Inflation, Investing and You
The Ipath Bloomberg Commodity Index (DJP) has risen by almost 60% since May of 2020. Commodity ETFs now hold the top six spots for relative strength among 51 ETF groups. If this continues, consumer inflation may soon reach a level not seen in decades. Hedge fund leader, Paul Tudor Jones, says he is going all-in on the inflation trade if the Federal Reserve Board continues to ignore higher prices.
Inflation has eaten away at the purchasing power of savers every decade since 1950. Inflation is one of the ways governments pay off their debts. Inflation helped pay off the cost of the civil war. World War II debts were paid off using inflation. To illustrate, the St. Louis Fed shows that urban consumer items costing $24 in 1950 now cost some $268, or 10 times that 1950 amount. By comparison, a house in 1950 cost $8,450. Where, as of May of 2021, Redfin shows the median price of a house in San Diego has risen to $765,000. That is an appreciation rate double the Fed’s annualized consumer price increase for urban consumers. Inflation hurts the young and the old. Young people cannot afford a house. Older workers cannot earn enough to retire. People living on a fixed income are in trouble. Anyone who does not have a clear strategy to keep up with inflation suffers. Since 1950 the S&P 500 has risen 11.4% annualized. That is a much greater annualized return than what can be found in the housing data. So, if you invested $100 in the S&P 500 in 1950 you would have approximately $212,000 today.
Better Inflation Hedges
To reduce downside risk before an inflation-based market correction, analysts often favor companies with pricing power. These companies show strong product or service demand beyond inflationary concerns. Financial stocks are expected to see a rise in earnings as inflation spikes. In addition, international companies tend to have an advantage during periods when the dollar is declining due to heavy fiscal and monetary influences. Oil and gas companies are also showing signs of life as they have both pricing power and Environmental, Social and Governance (ESG) plans in place.
The Federal Reserve has been fighting inflation for decades. They now say they were wrong. They now admit they may have exacerbated deflation. Even before the pandemic, the Federal Reserve Board began to see deflation as the real problem. To illustrate, U.S. wages have not kept pace with inflation. In 1950 the average family income was $3,300. In 2020 this number came in at $97,973. This rate of increase has not kept pace with the cost of housing inflation. By comparison, in 1950 it took 2.5 times a family’s income to buy a house. Today that number by way of San Diego standards is 7.8 times the family’s income. Many people have fallen through the cracks. Today seventeen out of every 100,000 Americans have experienced homelessness.
To rev up the economy, the Fed chose to lower interest rates. Still more deflation occurred. When it became clear monetary policy alone would not work, a double strategy adding fiscal policy was elected. This double strategy of fiscal and monetary policy has worked, limiting the length of the pandemic recession. Consumer demand has returned. Direct payments to businesses, workers and the unemployed have created what the Fed hopes is short-term inflation. A year ago, pricing power for many consumer goods and services was unknown. Today an imbalance between supply and demand has rippled through every industry, impacting everything from the price of car washes to restaurant menu items and furniture. A year ago, GDP growth collapsed. Today the Fed expects U.S. GDP growth to reach 7% this year and 4% in 2022.
The Federal Reserve Board has consistently stated that it wants inflation to run hot during this economic cycle to train consumers not to wait. Buy now. Invest now. Travel now. Spend, but be prudent. The risk, of course, is that the investment you make today may be the market correction of tomorrow. Therefore, you should only invest if you have a 3 to 5-year horizon. In this way, you are preparing yourself for the long term. Corrections come and go. Time is what separates speculation from prudent investing. This is how markets work.
The good news regarding inflation is that real economic growth trumps inflation. That is, real GDP growth of over 4% has historically allowed investors to remain optimistic about growth over inflation. If high growth and high inflation can live together during the second quarter of 2021 investors may well be protected from the kind of inflation that can lead to lower equity valuations. Void of wage-rate inflation in 2021, the advantage goes to the equities markets in 2022. We shall see.
Meanwhile, please remain cognizant of three skims that move swiftly and lightly across the value of your savings and investment vehicles each year. These three skimming tools help pay for the federal debt. This skimming process is called monetization. Higher taxes, inflation, and the dollar’s decline make up the elements of its function. The function is a partial solution against a growing federal debt. This Federal debt now totals some $29 trillion. To add perspective, to pay off this debt, every man, woman, and child in the United States would have to write a check for $64,534, since on average, (accounting for the billionaires in the United States) each citizen holds $488,586 in assets per man, woman, and child. Work and leveraged work are the way assets per person grow. In a population of 333 million, roughly half go to work each day. So, the next time you see a worker, let him or her know how much you appreciate their contribution to reducing the federal debt. By the way, these people also pay for school lunch programs, pay to end the war on poverty, pay aid to dependent mothers, pay for local theater, the arts programs, symphony, legal support of constitutional causes, fund their local churches or synagogues and engage society in a healthy way. This process is called the Judeo-Christian work ethic. Here at Vaughn Woods Financial Group, Inc. we assist such people and their beneficiaries every day to manage securities portfolios that outgrow inflation while supporting the income needs of family members.
Vaughn Woods, CFP, MBA
Vaughn Woods Financial Group, Inc.
2226 Avenida De La Playa
La Jolla, CA 92037
Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal. Past performance is not a guarantee of future results. Asset allocation cannot assure a profit nor protect against loss. Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Views expressed in this newsletter may not reflect the views of Bolton Global Capital or Bolton Global Asset Management. The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. VW1/VWA0262
Sydnee Gatewoord, “Paul Tudor Jones Says”, June 14, 2021, Gurufocus.com
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