Inflation watch - 2022/02/15

 

I'm going to make an "inflation watch" article a regular feature here, because a lot is happening that you'll miss if you aren't looking for it - but it affects you very nearly and dearly, nevertheless.

First off today, vehicle prices.  Used vehicles are climbing to unheard-of price levels, so much so that some models actually exceed the new model MSRP!  Miss D. and I encountered this when vehicle shopping last week after misadventures with her previous wheels.  We were offered a two-year-old car with mid-20K miles on the odometer for $2,000 more than the MSRP on an identical, brand-new vehicle!  Needless to say, we didn't bite;  and once we'd demonstrated that we knew current prices (MSRP and invoice), and had excellent credit ratings, and were prepared to take our business elsewhere if we didn't get an affordable offer, things improved rapidly.  We ended up paying $300 over MSRP for a brand-new car, one of the top-selling models in the country, which is very much in demand.  In today's market, I took that for a win, particularly because we qualified for the manufacturer's very-low-interest loan offer, making it more affordable.

Why didn't we simply pay cash for an older, higher-mileage but lower-cost used vehicle?  That's easy to answer.  The Wall Street Journal published this list of the ten used cars that have shown the highest price increases over the past year.  Click the image for a larger view.

The increases range from a low of 51% to a high of 69% - in one year!!!  Admittedly, part of that is the supply chain crunch, but another part is inflation.  Other used cars have also gone up in price to a ridiculous extent, and I don't see things getting any better anytime soon.  (Note, too, how many of those ten vehicles are very economical when it comes to fuel consumption.  With gasoline prices going up and up, that's another factor to consider.)  Anyway, when faced with used car prices like that, plus a realistic view of how long we could run a used car with potential unknown problems and what we might have to pay in maintenance costs, etc., it made financial sense to buy a new car.  (The infamous "25% depreciation" that used to happen the moment you drove a new car off the dealer's lot, always a factor before now, no longer exists.  In the current market, we could sell it for as much as we paid for it, if not more!)  Sure, I hate paying current market prices - but that's the name of the game today.  Miss D. could not be without reliable, trustworthy wheels.  At least she now has a brand-new vehicle to enjoy.  I'll call that good.

Arthur Sido had his own nasty awakening about used vehicle prices.

Last night I went online to look for a replacement 15 passenger van, looking for something a couple of years old with 50-70k miles. I did this same search for another guy a couple of years ago and found a dozen in the mid 20 thousand dollar range without looking very hard. Now? Even searching in nearby cities an hour away, a similar van is running minimum $40,000. Nothing fancy, just a long van with 15 seats. I know used vehicles are a hot market right now but dang that is a huge increase and since I don't want to finance a used van for around $700/month, I guess we will keep this one running.

There's more at the link.

Last week we heard that inflation in January hit an annual average of 7.5%, the highest on record since 1982.  That, of course, is so much bull droppings, as we've said in these pages many times before.  If this country still measured inflation as we did in 1980, before the inflation calculations became politicized, it would be at least double that rate.  If you apply my suggested correction factor, based upon historical reality, actual consumer purchases (as opposed to government bureaucratic assumptions), and my bitter personal experience of inflation elsewhere, the current US consumer inflation rate is probably more like 26%.  When I look at our household shopping bills and the prices of the goods we normally buy, they do, indeed reflect that level of overall increase in prices since this time last year.

Charles Hugh Smith points out that globalization is a major driving force behind inflation, because it substitutes poor-quality products that don't last long for those of higher quality that needed to be replaced less often.

Globalization is the process of moving production of goods and services overseas to reap the gains of cheap labor, no environmental standards, corrupt politicians and the crapification of goods and services. Globalization is the process of exposing much of America's labor force to 1 billion new workers who will work for next to nothing since they have no other means of earning cash.

