Inflation and Investment Opportunities

Posted on November 19, 2021 by admin

Fiscal spending proposal has the potential to overheat a U.S. economy that is already struggling to keep up with record demand.

Rising inflation has Americans worried about their future purchasing power and their retirement plans, according to CNBC. Yet there are some opportunities to make and save money in this environment, as well as protect your investments.

With consumer prices up in October 6.2% from the year prior, inflation is too high and appears to be a clear and present threat to America pocket books and wallets.

With inflation at its highest level in several decades, economists are concerned that the pending multi-trillion dollar fiscal spending package will further overheat a U.S. economy already struggling to keep up with demand. The concern is that the package would exacerbate more fundamental supply constraints in the economy, driving up inflation over the longer term.

Thus, cash in the bank or in low-yielding bonds aren’t the best option in an inflationary environment when the stock market has gained nearly 27% this year, explains financial advisor Delano Saporu, CEO of New York-based New Street Advisors Group. Inflation reduces the value and purchasing power of that cash.

“If you are sitting on too much cash, you are doing yourself a disservice,” Saporu said.

Thus, it is recommended that you keep only enough cash to cover expenses for 12 months to 24 months. This way, if inflation becomes a big issue and causes stocks to tank, you aren’t forced to sell in a down market.

Investors do not love high inflation, which can hurt the growth prospects of high-rising tech stocks, among others. Because, higher prices can result in higher interest rates, which can lower the appeal of growth stocks compared to less risky alternatives.

The stock market tends to beat inflation given its rate of return, although growth may be slowed during inflation periods. Yet investing is for growth, not inflation hedges.

Since inflation is typically considered a result of a strong economy, financial experts recommend cyclical companies, which follow the cycles of an economy. That means sectors like industrials, energy and consumer discretionary. Also, gold, which is near five-month highs, and possibly cryptocurrencies are seen as inflation hedges.

References:

Best Business to Own When Inflation Spikes

Posted on November 7, 2021 by admin

Invest in asset-light businesses with pricing power.

In a letter to Berkshire Hathaway shareholders, the best type of business to own when inflation spikes, according to Berkshire Hathaway Chairman and CEO Warren Buffett, have two characteristics that make a business well adapted to an inflationary environment:

An ability to increase prices easily, and
An ability to take on more business without having to spend too much in order to do it.

In other words, aim to invest in asset-light businesses with pricing power.

Buffett also stated that the best business to own is one that doesn’t require continuous reinvestment of capital because it becomes more and more expensive as the value of a dollar drops.

“The best businesses during inflation are the businesses that you buy once and then you don’t have to keep making capital investments subsequently,” Buffett said, adding that “any business with heavy capital investment tends to be a poor business to be in inflation and often it’s a poor business to be in generally.”

Businesses like utilities or railroads “keep eating up more and more money” and aren’t as profitable, he explained. He prefers to own companies that people have a connection to. That is why “a brand is a wonderful thing to own during inflation,” Buffett said. Owning part of “a wonderful business,” as Buffett said in 2009, is useful because no matter what happens with the value of the dollar, the business’ product will still be in demand.

Buffett also said that it’s particularly handy to own real estate during times of inflation because the purchase is a “one-time outlay” for the investor, and has the added benefit of being able to be resold.

Inflation quietly eats away at earnings and purchasing power.

When the economy exhibits strong economic growth, there is a higher demand for goods and services, which in effect increases prices of those goods and services; that’s attributed to inflation. Essentially, the rate of inflation increases when demand in the economy is higher than supply, causing an overall price rise.

Inflation also impacts money sitting in the bank. While you may be receiving interest on savings from a money market account, the growth of inflation can outpace that of the savings rate offered by the bank. Keeping all your savings in cash is warranting your liquid assets a definite loss to inflation.

Effectively, your money does not grow at a higher rate, but loses purchasing power over time compared to if it was properly invested in equity assets.

Inflation

“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of [all] their citizens.” John Maynard Keynes

Inflation is tracked using the Consumer Price Index, known as the (CPI). This index, reported by the U.S. Bureau of Labor Statistics each month, measures the average change over time of prices consumers pay for goods and services.

The immediate effects of inflation are the changes in the behavior of consumption habits. In the long-term, inflation erodes the purchasing power of your income and accumulated wealth.

“Inflation reduces the ‘power’ of each dollar you have,” says Rob Isbitts, co-founder of The Hedged Investor in Weston, Florida. “A dollar is a dollar, but what it buys can be less in the future than it is today.”

Purchasing power risk – also known as inflation risk – is when the real interest rate, which accounts for adjusted inflation, shows the gain or loss in purchasing power.

How inflation is impacting your paycheck: 'The earnings of workers have eroded in recent months' https://t.co/DGdqIl2clG

— CNBC Make It (@CNBCMakeIt) November 5, 2021

Assets That Protect Against Inflation

Inflation can pose a threat to investments since prices that increase over time can decrease the value of your savings.

And, financial experts agree that there is no way to fully protect your investments against inflation. Nonetheless, there are ways to help protect against this risk. These experts say having a substantial allocation to stocks is important for growth potential while offsetting against inflation risk.

In the long term, the stock market is expected to outperform the inflation rate. Stocks are commonly thought of as an inflation protection asset since, over time, stock performance will outpace inflation. These assets are seen as a hedge against inflation:

TIPS, or Treasury Inflation-Protected Securities, which are bonds backed by the full faith of the U.S. government and protect against rising prices, make a very safe asset
REITs, or real estate investment trusts, are an organic hedge against inflation. When prices increase, real estate values increase as well. This asset is highly correlated with inflation, which means REIT returns are higher when inflation increases.
Gold is an asset that might provide protection against inflation and a good safeguard of inflation over the long run,

Inflation can significantly weaken your purchasing power and the performance of your investments and thus impact their value. That’s why acting to suppress the dangers of inflation is important to preserve the value of your cash flow and wealth in the long run.

