August 5, 2021
I’ve been sounding the alarm for months and months… pounding the table since last year… warning that, despite what the news and the Federal Reserve is saying, inflation is happening.
I truly wish I was wrong on this… It’s not an issue one should ever want to be right on.
The personal consumption expenditures price index, better known as the PCE index, is a measure of the prices that people living in the U.S., or those buying on their behalf, pay for goods and services.
It’s also an important gauge for inflation in this country…
Well, the PCE index just logged its largest increase in 30 years – crystalizing what I’ve been telling you since last summer: Inflation is real, and it’s here.
Yes, I know, our government officials insist it’s just a “temporary” thing… Everyone from President Joe Biden to Socialist Representative Alexandria Ocasio-Cortez to Fed Chairman Jerome Powell claims these higher prices are just fleeting… Even the bond market seems to think it’s temporary, given the record-low 10-year Treasury yield, but let me ask you something…
How often do local restaurants slash their prices?
How often does the cost of a movie ticket move lower?
Market forces are always at work, and if there’s not enough demand, producers will eventually respond with lower prices… But price decreases are far fewer and more inconsistent than increases, and they also tend to be indirect.
Such as… Maybe you’ll get a free appetizer to go with your entree at your local restaurant or the movie theater is offering free popcorn with that movie ticket… or perhaps (as a friend who’s looking for an apartment in NYC recently told me) a landlord may offer a few months of free rent. (So the landlord would rather give away rent than actually lower the monthly rent rate.)
But bottom line? Prices overall rarely go down and usually go up…
Over time, these price increases have a disastrous effect on savers, consumers, wage earners, and even lenders to the U.S. government. Indeed, even China loses out in this scenario.
Now perhaps that’s the intention. Because judging by the current trajectory, the U.S. government seems rather intent on inflating our way out of debt.
Some of us are quite concerned about the current $28 trillion in debt… After all, as history has proven, great societies typically fall because of too much debt.
But what if it wasn’t quite that much debt because the Fed, with President Biden’s administration and Congress’s help, printed so many dollars that $28 trillion was no longer worth $28 trillion?
If you look at our current debt load and consider the destruction of the dollar over the last several decades, you’ll discover some truth to this.
After all, $100 isn’t what it used to be. In order to buy today as much as you could just 10 years ago with $100, you’d need an estimated $120.79.
The U.S. dollar has had an average inflation rate of 1.91% per year between 2011 and today – producing a cumulative price increase of 20.79%.
As a result, according to the Bureau of Labor Statistics, the prices on store shelves are 1.21 times higher than average prices since 2011… And one single U.S. dollar buys just 82.79% of what it bought a decade ago.
It’s clear this means consumers need to either make more money or risk falling behind if they hope to maintain their standard of living.
But what does it actually mean for debt?
Today’s $28 trillion in debt may not be as massive as you think. (And to be clear, that’s not a good thing… which I’ll explain shortly.)
So with this thinking, the nearly $15 trillion in debt a decade ago is actually more like $18 trillion in today’s dollars. While the increase to the current $28 trillion is not OK by any means, it shows how inflation has the power to erode the outstanding debt.
This means if the recent consumer price increase of 5.4%, per the latest CPI report, continues climbing… that $28 trillion is not exactly $28 trillion.
Now, don’t get me wrong – it’s an insane number that’s growing more by the day. But my point is that as money becomes worth literally less, that overall U.S. debt number isn’t as meaningful.
This top tech investor now predicts a reset, but it’s not what most Americans expect. Get the full story here.
A Reduced Standard of Living
Now, while inflation may help the U.S. government as it tries to get out from under the massive debt it created for itself… What does it mean for everyone else?
A reduced standard of living.
It’s important to take a step back and think about how inflation really affects us. You might think, who cares? All prices are marching upward in lockstep, so what’s it really matter?
It does matter… Because incomes are not moving up at the same rate as prices.
