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Inflation: Thoughts - not Forecasts or Recommendations

| February 26, 2021

Might inflation matter to you? Maybe

In the New York Times article linked below, the author discusses potentially different economic situations. I switched out of my Economics major in junior year, but then took more Econ during my MBA. So I'm admittedly a curious economics nerd. The 4 different scenarios are interesting but I think even the author would say there's not a red light or a whistle that goes off to figure out which scenario we are in.

Without getting too political but trying to move actual understanding forward, some feel that we got the big inflation of the 70's because Lyndon Johnson didn't want to raise taxes to pay for the Vietnam War. On the other hand, if you already like Medicare and / or are looking forward to it, that was one of his accomplishments.

Like the joke goes about other topics, I might not be able to define inflation, but I know it when I see it. So while the price of US single family housing has broadly gone up in the past 50+ years, I do remember getting a 9% mortgage at some point for buying a single family home ... and being happy about it because at one point mortgages could be 12%. Yikes!

Fast-forwarding to some of my early days in finance. I remember talking to people who were missing their 15% CDs! I don't blame them and didn't then. What I probably did not say to anyone at the time was when you were making 15% on your CD, inflation was nearing 20% so, doing the arithmetic, you were 5% annually underwater.

The more complex issue is that everyone's personal rate of inflation is different. We don't all buy the standard basket of goods and services on which the official inflation rate is calculated.

COLA - Not the kind you drink - Cost of Living Allowance

Back in the day, many contracts e.g. for auto workers had a COLA element built-in. So workers knew they would receive X per hour in the first year of their contact, and they also know that if the broad Cost of Living went up, as it was consistently for many years some time ago, then they would get an annual raise. If they had a fixed rate on their mortgage, they knew that expense was not going up, so, they were ahead ... in that regard.

But some people are in a very different situation

Intentionally not being too specific, suppose your income is mostly or completely fixed. i.e. no COLA. (This can happen in multiple scenarios.) What happens when your normal living expenses go up. Not good. Belt-tightening. Food or medicine, in one of those really bad scenarios.

Pandemic example: Even worse. You lose your job, and unemployment is way less than you were making. Or your hours are cut. Things are tough at level prices. If groceries, electricity etc. start going up, a big unpleasant squeeze!

Minimum Wage: Is it inflationary? Where does it fit in?

In some - geographical areas - industries - companies - if you have a job or get one, you'll already be making as much more than the $15 possible minimum wage. In other areas, not even close. I took in what I thought was a very balanced presentation / discussion. Proponents of the $15 per hour talked about many people being elevated out of poverty. Business owners interviewed, not uniformly but not a small number, were not even sure if they could stay in business. Or, they knew they would have to look hard at cutting hours or even entire positions. End result. Some people get lifted out of poverty. Others become unemployed.

Like the old cliche story goes, if your neighbor loses her job, it's a recession. If you lose yours, it's a depression!

So does that mean a higher minimum wage is inflationary? I just don't know. I think actually it is unknowable.

What should investors consider? 9 Inflation Hedges (from Investopedia)

Also see the linked article. The 9 items are:

  1. TIPS
  2. Leveraged Loans aka CLOs
  3. Bloomberg Barclays Agg Bond Index
  4. Real Estate Income
  5. S & P 500
  6. REITs - Real Estate Investment Trusts
  7. 60 / 40 Stock Bond Portfolio
  8. Commodities
  9. Gold

Having read this list a few times, it now occurs to me IMPO - In My Professional Opinion - using several of these items arguably could create a portfolio that many investment pros might well consider to be "well-diversified."

Don't Go "Full Weimar"

So while I did kinda sorta have a "minor-ish" in Economics between undergrad and grad, not the case for history. Which I have and still do read independently. Reading Ben's post, I learned something I think interesting that I had no knowledge of previously. The Weimar Republic had been intentionally trying to inflate their currency. They had large reparations imposed on them as a result of losing WWI. So their intent was to pay these back with inflated currency. Not completely irrational, except it got out of hand.

Those of us who remember / admire Paul Volcker were happy that he forcefully demonstrated leadership in breaking the back of US inflation when he chaired the Federal Reserve. But not without a lot of economic pain on the population.

So, making a one-off exception to my "no forecasts" mention above, I just don't see us having anything like the inflation of the 1970's. Possible, but unlikely.

Stay tuned.

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