References:

Global Inflation Worries

Posted on October 28, 2021 by admin

“Inflation will be higher and more persistent than people expect.” Mohamed El-Erian, Allianz & Gramercy Advisor

Higher and more persistent inflation may now be an unavoidable economic fact of life for Americans, and it’s starting to make a lot of economists, investors and public leaders worry. They, specifically economists, collectively believe inflation is primed for rapid growth domestically as trillions in federal stimulus spending is layered on top of the Federal Reserve’s loose monetary policy.

This level of unadulterated fiscal spending could mean that investors will have to get used to inflation, higher interest rates, more market volatility and lowered returns on invested capital.

In conjunction to domestic and global inflation concerns, there exist two significant global economic worries for individuals and investors:

Global supply chain constraints which are significant and will get worst whether it is disrupted supply chains or labor worries, and
Global tightening of monetary conditions and less liquidity.

But, major shocks to the economy tend to be caused by either a major policy mistake or market accidents. Yet, we’re unlikely to witness double digit inflation in the United States.

"The case for stocks remains strong in relative terms. In asbolute terms, there are two things that very clear. Supply constraints are significant and will get worse … the second thing is we are on the cusp of global tightening," says @elerianm ahead of a busy earnings week. pic.twitter.com/zyRqwHHWvO

— Squawk Box (@SquawkCNBC) October 25, 2021

The Federal Reserve and the Biden Administration contend that the elevated inflation readings will prove transitory. The Fed and Administration view that the current inflation stems chiefly from temporary factors such as supply bottlenecks and a spike in post-pandemic consumer demand.

The August inflation report showed that prices increased by 5.4% year over year in July. Wages increased, too—but not by enough to offset inflation.

And, Americans know inflation when they see it: retail shops and restaurants are raising their prices on consumers, and prices of used cars and trucks were 32% higher in August than they were a year earlier, and workers are discovering bargaining power over wages for certain positions for the first time in years, according to Barron’s. “Inflationary pressures are likely to rise because everyone is spending—including the government—and it becomes a self-sustaining cycle,“ says Karen Karniol-Tambour, co-chief investment officer for sustainability at Bridgewater Associates.

“When you live in a world of abundant liquidity, investors tend to take on too much risk.” Mohamed El-Erian

Congress has assigned a dual mandate for the Federal Reserve: Foster maximum employment and maintain price stability. The FOMC has interpreted maintaining price stability as keeping inflation growing at about 2% a year over the long-term.

Over the past two decades, the Federal Reserve has been unable live up to its two percent inflation mandate. Using the Fed’s preferred gauge of inflation, core Personal Consumption Expenditures (PCE), which tracks price changes over time without volatile energy and food costs, inflation has remained stubbornly below the Fed’s 2% annual target since the 2007 – 09 Great Recession, except for a brief stretch in early 2012 and much of 2018.

Going from a disinflationary world to an inflationary world

Evidence that some of the issues that might spur inflation could abate ahead, particularly some of the supply chain issues. Additionally, unit labor costs remain low, meaning that companies still aren’t spending substantially more for productivity, which also could tamp down inflation.

Federal Reserve Chair Jerome Powell has been resolute in his commitment to seeing the whites of inflation’s eyes before raising rates or paring back quantitative easing. But some market observers believe the Fed is being too lax.

“Financial conditions should remain quite accommodative for a while and in our view risks an overshoot,” said Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income.

The drivers of global inflation are many and complex. They include global economic and policy forces as well as domestic. Yet, it’s important to keep in mind that the rise in inflation isn’t necessarily life altering. Although, policy makers can’t hold on to the “mystical attraction of transitory inflation” when the facts on the grow indicate the contrary, according to Mohamed El-Erian. Given the extraordinary level of fiscal and monetary economic stimulus, inflation may be less transitory than previously thought.

On the "transitory #inflation" narrative, including why the longer it retains an almost mystical hold on the #Fed's thinking, the greater the risk of a policy error whose negative implications could last for years and extend well beyond the US.https://t.co/iEgUxMgcXQ @bopinion

— Mohamed A. El-Erian (@elerianm) October 25, 2021

References:

The Debt Ceiling and Congressional Brinkmanship

Posted on October 5, 2021 by admin

“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” Warren Buffett, Chairman and CEO, Berkshire Hathaway

Around October 18, Treasury Secretary Janet Yellen and the U.S. Treasury Department have warned Congress that the government will no longer be able to pay all its bills unless the $28.5 trillion statutory debt ceiling is increased or suspended.

Source: Congressional Research Service, Congressional Budget Office, and the Treasury Department. Data as of 05/01/2021.

Moreover, Secretary Yellen believes the economy would fall into a recession if Congress fails to address the borrowing limit before an unprecedented default on the U.S. debt.

While the U.S. has never failed to pay its bills, economists say a default would tarnished faith in Washington’s ability to honor its future obligations on time and potentially delay Social Security checks to some 50 million seniors and delay pay to members of the U.S. armed services.

“If you ask the question of Americans, should we pay our bills? One hundred percent would say yes. There’s a significant misunderstanding on the debt ceiling. People think it’s authorizing new spending. The debt ceiling doesn’t authorize new spending; it allows us to pay obligations already incurred.” Peter Welch (D-VT), U.S. House of Representatives Democratic Caucus Chief Deputy Whip

Increases to the debt ceiling aren’t new. They’ve occurred dozens of times over the last century, mostly matter-of-factly, a tacit acknowledgement that the bills in question are for spending that Congress has already approved.

One thing separating today’s debt debate from those of the past is the larger-than-ever national debt, according to Fidelity. Publicly held US debt topped 100% of GDP in 2020 and is expected to reach 102% by the end of 2021.

And the debt is projected to increase significantly in the future. The Congressional Budget Office (CBO) projects a federal budget deficit of $2.3 trillion in 2021—the second largest deficit since 1945.

Source: Congressional Budget Office, as of February 11, 2021.