Developing nations have limited means to enforce environmental regulations, so they are the convenient and cheap dumping grounds for global corporations maximizing profits by dumping toxic waste in landfills, rivers, etc. Should there be any spot of bother, comparatively low-cost bribes and payoffs to corrupt leaders insure the labor and land will continue to be exploited without any problems with labor unions, environmental standards, etc.

Globalization also means making the product look nice but strip out all quality as needless expense. Thin the paint so the steel rusts out in months, use the shoddiest materials so the veneer peels off, the screws snap, the commodity chip fails, taking the mother board and entire appliance down with it, and so on, in an endless and oh-so-profitable parade of crapification.

Well-paid shills tally up all the "savings" generated by crapification but they never look at the immense losses in utility and durability. An appliance that cost $500 and lasted 20 years without any repair is far less expensive over the 20 year lifespan than a $400 appliance that fails in 4 years and can't be repaired, or the repair costs almost as much as a new appliance. The hapless consumer of crapified goods ends up paying $2,500 over the 20 years for poorly made junk that falls apart in a few years or mysteriously fails as cheap electronic components blink off.

Again, more at the link, and well worth reading in full.

Finally, Karl Denninger explains that there's only one way to protect yourself against financial disruption (including that caused by inflation).

There is only one way to protect yourself against this, which you do not want to hear:  You must get your monthly nut down.

Let's define terms:

Monthly nut: Your fixed and inviolate expenses, which includes all debt service, taxes, utilities, food, clothing and transportation.  In other words that which you cannot reasonably shave off without losing your livelihood or even your life.

Depletion rate: Your monthly nut less your minimum earnable income from all sources, ex of taxes.  This is the amount of your assets you must consume every month.  If its negative your assets are growing, if its positive they're shrinking.

Note that the "minimum earnable income" is never today's income level.  It's what you could immediately replace today's income with if you were fired, laid off or otherwise lost your job irrespective of the reason.  It thus is the worst case scenario, but unless its zero your depletion time is never simply how much you have divided by how much you must spend.  It's always better than that.

This is how you make small changes work for you rather than against you.  When you're in debt it is the exact opposite; small changes always multiply against you.

Example (all in yearly terms):

You have $200,000.

Your annual minimum expenses are $20,000.

Your assets will last 10 years, assuming the expenses and assets do not change.  If the assets are cash, they will not change.  The expenses may go up or down, and are expected to rise due to inflation.  Note that any "asset" that is marked to a market (e.g. in stocks, any bond that is not issued by the US Government) and any cash not backed by a US Government guarantee if not in your possession or unable to be defended with lethal force cannot be counted on as to value.

Now let's assume you take a part-time job that makes (after taxes) $10,000.  That's half-time @ $10/hr after tax.  That's not hard to do, is it?

Your assets now last for 20 years, not 10!

By doing a very modest amount of work you have doubled the time.

What if you can make $15/hr and work about 30 hours/wk?  Now your assets last indefinitely.  Heh, that ain't bad on a part-time job, is it?

What if you have the first case and can cut $5,000 out of your annual required expenses?  You now have FORTY YEARS worth of money!  Heh, you took 25% off your expense ratio but doubled the time.

People say "but inflation will eat it."  True.  But inflation will also increase your earnings at the same time and since you get the leverage of having a depletion rate that is a fraction of the whole you should be able to stay even without too much trouble.

Remember that we all die so the goal isn't to make it work for the next 100 years.  It's only to make it work through however many years you reasonably expect you might live, plus some if you outlive your expectations.  In addition once you establish these figures and know where they are you can build in a reasonable cushion and enjoy some luxuries over and above that nut with the additional funds.  It's only a luxury, that is, all pleasure and no pain, if it doesn't put you at risk of ruination.  If it does then the lost sleep is nearly-certain to be worse than the pleasure gained.

More at the link.  Highly recommended reading.  Denninger goes on to illustrate how you can attain that level of financial security (although if you're older, it's a lot harder).  Sound advice.

Peter