Episode 53: Inflation- It’s Not Transitory!

Here are just a handful of the things that you’ll learn:

So, let me ask you a question, how many times in the last couple of months or so have you heard the word inflation?


I bet it’s a lot. It seems like every other article is written about inflation and if you turn on any of the popular business channels even your nightly news, it’s mentioned many times during the broadcast.


As a matter fact if you Google the word inflation, you’ll get 180 million results!  If it took you two minutes to read each result. It would take you 685 years to read them all!


I think it’s worthwhile to study inflation and understand exactly what it is and how to protect yourself from its effects and that’s what we’re going to do on today’s podcast!


Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. So, unless you’re a client I can’t give you advice because I don’t know you. So, think of this as helpful hints and education only. And please before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser…………. right? that’s only common sense.


(1:00) Practical Planning Segment: I am joined today by our resident CFP® and VP of Advisory Services, Mr. Nicholas Craven!


We have news for you, inflation is not transitory! And that’s been a big buzzword from the federal reserve. They are constantly putting out statements in the news media saying that this inflation spike that we have had recently is transitory meaning it’s not going to last.


(3:00) US consumer prices were up by 5.4% for the year ending June 2021, so naturally, it is at the center of attention from many investors. 


Contrary to popular belief inflation has nothing to do with higher wages, government spending, economic growth, it is all about printing money.


The famous economist Milton Friedman, my favorite economist of all time says, “inflation is always a monetary phenomenon.”


(4:30) The definition of inflation is “too much money chasing too few goods.”


So, you can understand why people think that inflation is transitory.


Looking at these numbers of inflation is at 5.4% we must also keep in mind that we are comparing the most recent months to very weak months one year ago during the pandemic.  So, I do believe that. And I believe that when we start seeing numbers comparing one month over a previous month and the previous month was higher production and economic output will start to see those numbers level off a bit.


However, if we look at the last three months, we see that inflation is up as measured by the CPI and an annualized rate of 8%.  So obviously it’s not all about a base effect.


And obviously, our supply chains were broken during the pandemic. We had supply chain problems so there is some truth to that remember the definition is too much money chasing too few goods.


However, it all comes back to the printing of money. Remember Milton Friedman said it is always a monetary phenomenon. The Fed has increased the money supply measured by M2 by 30%! That is the largest increase in the money supply since World War II in the 1940s.


(7:30) What is M2?  Now you’re taking me back to my economics classes in college. M2 is a measure of the amount of money that we have as a society and it includes cash, checking deposits, any money that’s easily convertible and can easily be turned into spendable cash. Things like a savings account, money market account, mutual funds. M2 to include all of this because it can be easily converted and spent.


When you increase the money supply the value of the dollar must come down! I think the best way to illustrate this is through an example.


If we have an economy where we have $10 and 10 apples. Each Apple cost what? One dollar!


If the Fed increases the money supply from $10-$13 which is a 30% increase, but we only still have 10 apples, what do you have now per Apple? $1.30, correct. That is inflation!


Now if you look at what happened last year where we damaged our supply chains, and I would argue 100% self-inflicted. We damaged our output. So, if we carry this example forward and now, we increase the money supply by 30% to $13 but we can only produce five apples. Each apple now cost $2.60!


Now the reason they say that inflation is transitory is that they are assuming our output will increase back up to the 10 Apple count but remember the money supply is still up 30%. That’s permanent and not transitory!!!!!!


You say that’s why we are making the argument that inflation is here to stay because the federal reserve has increased the money supply by 30%. And as I mentioned earlier that’s the largest increase since World War II.


(11:00) There are some people out there that also believe in modern monetary theory. Basically, this is Keynesianism. John Maynard Keynes was an economist that believed in deficit spending. But this deficit spending is Keynesianism on steroids!


The argument is that deficit spending is good! Print and spend as much money as you want, and we will have no bad effects!


Their argument is that if you increase the dollars from $10-$13 a 30% increase, someone like Jeff Bezos will come along and increase or supply from 10 apples to 13 apples! They argue just by increasing the money supply we will encourage higher output!