Failure to address the current challenge could shake global markets even before the Treasury has exhausted its available measures to pay bills. A U.S. debt default, whether through delayed payments on interest owed on U.S. Treasuries or on other obligations, would be unprecedented.

The effect would be one of perception. And, perception can be tied to the reality that someone isn’t going to be paid on time, whether it be government contractors, individuals who receive entitlement payments, or someone else. The damage to U.S. credibility would be irreversible.

Even if a default were only technical—if payments other than interest on debt were delayed—the United States could no longer fully reap the benefits bestowed on the most reliable debtors.

Interest rates would likely rise, as would financing costs for businesses and individuals. Debt ratings would be at risk. The government’s own financing costs, borne by taxpayers, would increase. Stock markets would likely be pressured as higher rates made companies’ future cash flows less predictable. Such developments occurring while economic recovery from the COVID-19 pandemic remains incomplete makes the potential scenario all the more important to avoid.

Let it be said that no one doubts the ability of the United States to pay for its obligations, according to Vanguard. There is a minimal credit risk posed by the United States is supported by its strong economic fundamentals, excellent market access and financing flexibility, favorable long-term prospects, and the dollar’s status as a global reserve currency.

The House has passed a measure that would suspend the debt ceiling through mid-December of 2022, and the bill now goes to the Senate. Republicans in the Senate oppose any effort to raise the borrowing limit and appears intent on making Democrats address it as part of their sprawling investment in social programs and climate policy under reconciliation.

Senate Democrats could lift the debt ceiling without the GOP votes through reconciliation, although that would come with downsides. Under reconciliation, a simple majority of senators can pass a very small number of budget bills each year. The process is sufficiently complex that it would probably take a couple of weeks and distract Democrats from their negotiations over Biden’s “Build Back Bette” agenda.

Thus, the Democrats resist raising the debt ceiling through reconciliation if it means potentially sacrificing other policy goals. And, the rules for reconciliation would require Democrats to specify a new limit for the national debt which would expose them to potentially uncomfortable GOP political attack ads.

Republicans insist that since Democrats control both the executive and the legislative branches and are in a socialistic tax-and-spend binge, they should bear sole responsibility for dealing with the debt limit, which is rearing its ugly head again because the suspension included in a two-year 2019 budget deal expired on July 31.

While top Democrats have argued against using reconciliation to raise the debt limit, their staff has also consulted with the chamber’s nonpartisan parliamentarian to chart out the process for possibly doing so. https://t.co/RDg6bvUtBE

— WSJ Politics (@WSJPolitics) October 4, 2021

Democrats argue that Republicans should share the burden of this unpopular chore, since (a) much of the debt involved was run up under Republican presidents and (b) Democrats accommodated Republicans on debt-limit relief during the Trump presidency.

For long term investors, it’s clearly in the best interest of the country to resolve any debt-ceiling issues, according to Fidelity. And, it’s important to understand that there will always be times of uncertainty. It’s important to take a long-term view of your investments and review them regularly to make sure they line up with your time frame for investing, risk tolerance, and financial situation.

References:

Life Insurance

Posted on August 23, 2021 by admin

If something were to happen to you today, is your family protected?

Life insurance is a relatively low cost way to ensure that your family will have financial security if you or the primary earner should die prematurely. Furthermore, life insurance is often necessary financially because it provides peace of mind—not just for you, but for your whole family.

Conventional wisdom dictates that you don’t need life insurance if no one else depends on your income. While mostly true, there are many reasons why you should obtain life insurance if no one depends on your income.

Insurability and low premiums. Buying a policy both locks in lower premiums and guarantees insurability later in life. An existing insurance policy guarantees the ability to purchase additional insurance with no medical underwriting or physical exams.
Cash Value Growth. Whole Life insurance policy provides attractive cash value growth. Access this cash value at any time using a policy loan. Or, if you cancel the policy, you get a return of all or a majority of the premiums paid, or the cash value – whichever is greater.
Funeral and burial expenses. From a practical perspective, in addition to the emotional devastation, parents also face significant expenses in the event of a child’s death. According to the Natural Funeral Directors Association, the median cost of a funeral with burial exceeds $7,000. Purchasing insurance for children alleviates the significant financial burden for a family coping with a tragic loss.

Not only do rising prices make life increasingly expensive, but, as life’s circumstances change – you marry, buy a house, have children, and perhaps need to care for others – you have greater responsibilities and a need for better financial protection.

Key Takeaways

There are several excellent reasons to obtain insurance coverage for you and your family.

You can lock in low premiums while they are young and healthy.
You can lock in eligibility for other services while they have an active policy.
Permanent insurance provides a store of cash value that safely grows at a high crediting rate, which can be used to help fund future expenses like college tuition.
In the event of loss, a policy can cover the ever growing expenses of funerals and burials and protect your savings.

References:

U.S. Labor Shortage Maybe Worse Than It Looks | Barron’s

Posted on August 1, 2021 by admin

“Enhanced unemployment benefits have made it harder for employers to fill low-paying jobs, working parents continue to struggle with child care, and some workers are sitting out because of pandemic concerns.” Barron’s

According to a recent article in Barron’s Magazine, there are 9.2 million job openings and 9.5 million unemployed in the U.S. Employers, conservative politicians, economists, and policy makers blame the bottleneck on twin forces:

Generous jobless benefits that have made unemployment the better economic decision for millions of low-paid workers, and
A year of remote learning that has pushed some two million parents—mostly mothers—out of the labor force.

The expectation by many economists is that the labor shortage will resolve itself this fall once extra federal jobless assistance ends as of September 6 and parents send their children back to school. However, there are deeper problems besetting the labor market, from “an aging workforce and a new desire of many workers to be their own boss to a deep skills mismatch and a pandemic that hasn’t ended”.

The impact of slowing population growth on labor supply hadn’t been so apparent before the pandemic because many baby boomers worked past the traditional retirement age of 65. In July 2019, Pew Research Center said the majority of U.S. adults born between 1946 and 1964 were still working, with the oldest among them staying in the labor force at the highest annual rate for people their age in more than half a century. But now the oldest boomer is turning 75, the working-age population is falling for the first time in U.S. history, and the pandemic has led many older workers to retire ahead of schedule.

