Inflation: the bad and the ugly (there is no good)

 

Well, I guess we'd better take another look at inflation.  I'm not talking about what the talking heads in government and the big banks say:  most of them are lying through their teeth, and unworthy of attention.  They largely created the mess we're in, and they're feverishly doubling down on past mistakes and making it worse by the day.  The rest of us, tragically, are already caught up in the consequences of their arrant stupidity and mendacity, and it's going to get worse.

Let's consider inflation and investing, and what that means for your savings - and, perhaps most important of all, your pension.  John Mauldin had this to say last week:

Everything we see about today’s markets screams “overvalued” ... sadly, the current context is not exactly bullish. You don’t have to be an economic rocket scientist to know that both inflation and deflation aren’t good for stock investments ... The “sweet spot” is generally when inflation is between zero and 3% and valuations are much lower. We are well past the valuation and inflation metrics of the tech bubble.

That suggests one of two things needs to happen: either inflation needs to drop dramatically or the stock market needs to drop significantly, or some combination of the two—at least from a historical perspective. Depending on how you measure standard deviation, we are somewhere between 4–5 standard deviations from the mean. Again, dramatically higher than the Roaring 20s (well more than double) or the tech bubble (more than 50% higher) ... The potential for a real bear market triggered by earnings compression and Federal Reserve actions is quite real ... What if the Fed raises short-term rates to (gasp!) 1%? Or even slightly higher? You think that’s not a possibility? Tell me what inflation is going to be. How serious is Jay Powell going to be in fighting inflation? There are way too many known unknowns in our future to be complacent.

. . .

Next year is truly unknown territory. The Fed has signaled it will begin to reduce quantitative easing. Even though its balance sheet will be expanding, it is a tightening of monetary conditions. It remains to be seen how fast they will do it. There are other unknowns, too ... Because workers are scarce relative to demand for their services, they have more influence. They can demand and receive higher wages. This is inflationary.

At the same time, available investment capital greatly exceeds the demand for it. This is one reason interest rates are persistently low. If you want to earn interest income by lending your capital, you are competing with many others who want to do the same. Borrowers naturally choose the best terms, so you get a race to the bottom.

In sum, we are shifting from a capital-constrained economy to a labor-constrained economy. I don’t think this is temporary ... This will be a different investing environment than most of us have ever known ... The giant funds will have far greater problems. Plans that are already underfunded are having to invest in overvalued markets that will swing to undervalued at some point, possibly just as the plans need cash to pay benefits. They will become even more underfunded and then have to face an investing environment where their size makes above-zero returns very difficult to achieve.

If you are counting on one of those funds to pay your living expenses for a long retirement, you may be in for a shock. Now would be a good time to start making alternate plans.

There's more at the link.

Do please note Mr. Mauldin's closing remarks about your pension.  In a high-inflation investing environment like ours, constrained by other factors such as catastrophic political ineptitude and a labor shortage, the investments that fund our pensions, IRA's, 401(k)'s and other financial vehicles are faced with a dire situation.  It's not safe to rely on them to protect our finances in retirement.  I think many of us will be faced with the necessity of working into our old age, as long as we're able to do so, in order to put food on the table.

This, in turn, opens up a new can of worms:  what will government do about it?  Older people are a solid voting block that can wield significant political interest.  There's bound to be pressure to "compensate" older people for their suddenly reduced pension and retirement benefits - but Social Security is almost broke.  Where will that money come from?  The answer is almost inevitable.  I think we'll see ever-greater pressure to "nationalize" private retirement investments, in exchange for a government-guaranteed pension.  This idea isn't new, of course, but money - or the lack thereof - talks, and right now too many government functions are too short of money.  They'll take whatever they can get from anybody.

According to the Organization for Economic Cooperation and Development, pension funds in the USA in 2020 controlled assets worth $18.75 trillion.  That's an awful lot of money to tempt spendthrift politicians.  They could use it to reduce the US deficit (currently $28.9 trillion), thereby allowing them to borrow even more in future because "the deficit is so low!".  In exchange, they could promise us a state-funded "pension", to be paid out of future taxes and borrowings.  Just think of the temptation to the powers that be to do something like that!  What's the betting they could cream off several trillions of that in graft, fraud, shoddy accounting and just plain theft?

Those who think their personal pension savings, investments and funding are safe right now, and won't be affected either by high inflation or by political shenanigans, are living in cloud cuckoo land . . .

As for inflation, the official year-on-year rate (which is so mangled, folded, spindled and mutilated by bureaucrats that it's effectively worthless as a true gauge of the current state of affairs) is currently 6.2%.  Applying my earlier rule of thumb, if we multiply that by 3½, we get 21.7%, which (according to my wallet and my daily expenditures) is a much more realistic estimate of the US inflation rate at this time.  I've seen others place it as high as 30-40%, based on their experience in other parts of the country.  (Please compare current food prices in your area to those you paid in January this year, and let us know the difference in Comments.  I'd like to get a feel for how other parts of the country are experiencing food inflation - one of the most basic, yet most important, measures of our economy.)

So, tell me . . . has your income gone up in proportion to the actual rate of inflation this year?  If it has, you're in a tiny - a minuscule - minority, for which you should give thanks.  The rest of us haven't been so fortunate, and it's going to get worse next year.

Inflation is, of course, a monetary phenomenon, as we've discussed in these pages on several occasions.  If our money becomes devalued, prices rise to compensate for that - which is precisely what we're seeing all around us today, because over the past few years the Federal Reserve has been printing money like there's no tomorrow, devaluing every single dollar in circulation.  Egon von Greyerz points out:

Money used to be a stable medium of exchange and a store of value but that was in the days when there were sound monetary principles, mostly backed by gold or silver.

Since 1913 and especially 1971 there is no discipline and no morals when it comes to the issuing of money as unlimited amounts of fake fiat money is printed at will.

. . .

Since 1930, the US government has had budget deficits every year, except a couple of years in the 1950s and 1960s. The Clinton surpluses were fake due to false accounting.

So for 90 years, the most powerful economic power in the world has been living on borrowed money and borrowed time.

The consequences are blatant and for most people to see, if they care to look. But their government won’t tell them and the media is too ignorant to understand it.

Probably not even 1% of Americans understand that their leaders and bankers are destroying their money on a daily basis.

How many Americans would understand that since 1971 their US dollar has lost 98% of its purchasing power? Virtually nobody realises that the dollar only buys 2% of what it bought in 1971.

Again, more at the link.

The inevitable result is that keeping a lot of money in cash, or in a savings account, has become a mug's game.  We have to keep some cash around in our "rainy day fund", or emergency reserves:  but that money is losing value each and every day, because it can't earn enough interest to preserve its value.  As the Daily Mail pointed out in a recent headline:

COVID has driven Americans to bank $1.6 TRILLION in ‘excess savings’ they stashed over fear of economic chaos: Experts warn value of rainy day money is being slashed by surging inflation

They're not joking.

I used to agree that building up and maintaining a six-month reserve of cash, sufficient to pay all your regular bills and fund all your routine needs for that period, was a good idea.  However, in a high-inflation environment, it isn't necessarily the wisest move.  What I'm doing is converting some of our reserve cash (which was far less than six months' worth to begin with) into actual reserves of physical needs.  Those things will still help us keep our heads above water if we face financial hardship - and once bought, they won't lose value.  The way things are going, that's not a bad idea.  (I can't help noting that no more than a month after I bought some of those things, their price has already risen by between 10% and 25% over what I paid for them.  That's partly due to seasonal price changes in items like heaters, fuel, etc., but even so . . . ouch!)

Peter