This is a fallacy. It’s a pipe dream. It has never worked in history. If more output were available, we would do it whether there was more money in the economy or not.


So, this is why we say inflation is here to stay!  Eventually, prices across the board will most likely rise by 30%. We don’t know how long that will take, it could take three years maybe five years, maybe six years. If it takes six years that would be 5% inflation per year


So now that we have set the stage and hopefully understand that some inflation is here to stay what can we do about it and what strategies are available to mitigate the effects of an increase in prices!


We call this the silent income killer. Because if you don’t have income that keeps up with inflation… you’re losing money!


Let’s go talk about some strategies to handle inflation in our coachable segment!


(14:50) Coachable Segment:


Let’s talk about a few popular ideas about fighting inflation. Some of these probably could be considered myths. And then we’ll talk about other ideas that are backed by evidence.


I think one of the most popular ideas floating around is to buy gold, precious metals, or even commodities for that fact. I know Nick recently did a coaching class where he looked at gold as an inflation-fighting mechanism, and let’s just say we don’t think this is a sufficient strategy.


(17:30) Increase your earning power! Obviously, this is easier said than done. It’s obvious that if you maintain your lifestyle but earn more money than that is a successful strategy to battle inflation. But how do you earn more money? Really comes down to, if you’re still working, investing in yourself.  Whatever occupation you are in, whether it’s a white-collar job or a blue-collar job there are things that you can do, classes that you can take, that you can invest in yourself and improve your credentials!


Now the big problem is if you are already retired and not going back to work and have no desire to work even part-time or maybe you can’t work because of a disability, how do you fight inflation?


Do you have or have you thought about developing an income plan that has some type of inflation protection within it? This may be just simply Social Security increasing with a COLA. Maybe your existing pension has a COLA adjustment?  If you don’t have an existing pension, you can create one on your own using an annuity with a COLA adjustment.


(21:40) Next, let’s talk about your investment plan. Do you have an investment plan? Obviously to have an investment plan you need to have investments, but are those investments properly allocated in a variety of asset classes that have shown to outpace inflation.


  • Dimensional fund advisors, DFA has released an article discussing asset classes that have outpaced inflation and the study goes back to 1927. They studied 23 asset classes and they measured real returns which equal net of inflation. All 23 asset classes except one month treasury bills had positive average real returns in high inflation years. Some asset classes such as small-cap value and large-cap value, value asset classes significantly outpaced inflation. Does your investment plan include asset classes of large and small value?
  • It’s important to note that we’re not talking about putting an entire investment portfolio in more volatile asset classes, it must be meticulously designed and built based on each client’s risk tolerance.


(25:59) What about tax planning? I think most people understand that taxes are an expense. And I personally believe tax inflation is on the rise! It’s just a different way of saying tax increases most likely are going to happen in the future. As a matter fact, TCJA expires in 2025. We know that even if the current administration doesn’t raise taxes before 2025, taxes are going up in 2026. Because the Trump tax cuts expire.


Do you have a tax plan? A proactive tax plan looking at saving taxes not on just a yearly basis but over a lifetime?


(28:00) A fourth possible strategy is considered inflation-protected securities. These are commonly referred to as TIPS. They are designed to provide inflation protection. While certain investments like real estate investment trusts and commodities are sometimes considered inflation-sensitive assets, the data provides little support that they are good inflation hedges.


What will next month’s inflation reading be? Nobody knows. Nobody has a crystal ball! Fortunately, we don’t need a crystal ball to address inflation in our portfolios.


I think the number one takeaway is to build a diversified portfolio with asset classes that have shown to outpace inflation over the long term, rebalance back to your targets, and build a portfolio based on your risk tolerance and return expectations.


Look, if all this seems a little overwhelming. Get some help!


Shameless plug here…. This is exactly what we do here.  we look at tax planning, investment planning, income planning, and Estate planning.



Final Disclaimer:


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