Geoffrey Sanzenbacher, an economics professor at Boston College, found that 15% of those over age 62 were retired a year after the coronavirus took hold in the U.S., up from 10% a year after the 2007-09 recession started and 13% right before the pandemic. As companies expect workers to return in the fall, he says another wave of older workers may choose to retire if they can no longer work remotely.

And, it isn’t just older workers walking away from the labor market, nor is it only low-paid service workers. Many departed workers are gone for good since they joined the gig economy or started new businesses that have flourished during the pandemic.

Yet, there is some evidence that continuing claims for jobless insurance have fallen faster in states that ended the extra payments ahead of the federal Sept. 6 expiration. Aneta Markowska, chief economist at Jefferies, says such claims have fallen 24% since mid-May in the states that have already cut the extra $300 a week, compared with a 0.7% increase in states that haven’t.

A record number of new businesses launched during the pandemic as workers turned into entrepreneurs. Immigration, the lifeblood of many services companies, dropped significantly in recent years. Retail day trading is still booming along with the stock market, keeping many who became amateur traders during the pandemic on the sidelines.

Many doubts persist that millions of moms will return to work in September. Many families have established new norms over the past year, and many parents still harbor COVID-19 virus concerns. While employment among working women without children has almost returned to prepandemic levels, mothers with school-age children are lagging, Misty Heggeness, economist at the U.S. Census Bureau says. Further, she is skeptical that trend will meaningfully change in September. “I think we’re underestimating the fear people have with the virus,” Heggeness says, adding that it’s plausible some parents will hold back children in the fall if virtual learning is an option and if parents themselves remain reluctant to return to workplaces.

June’s Unemployment numbers

The June jobs report looks almost perfect, with hiring beating Wall Street’s expectations and wages rising. One might be tempted to declare the labor shortage over. But investors shouldn’t take the bait just yet. While a nonfarm payroll increase of 850,000 is undeniably strong, it belies a labor market still plagued with supply problems.

First, consider that government hiring rose 193,000 last month. That accounts for the entire headline overshoot versus economists’ expectations. Company payrolls increased 662,000, which would be incredible for normal times. Yet it was still far off the one million mark that economists had anticipated by this point in the recovery, as the economy bursts open and vaccinated consumers spend the trillions of dollars in cash stashed during the pandemic.
Second, labor-force participation was flat in June despite better hiring. That rate, 61.6%, is still down 1.7 percentage points from its prepandemic level. The employment-population ratio, which Federal Reserve officials have said they are watching, was also unchanged in June; at 58%, it remains 3.1 percentage points below its prepandemic level.
Third, the slowdown in wage growth is deceiving. The 0.3% increase from May looks like a Goldilocks print—enough to drive continued spending without fueling inflation fears that have been building as shortages from labor to chips to food push prices broadly higher.

Hiring is being held back by supply, not demand: On an annualized basis this year, leisure and hospitality wages are up 12.3%, transportation and warehousing pay is up 8%, and retail wages are up 5.5%.

Labor force participation was stagnant in June, reflecting an ongoing labor shortage. The degrees to which transitory factors—generous unemployment benefits, child-care issues, and Covid-19 concerns—are capping hiring and driving up wages won’t be clear for months. Schools need to reopen to resolve child-care issues holding back working parents, and enhanced unemployment pay needs to expire before it becomes clear the extent to which such benefits are keeping workers home.

While about two dozen states either have started cutting or are about to cut the extra $300 a week in unemployment insurance ahead of the federal program’s Sept. 6 expiration 70% of those unemployed won’t be affected by those early terminations.

References:

Buffett on Inflation

Posted on July 16, 2021 by admin

“Inflation often feels like an abstract concept, but it hits everyday people the hardest.” Warren Buffett

Inflation is when the dollars in your wallet lose their purchasing power — either because the money supply has dramatically increased or because prices have surged, according to Bankrate.com.

Effectively, inflation occurs when the cost of goods and services in the economy goes up over a sustained period of time. Yet, inflation doesn’t happen overnight, and it also doesn’t happen when the cost of one particular good or service goes up.

From an economics perspective, inflation refers to price increases to the broader economy. And, price increases aren’t always synonymous with inflation — and some economic experts say a little bit of inflation is actually good for the economy. That’s for two main reasons: One, it prevents a deflationary trap, which experts say can be even worse than deflation because money loses value. Another reason is because households make better financial decisions when they expect stable and low prices.

“We may see prices rise on certain things like gas or milk, but it’s not necessarily inflation unless you see prices rising sort of across the board, across many different products and services,” says Jordan van Rijn, senior economist at the Credit Union National Association (CUNA).

The Berkshire CEO described high inflation as a “tax on capital” that discourages corporate investment. The “hurdle rate,” or the return on equity needed to generate a real return for investors, climbs when prices rise, Buffett said. “The average tax-paying investor is now running up a down escalator whose pace has accelerated to the point where his upward progress is nil,” Buffett added.

Warren Buffett says Berkshire Hathaway is seeing "very substantial inflation" and raising prices https://t.co/tQteM8kmTa

— CNBC (@CNBC) May 3, 2021

Buffett pointed out inflation can hurt more than income taxes, as it’s able to turn a positive return on investment into a negative one. If prices have climbed enough, people who make a nominal return on their investment may be left with less purchasing power than before they invested.

Inflation Causes

Given the federal government’s unprecedented loose monetary policy, fiscal spending spree and money-printing splurge over the last year, many economists have warned that such fiscal irresponsibility could result in a destructive wave of inflation.

‘I worry about inflation. I do not believe inflation is going to be transitory.’ Larry Fink, chairman and CEO, BlackRock Inc.

Defenders of federal government pandemic monetary and fiscal interventions have insisted that any resulting price inflation is just transitory. But recent data is showing that price inflation is hitting new highs and many economists believe that inflation is deep rooted and non-transitory.