Inflation is happening at a faster rate than wage growth. “Real wages” – a measure of income after accounting for the cost of goods and services people buy – fell by almost 2%, on average, last month compared with 2020. And that sure takes a bite out of the average American’s spending power.
Meanwhile, what about savers? This is the part that really irks me…
Americans are effectively being punished for doing the right thing… If you save your money, those dollars over time become worth less and less.
Plus, the current investing landscape is a scary one since it’s forced too many people further and further out on the risk curve in search of returns. After all, folks need to find a heck of a return in order to just keep up with the ever-increasing rate of inflation – which based on the CPI right now is over 5%.
Simply said: investors need to make more than 5% after taxes just to have their money hold its value.
And I’m afraid, that with more and more financial engineering from the Federal Reserve, average Americans will continue to feel the pain.
My expectation is that sooner or later, interest rates will go up. (Let’s all hope that we’ve managed to pare down our debt before that happens, but I’m not holding my breath.)
Given the fluidity of the situation, and knowing that the Fed can’t print money forever, asset allocation in this environment is critical. Diversification is crucial. It’s worth keeping a portion of your portfolio in solid commodities like gold and oil. (Despite predictions that oil is going away in favor of greener alternatives, it will take a long time to happen… and in the interim, oil will continue seeing appreciation in price amid more regulatory hurdles.)
Another sector worth considering might be banks.
I spoke to a dear friend, a known stock picker, about this the other day. Now, he told me he was out of banks altogether as they’d become too richly valued. While there is some truth to this, as someone who’s in this for the long haul and believes investors should identify trends and then stay put for a long time, I still like financials.
Yes, I wish they were cheaper of course… But they may be one of the more solid places over the next couple of decades where investors can benefit from either a higher interest-rate environment (in which case, profits go way up), or even a lower one, too.
I believe the Fed will someday have to act on rates, and we will then see better profit margins among many leading financial institutions.
Meanwhile, if the money printing continues for another 10 years with low interest rates? Well then, I still like financials. That’s in part because financial institutions will benefit from easy money.
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- Cheap money encourages more companies to buy each other up… In the case of financial giants like Goldman Sachs or JP Morgan, this will lead to higher advisory revenues.
- Easy money will incentivize more private companies to go public – again benefiting traditional investment banks that will collect underwriting fees.
- Finally, more consumers will most likely take out home-equity loans and mortgages – generating more fees and profits for the banks.
Wells Fargo (WFC), Goldman Sachs (GS), JP Morgan (JPM), and Citi (C) are all key names in the industry. And despite their already high valuations, they are worth looking at for investing (and perhaps buying on those increasingly infrequent down days).
Meanwhile, there are also some solid index funds in the sector right now that are low cost. The SPDR S&P Regional Banking Fund (KRE) and the Vanguard Financials Index Fund (VFH) both have dividend yields near 2%.
Finally, the Financial Select Sector SPDR Fund (XLF) has always been my go-to fund. Really, since my beginning days in financial news way back at Bloomberg in the year 2000, I always kept XLF front and center on my screen as I considered it one of the best benchmarks for the financial industry.
I know the markets keep going up, up and away… And it’s for this reason that some actually think investing is easy in this environment. But it’s actually trickier than ever.
At some point, the music will stop… We have to hope the Fed’s financial engineering is sophisticated enough to prevent a hard landing, but we all know nothing is certain. So I remind you again to stay diversified and think through opportunities that should thrive in both a low- and high-rate environment.
Assuming there’s no credit-crisis repeat of 2008 in the works (and at present, I’m not at all forecasting that), then banks should help support your portfolio regardless of Jerome Powell and his pals.
And finally, if you’re on the fence about investing, and need another reason to not leave all your money in dollars under the mattress? Remember this… A dollar in today is worth just 15% of what it was in 1972.
And $100 back in 1950 is equivalent in purchasing power to about $1,127 today.
Inflation has become a reality of life… And if you don’t want to work forever, you need to invest accordingly.
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Publisher, American Consequences
With Editorial Staff
August 5, 2021