as you have enough equities in your portfolio, you will give yourself the best chance of success with your personal financial plan. And, so perhaps, maybe, there is a chance, you don’t have to worry at all.
On the other hand
But keeping the costs in line for that big expense or that big vacation, that is another matter entirely. If you have had equities in your portfolio, you likely have seen very good gains. You may be inclined to spend them. You may want to talk with your financial planner first.
Equities are one of the most reliable, time-tested, long-term ways to stay ahead of inflation. We are not 100% sure that inflation is here—and we will not be until after it is over with. The headline news is always going to promote bad news because it sells. But the equity markets, in large part, are brushing off the worries about inflation. As we have talked about for a long time.