However, the June’s Consumer Price Index (CPI) shows prices once again sharply on the rise. From June 2020 to June 2021, the data show that consumer prices rose a staggering 5.4 percent. Larry Fink, Chairman and CEO of BlackRock Inc., isn’t convinced by the Federal Reserve’s arguments that U.S. inflation pressures will fade away once supply bottlenecks and other temporary factors resulting from the COVID-19 pandemic fade away.

Economists lump inflation causes into two categories: demand-pull and cost-push inflation.

Cost-push occurs when prices increase because production is more expensive; that can include rises in labor costs (wages) or material prices. Firms pass along those higher costs in the form of higher prices, which then cycles back into the cost of living.

On the flip side, demand-pull inflation generates price increases when consumers have resilient interest for a service or a good.

While price inflation has many causes, much of the current inflation can be traced back to the policy of the Federal Reserve. The Fed essentially created trillions of new dollars to pump into the economy in the name of “pandemic stimulus.”

“The quantity of money has increased more than 32.9% since January 2020,” Federal Economic and Education (FEE) economist Peter Jacobsen explained in May. “That means nearly one-quarter of the money in circulation has been created since then. If more dollars chase the exact same goods, prices will rise.”

“We are seeing very substantial inflation,” Warren Buffet said at a recent shareholder meeting. “It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.”

The typical person’s standard of living declines as a result of price inflation, because what really matters is not what number appears on your paycheck but the purchasing power of your paycheck. Working-class Americans suffer tremendously when their energy bill increases by nearly 25 percent in just one year, for example.

It is not a secret that stocks, like bonds, do poorly in an inflationary environment, according to Warren Buffett.

“There is no mystery at all about the problems of bondholders of in an era of inflation. When the value of the dollar deteriorates month after month, a security with income and principal payments denominated in those dollars isn’t going to be a big winner” Buffet states. “You hardly need a Ph.D. in economics to figure that one out.”

Regarding stocks, the conventional wisdom believes “…that stocks were a hedge against inflation. The proposition was rooted in the fact that stocks are not claims against dollars, as bonds are, but represent ownership of companies with productive facilities. These, investors believed, would retain their value in real terms; let the politicians print money as they might.”

The main reason it, stocks as a hedge against inflation, do not turn out the way conventional wisdom believed, according to Buffett, is that “stocks, in economic substance, are really very similar to bonds”.

References:

What the Inflation of the 1970s can Teach Us Today

Posted on July 13, 2021 by admin

A Wall Street Journal survey finds that “strong economic rebound and lingering pandemic disruptions fuel inflation forecasts above 2% through 2023”.

The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s, according to WSJ. Americans should brace themselves for several years of higher inflation than they’ve seen in decades, according to economists who expect the robust post-pandemic economic recovery to fuel brisk price increases for a while.

Economists surveyed this month by The Wall Street Journal raised their forecasts of how high inflation would go and for how long, compared with their previous expectations in April.

On average, the WSJ survey respondents expect a widely followed measure of inflation, which excludes volatile food and energy components, to be up 3.2% in the fourth quarter of 2021 from a year before. They forecast the annual rise to recede to slightly less than 2.3% a year in 2022 and 2023.

That would mean an average annual increase of 2.58% from 2021 through 2023, putting inflation at levels last seen in 1993.

References:

https://www.wsj.com/articles/higher-inflation-is-here-to-stay-for-years-economists-forecast-11626008400

Inflationary Pressures are a Real and Present Concern

Posted on June 12, 2021 by admin

“Inflation jumped 5 percent in the past year, the fastest pace in 13 years.”

Inflation in the US has jumped to the highest rate since 2008. For the past decade, inflation has averaged under 2 percent a year. But suddenly, inflation is rising much faster than anticipated and planned by the Federal Reserve. For instance, inflation rose 5 percent between May 2020 and May 2021, the Labor Department reported.

Inflation results when demand exceeds supply in an economy. When the economy grows faster than its ability to provide goods and services demanded by consumers, prices rise. When the economy grows more slowly than its potential growth rate, prices tend to fall. Factors that affect an economy’s growth rate include the supply of labor and the productivity of those workers.

Inflation is imply defined as the price of a good or service increasing over time. Conversely, you can also define inflation by looking at the value of the dollars purchasing those goods and services. Said another way, while you might agreed that the price of good and services have increased, you can also state the dollars you spend now purchase less quantity of goods and services … and by extension, the dollars themselves are clearly worth less.

Money supply and budget deficits

We’ve learned that inflation is, “always and everywhere a monetary phenomenon,” according to economist Milton Friedman. Money supply growth is a requirement, but in and of itself, it’s not enough to cause inflation. The money needs to find its way into the economy and turnover rapidly to generate inflation. (This is referred to as the velocity of money or ratio of M2 money supply to gross domestic product, or GDP.) In recent years, the velocity of money has fallen sharply.

Rising budget deficits are not necessarily linked to inflation, either, but can contribute to an overheating economy. It all depends on whether it stimulates demand to exceed supply. From a long-term perspective, there has been little correlation in recent years between the level of debt in the economy and inflation.

The causes of present inflation and the primary explanations are:

Pent-up demand following the COVID-19 shutdown.
Base effects (essentially older low values rolling off).
A massive increase in the supply of dollars.

Rising Prices

“Inflation is taxation without legislation.” – Milton Friedman.

With commodity prices soaring, money supply growth exploding, and government spending surging, there is a palpable fear of a return to 1970s-style inflation. I get it. I remember those times.

Core inflation, which strips out volatile items such as food and energy, leaped to the highest level since 1992. It rose 3.8% year-on-year, up from 3% in April.
Other official data showed that the number of initial claims for jobless benefits fell to its lowest since mid-March 2020, when the first wave of Covid-19 hit.

The cost of used cars and trucks climbed 7.3% in May from April, accounting for a third of the increase in inflation. Prices were 29.7% higher than a year earlier. They have risen in recent months because of a global semiconductor shortage that has held back car production, pushing people to enter the market for second-hand vehicles instead.

