Inflation is More than Just Money Printing

The inflation we are experiencing in the United States is more than just money printing. It is because of herd mentality here in the States compounded by a growing lack of trust in the US Dollar abroad.

the first thing on most people’s minds during inflation is their food prices

Demand for Benjamins Abroad

When I lived in Malaysia, each weekend there was a line that stretched for at least a few dozen people at a mall named Mid Valley in heart of Kuala Lumpur. That line was people exchanging their local currency – the Malaysian ringgit, into US Dollars. They did so to preserve purchasing power since their local currency was being devalued due to their country’s dependence on oil production for their economy. You see, when the US dollar is the world reserve currency it tends to preserve its power since everyone wants to collect them and not necessarily spend them. Imagine if everyone in the world was doing the same, and not just the mom and pop citizens but also entire governments!

This action takes circulating USD out of circulation at least temporarily, and demand of this nature makes the USD stronger versus the currency that are being exchanged out of. Even though both the US and Malaysia were making fiat (and I’m not talking about the poorly made cars) paper currency, the US benefits from strong demand from other countries continuing to prop up the dollar and wanting to sell their goods for dollars.

Herd Mentality Causing Price Spikes at Home

Now if you tune into CNN or some other popular news channel you will be told that price hikes have to do exclusively with ports being backed up due to Covid related worker shortages – this is not the whole story. Demand for goods is higher, and the desire to hoard goods hasn’t completely gone away from more than a year ago (remember when everything was rationed?). If you go to the local Costco or Sams Club here in Albuquerque they are still limiting the number of bottle water packs you can buy to two or three, people seem to still be being more toilet paper than normal, and there are folks who are already finishing up their Christmas shopping for fear of items not being available or being much more expensive come December. This spending is what I like to call velocity of money in motion, and is causing prices to go up on main street.

What about Real Estate?

The cash that the Federal Reserve created months and years ago had already funneled into the financial system first and caused companies flush with cash to go for asset buying sprees, such as real estate. Big companies like OpenDoor and Zillow bought homes over their value, in anticipation of “flipping” them and making money purely from the upward price trend that was happening since mid 2020. The only problem is individuals stopped receiving stimulus checks and companies started opening up and wanting people to get back to work – slowing down the home buying and turning the rising price trend around if even slightly.

I wholeheartedly expect home prices to fall in the hottest areas this winter, but I do think the fall will be short-lived as moderate inflation catches up. People will start to demand higher wages and the most profitable industries will be able to provide them. Industries that cannot adjust their prices very much to keep track with inflation will suffer, and their employees will suffer with stagnant wages. I expect the agriculture industry to come out of this better than before, same with companies that sell inelastic goods such as food and modest housing. Luxury housing will suffer along with luxury good industries.

What can I do?

Go back to my blog and read the article titled “How To Preserve Your Assets During 1970’s Style Inflation?

Make sure your income keeps up with inflation, pivot to make that happen. Make sure you have skills that are in demand that are well compensated for if you’re starting out, and if you already have assets make sure they are cash flowing. Having debt during high inflation is a great thing as long as your income keeps up with inflation. For example, if you own a rental property and pay a 30 year fixed rate mortgage ideally you’ll be able to adjust your rent for inflation.

Bottom Line

Inflation is not transitory in that it will return to what it was before Jerome Powell’s speech. It may slow down and prices for certain things may decrease as supply rises to meet demand, but you shouldn’t be dormant with your cash but put it to work ASAP. Watch for a real estate correction this winter for a buying opportunity if you’ve been waiting. Don’t panic.

How To Preserve Your Assets During 1970’s Style Inflation?

So times have changed, but inflation is back. In the 1970’s prices went up 10% year over year due to a few things – in my opinion OPEC and the departure from the gold standard were the biggest reasons. During that time period you would have made out quite well if you kept all your cash in energy stocks and real estate investments. You’d also make out like a bandit holding gold and silver.

During this period I think the same is true, however there’s a few differences.

  1. Energy stocks now should include “Green Energy” companies and not just comprise of typical fossil fuel producers/ refiners.
  2. I’d focus more on residential real estate instead of commercial real estate especially if the commercial REITS are heavily invested in traditional office buildings and property in large metropolises.
  3. Gold and silver now have competition – cryptocurrencies led by bitcoin and etherium. Altcoins offer large APY yields to those who risk holding them and “staking” them or participating in defi programs. Bank interest rates are still abhorrently low, and at the time of writing this the best interest you can get on a savings is basically 0.5% with Ally unless you are using some promotion or something that requires you go through hoops. Defi can easily get you closer to 20%.
  4. One sector I’m willing to keep cash in is food producing companies and food sellers. That means Lamb Weston, Conagra, Archer-Daniels Midlands for the food producers and Albertsons and Walmart for the retailers. These companies make money off of an inelastic good, and for those who took economics that means that people can’t really stop buying regardless of the price. When it comes to low level luxury goods price elasticity means that demand goes down when price goes up, and for some goods this effect is stronger than others.
  5. Another sector that sells goods that are partially inelastic is energy, that means energy companies and I’d throw in green energy companies into this mix. Fuel is needed for heating during the winter and essential transportation year round.
  6. One winner of inflation that wasn’t around during the 1970’s could be the internet and internet based businesses. As people are too poor to go out, pay for fuel, and dine out they may turn to internet based entertainment such as we saw during Covid in mid 2020.
  7. Regarding real-estate, we did see a huge surge in price in the past few years as people moved around the country with the ability to work from home and the newfound realization that their life is finite due to the pandemic – we may see real estate prices keep up with inflation or slow down a bit, I think a slowdown is more likely as homeowners feel the strain of inflation and sell-offs start to happen. This will benefit people and corporations who have the means to buy up these properties and rent them out.

What not to do:

  1. Nothing – don’t do nothing. Take action to preserve your value that you’ve worked hard to build.
  2. Bank CD – if you lock your money into these low yield fixed rate certificates of deposits you are effectively throwing your money away.
  3. Keep all your money in Consumer Discretionary and related businesses stock. That means Footlocker, Texas Roadhouse, etc.

Is inflation “transitory”

  • I don’t think so, I think it will slow down in the future but what you can buy for the dollar now will never buy you more in the future. I see inflation going up 5 to 10% for the next few years, and that is on the optimistic side.

US Debt 25 Trillion and Counting. How to Protect Yourself.

The United States is 25 trillion dollars in debt. It collects around 3.2 trillion dollars in tax revenue every year and spends 6.2 trillion dollars every year. The spending continues to go up and all the while the US is paying interest on its debt. Instead of hoarding dollars you should consider some of these other stores of value.

The US dollar is one of the strongest currencies out there, backed by the strongest military and economy the world has ever seen. That being said it is not in the interest of the United States government to have the US dollar increase in value, especially because it owes so much in the form of Treasury bonds and notes. Thankfully most debt is internal – meaning the debt is held by US entities and the Federal Reserve, however there is a lot of debt owned by foreign countries as well. This makes inflation FAVORABLE for multiple reasons – the amount owed to others decreases in real value and economic growth occurs when people use their money to make a higher return than inflation and the interest rates.

If the Federal Reserve were to increase interest rates it would strengthen the US dollar, going against the interests I mentioned above.

This is fine, you just need to know where to put your money so you aren’t affected as much by it.

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