Energy prices rose, by 28.5% year-on-year, including a 56% jump in gasoline prices compared with May 2020, when demand slumped due to the pandemic. And, gasoline prices are destined to go higher with the cancelation of the cross-border permit for the Keystone XL pipeline and suspension of the program for oil and gas leasing on federal lands and waters.

The cost of flights, household furnishings, new cars, rental cars and clothing rose during May.

Inflation jumped 5 percent in the past year, the fastest pace in 13 years. Few are panicking yet, but there’s a big debate about how long prices will stay high. https://t.co/yefQt0zQWH

— The Washington Post (@washingtonpost) June 10, 2021

What should investors do?

In response to inflation, investors should:

Must become awareness of inflation. Inflation is likely to increase throughout the year (and perhaps further), and bonds are likely to at least be less of a stalwart than they have over the past 40 years. It is important to realize that is possible and you should all be prepared for lower near-term performance in fixed income markets.
Diversification is key. Equities, for example, have historically been a reasonable asset during certain inflationary periods as companies can often pass through increased costs.
Explore other forms of inflation protection, as well as a broader diversification of fixed income instruments.

Inflation is clearly present for U.S. consumers in the grocery stores, at gas stations and in vehicle sales. Fears over rising prices has investors fearing that pent-up demand and supply chain bottlenecks would create inflationary pressures, and force the Federal Reserve to “tamper” their monetary stimulus program and dampen demand by increasing interest rates.

References:

Financial Planning 12 Step Process

Posted on April 15, 2021 by admin

A financial plan creates a roadmap for your money and helps you achieve your financial goals.

The purpose of financial planning is to help you achieve short- and long-term financial goals like creating an emergency fund and achieving financial freedom, respectively. A financial plan is a customized roadmap to maximize your existing financial resources and ensures that adequate insurance and legal documents are in place to protect you and your family in case of a crisis. For example, you collect financial information and create short- and long-term priorities and goals in order to choose the most suitable investment solutions for those goals.

Although financial planning generally targets higher-net-worth clients, options also are available for economically vulnerable families. For example, the Foundation for Financial Planning connects over 15,000 volunteer planners with underserved clients to help struggling families take control of their financial lives free of charge.

Research has shown that a strong correlation exist between financial planning and wealth aggregation. People who plan their financial futures are more likely to accumulate wealth and invest in stocks or other high-return financial assets.

When you start financial planning, you usually begin with your life or financial priorities, goals or the problems you are trying to solve. Financial planning allows you to take a deep look at your financial wellbeing. It’s a bit like getting a comprehensive physical for your finances.

You will review some financial vital signs—key indicators of your financial health—and then take a careful look at key planning areas to make sure some common mistakes don’t trip you up.

Structure is the key to growth. Without a solid foundation — and a road map for the future — it’s easy to spin your wheels and float through life without making any headway. Good planning allows you to prioritize your time and measure the progress you’ve made.

That’s especially true for your finances. A financial plan is a document that helps you get a snapshot of your current financial position, helps you get a sense of where you are heading, and helps you track your monetary goals to measure your progress towards financial freedom. A good financial plan allows you to grow and improve your standing to focus on achieving your goals. As long as your plan is solid, your money can do the work for you.

A simple, 7 baby steps to start with your financial planning.

Thanks to @aidy_syazreef for sharing the poster. pic.twitter.com/TFt3H90iTR

— #BangsaEnamAngka (@FinancialGory) March 29, 2021

A financial plan is a comprehensive roadmap of your current finances, your financial goals and the strategies you’ve established to achieve those goals. It is an ongoing process to help you make sensible decisions about money, and it starts with helping you articulate the things that are important to you. These can sometimes be aspirations or material things, but often they are about you achieving financial freedom and peace of mind.

Good financial planning should include details about your cash flow, net worth, debt, investments, insurance and any other elements of your financial life.

Financial planning is about three key things:

Determining where you stand financially,
Articulating your personal financial goals, and
Creating a comprehensive plan to reach those goals.
It’s that easy!

Creating a roadmap for your financial future is for everyone. Before you make any investing decision, sit down and take an honest look at your entire financial situation — especially if you’ve never made a financial plan before.

The first step to successful investing is figuring out your goals and risk tolerance – either on your own or with the help of a financial professional.

There is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money.

12 Steps to a DIY Financial Plan

It’s not the just the race car that wins the race; it also the driver. An individual must get one’s financial mindset correct before they can succeed and win the race. You are the root of your success. It requires:

Right vehicle at the right time
Right (general and specific) knowledge, skills and experience
Right you…the mindset, character and habit

Never give up…correct and continue.

Effectively, the first step to financial planning and the most important aspect of your financial life, beyond your level of income, budget and investment strategy, begins with your financial mindset and behavior. Without the right mindset around your financial well-being, no amount of planning or execution can improve your current financial situation. Whether you’re having financial difficulty, just setting goals or only mapping out a plan, getting yourself mindset right is your first crucial step.

Knowing your impulsive vices and creating a plan to reduce them in a healthy way while still rewarding yourself occasionally is a crucial part of a positive financial mindset. While you can’t control certain things like when the market takes a downward turn, you can control your mindset, behavior and the strategies you trust to make the best decisions for your future. It’s especially important to stay the course and maintain your focus on the positive outcomes of your goals in the beginning of your financial journey.

Remember that financial freedom is achieved through your own mindset and your commitment to accountability with your progress and goals.

“The first step is to know exactly what your problem, goal or desire is. If you’re not clear about this, then write it down, and then rewrite it until the words express precisely what you are after.” W. Clement Stone

1. Write down your goals—In order to find success, you first have to define what that looks like for you. Many great achievements begin as far-off goals, that seem impossible until it’s done. Though you may not absolutely need a goal to succeed, research still shows that those who set goals are 10 times more successful than those without goals. By setting SMART financial goals (specific, measurable, achievable, relevant, and time-bound), you can put your money to work towards your future. Think about what you ultimately want to do with your money — do you want to pay off loans? What about buying a rental property? Or are you aiming to retire before 50? So that’s the first thing you should ask yourself. What are your short-term needs? What do you want to accomplish in the next 5 to 10 years? What are you saving for long term? It’s easy to talk about goals in general, but get really specific and write them down. Which goals are most important to you? Identifying and prioritizing your values and goals will act as a motivator as you dig into your financial details. Setting concrete goals may keep you motivated and accountable, so you spend less money and stick to your budget. Reminding yourself of your monetary goals may help you make smarter short-term decisions about spending and help to invest in your long-term goals. When you understand how your goal relates to what you truly value, you can use these values to strengthen your motivation. Standford Psychologist Kelly McGonigal recommends these questions to get connected with your ideal self:

What do you want to experience more of in your life, and what could you do to invite that/create that?
How do you want to be in the most important relationships or roles in your life? What would that look like, in practice?
What do you want to offer the world? Where can you begin?
How do you want to grow in the next year?
Where would you like to be in ten years?

Writing your goals out means you’ll be anywhere from 1.2 to 1.4 times more likely to fulfill them. Experts theorize this is because writing your goals down helps you to choose more specific goals, imagine and anticipate hurdles, and helps cement them in your mind.

2. Create a net worth statement—To create a successful plan, you first need to understand where you’re starting so you can candidly address any weak points and create specific goals. First, make a list of all your assets—things like bank and investment accounts, real estate and valuable personal property. Now make a list of all your debts: mortgage, credit cards, student loans—everything. Subtract your liabilities from your assets and you have your net worth. Your ratio of assets to liabilities may change over time — especially if you pay off debt and put money into savings accounts. Generally, a positive net worth (your assets being greater than your liabilities) is a monetary health signal. If you’re in the plus, great. If you’re in the minus, that’s not at all uncommon for those just starting out, but it does point out that you have some work to do. But whatever it is, you can use this number as a benchmark against which you can measure your progress.

3. Review your cash flow—Cash flow simply means money in (your income) and money out (your expenses). How much money do you earn each month? Be sure to include all sources of income. Now look at what you spend each month, including any expenses that may only come up once or twice a year. Do you consistently overspend? How much are you saving? Do you often have extra cash you could direct toward your goals?

4. Zero in on your budget—Your cash-flow analysis will let you know what you’re spending. Zeroing in on your budget will let you know how you’re spending. Write down your essential expenses such as mortgage, insurance, food, transportation, utilities and loan payments. Don’t forget irregular and periodic big-ticket items such as vehicle repair or replacement costs, out of pocket health care costs and real estate taxes. Then write down nonessentials—restaurants, entertainment, even clothes. Does your income easily cover all of this? Are savings a part of your monthly budget? Examining your expenses and spending helps you plan and budget when you’re building an emergency fund. It will also help you determine if what you’re spending money on aligns with your values and what is most important to you. An excellent method of budgeting is the 50/30/20 rule. To use this rule, you divide your after-tax income into three categories:

Essentials (50 percent)
Wants (30 percent)
Savings (20 percent)

The 50/30/20 rule is a great and simple way to achieve your financial goals. With this rule, you can incorporate your goals into your budget to stay on track for monetary success.

5. Create an Emergency Fund–Did you know that four in 10 adults wouldn’t be able to cover an unexpected $400 expense, according to U.S. Federal Reserve? With so many people living paycheck to paycheck without any savings, unexpected expenses might seriously throw off someone’s life if they aren’t prepared for the emergency. It’s important to save money during the good times to account for the bad ones. This rings especially true these days, where so many people are facing unexpected monetary challenges. Keep 12 months of essential expenses as Emergency Fund or a rainy day fund. If you or your family members have a medical history, you may add 5%-10% extra for medical emergencies (taking cognizance of the health insurance cover) to the amount calculated using the above formula. An Emergency Fund is a must for any household. Park the amount set aside for contingencies in a separate saving bank account, term deposit, and/or a Liquid Fund.

6. Focus on debt management—Debt can derail you, but not all debt is bad. Some debt, like a mortgage, can work in your favor provided that you’re not overextended. It’s high-interest consumer debt like credit cards that you want to avoid. Don’t go overboard when taking out a home loan. It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. But, as a rule of thumb, the value of the house should not exceed 2 or 3 times your family’s annual income when buying on a home loan and the price of your car should not exceed 50% of annual income. Try to follow the 28/36 guideline suggesting no more than 28 percent of pre-tax income goes toward home debt, no more than 36 percent toward all debt. This is called the debt-to-income ratio. If you stick to this ratio, it will be easier to service your loans/debt. Borrow only as much as you can comfortably repay. If you have multiple loans, it is advisable to consolidate all loans into a single loan, that has the lowest interest rate and repay it regularly.

“Before you pay the government, before you pay taxes, before you pay your bills, before you pay anyone, the first person that gets paid is you.” David Bach

7. Get your retirement savings on track—Whatever your age, retirement planning is an essential financial goal and retirement saving needs to be part of your financial plan. Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. The earlier you start, the less you’ll likely have to save each year. You might be surprised by just how much you’ll need—especially when you factor in healthcare costs. To build a retirement nest egg, aim to create at least 20 times your Gross Total Income at the time of your retirement. This is necessary to keep up with inflation. But if you begin saving early, you may be surprised to find that even a little bit over time can make a big difference thanks to the power of compounding interest. Do not ignore ‘Rule of 72’ – As per this rule, the number 72 is divided by the annual rate of return on investment to determine the time it may take to double the money invested. There are several types of retirement savings, the most common being an IRA, a Roth IRA, and a 401(k):

IRA: An IRA is an individual retirement account that you personally open and fund with no tie to an employer. The money you put into this type of retirement account is tax-deductible. It’s important to note that this is tax-deferred, meaning you will be taxed at the time of withdrawal.
Roth IRA: A Roth IRA is also an individual retirement account opened and funded by you. However, with a Roth IRA, you are taxed on the money you put in now — meaning that you won’t be taxed at the time of withdrawal.
401(k): A 401(k) is a retirement account offered by a company to its employees. Depending on your employer, with a 401(k), you can choose to make pre-tax or post-tax (Roth 401(k)) contributions. Calculate how much you will need and contribute to a 401(k) or other employer-sponsored plan (at least enough to capture an employer match) or an IRA.

Ideally, you should save 15% to 30% from your net take-home pay each month, before you pay for your expenses. This money should be invested in assets such as stocks, bonds and real estate to fulfil your envisioned financial goals. If you cannot save 15% to 30%, save what you can and gradually try and increase your savings rate as your earnings increase. Whatever you do, don’t put it off.

After retiring, follow the ‘80% of the income rule’. As per this rule, from your investments and/or any other income-generating activity, you need to generate at least 80% of the income you had while working. This will ensure that you can take care of your post-retirement expenses and maintain a comfortable standard of living. So make sure to invest in productive assets.

8. Check in with your portfolio—If you’re an investor, when was the last time you took a close look at your portfolio? If you’re not an investor, To start investing, you should first figure out the initial amount you want to deposit. No matter if you invest $50 or $5,000, putting your money into investments now is a great way to plan for financial success later on. Market ups and downs can have a real effect on the relative percentage of stocks and bonds you own—even when you do nothing. And even an up market can throw your portfolio out of alignment with your feelings about risk. Don’t be complacent. Review and rebalance on at least an annual basis. As a rule of thumb, your equity allocation should be 100 minus your current age – Many factors determine asset allocation, such as age, income, risk profile, nature and time horizon for your goals, etc. But you could broadly follow the formula: 100 minus your current age as the ratio to invest in equity, with the rest going to debt. And, never invest in assets you do not understand well.

Good health is your greatest need. Without good health, you can’t enjoy anything else in life.

9. Make sure you have the right insurance—As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Although insurance may not be as exciting as investing, it’s just as important. Insuring your assets is more of a defensive financial move than an offensive one. Having adequate insurance is an important part of protecting your finances. We all need health insurance, and most of us also need car and homeowner’s or renter’s insurance. While you’re working, disability insurance helps protect your future earnings and ability to save. You might also want a supplemental umbrella policy based on your occupation and net worth. Finally, you should consider life insurance, especially if you have dependents. Have 10 to 15 times of annual income as life insurance – If you are the bread earner of your family, you should have a tem life insurance coverage of around 10 to 15 times your annual income and outstanding liabilities. No compromise should be made in this regard. Review your policies to make sure you have the right type and amount of coverage. Here are some of the most important ones to get when planning for your financial future.

Life insurance: Life insurance goes hand in hand with estate planning to provide your beneficiaries with the necessary funds after your passing.
Homeowners insurance: As a homeowner, it’s crucial to protect your home against disasters or crime. Many people’s homes are the most valuable asset they own, so it makes sense to pay a premium to ensure it is protected.
Health insurance: Health insurance is protection for your most important asset: Your health and life. Health insurance covers your medical expenses for you to get the care you need.
Auto insurance: Auto insurance protects you from costs incurred due to theft or damage to your car.
Disability insurance: Disability insurance is a reimbursement of lost income due to an injury or illness that prevented you from working.

10. Know your income tax situation—Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning. Tax legislation tend to change a number of deductions, credits and tax rates. Don’t be caught by surprise when you file your last year’s taxes. To make sure you’re prepared for the tax season, review your withholding, estimated taxes and any tax credits you may have qualified for in the past. The IRS has provided tips and information at https://www.irs.gov/tax-reform. Taking advantage of tax sheltered accounts like IRAs and 401(k)s can help you save money on taxes. You may also want to check in with your tax accountant for specific tax advice.

11. Create or update your estate plan—Thinking about estate planning is important to outline what happens to your assets when you’re gone. To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. At the minimum, have a will—especially to name a guardian for minor children. Also check that beneficiaries on your retirement accounts and insurance policies are up-to-date. Complete an advance healthcare directive and assign powers of attorney for both finances and healthcare. Medical directive forms are sometimes available online or from your doctor or hospital. Working with an estate planning attorney is recommended to help you plan for complex situations and if you need more help.

12. Review Your Plans Regularly–Figuring out how to create a financial plan isn’t a one-time thing. Your goals (and your financial standing) aren’t stagnant, so your plan shouldn’t be either. It’s essential to reevaluate your plan periodically and adjust your goals to continue setting yourself up for success. As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young 20-something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mid-30s who has an established career. Staying updated with your financial plan also ensures that you hold yourself accountable to your goals. Over time, it may become easy to skip one payment here or there, but having concrete metrics might give you the push you need for achieving a future of financial literacy. After you figure out how to create a monetary plan, it’s good practice to review it around once a year.

Additionally, take into account factors such as the following:

The number of years left before you retire
Your life expectancy (an estimate, based on your family’s medical history)
Your current basic monthly expenditure
Your existing assets and liabilities
Contingency reserve, if any
Your risk appetite
Whether you have adequate health insurance
Whether you have provided for other life goals
Inflation growth rate

A financial plan isn’t a static document to sit on — it’s a tool to manage your money, track your progress, and one you should adjust as your life evolves. It’s helpful to reevaluate your financial plan after major life milestones, like getting m arried, starting a new job or retiring, having a child or losing a loved one.

Financial planning is a great strategy for everyone — whether you’re a budding millionaire or still in college, creating a plan now can help you get ahead in the long run, especially if you want to make a roadmap to a successful future.

For additional financial planning resources to create your own financial plan, go to the MoneySense complete financial plan kit.

References:

From Gratitude to Greatness: Brownlee Global's Path to a Purposeful Life

Guide and Educate Individuals How to Build Long-Term Wealth, Better Manage Their Money, and Achieve Financial Freedom

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