What is Inflation and What Should I Do About it?
Worried about high inflation and its impact on your investments? Wondering what is stagflation and how could that impact your portfolio? In this episode we discuss inflation in a practical way so that you understand the current environment and how to invest during high inflation. We discuss:
What is inflation?
How is inflation good and bad?
What is stagflation and how is that harmful?
What's causing inflation to be so high right now?
Will energy and gas prices remain high long-term?
How to invest during high inflation?
Transcript:
hello. Hello friends. Welcome back to another episode of the six-figure investor podcast. Today. We're going to be talking about dumped on inflation. I know it's on everyone's hearts and minds right now.
No Dona don't jump away from the podcast too quickly. We're going to talk about what is inflation. Brian's going to give us sort of the 1 0 1 on inflation. You get to see me be all confused and try to get clarity. And we're going to talk about what it means for you. So hang in there for the show opener and we will be right back to talk even more about inflation.
Hey guys. We're so excited that you're joining us today. As we mentioned in the upfront, we're going to be talking about inflation. It's like the hot topic that everyone wants to talk about, or doesn't want to talk about when it comes to what's happening in the United States of America, with the markets and money.
It's actually the number one issue on the minds of many Americans. According to pew research. Oh, well, always bringing it in with the stats. Aren't you Mr. Brian seat, number one problem in America inflation. So everybody says, well, I'm glad that we're talking about it today because I think I probably have a third graders understanding of inflation, and I believe that by the end of this podcast episode, a I will understand a lot more about inflation and what I need to do as a result of what's happening in the market.
Is that a fair assessment? Yeah, let's talk about inflation and stagflation and all the kinds of fallacious that are out there. Ooh, stagflation. Now you're speaking to all my fears. Okay. Well, why don't you kick us off with like a primer, a one-on-one of like, what is inflation?
Well, let's talk about that bottle of wine that you wanted to drink before we started recording this app. Most things increase in price year over year. So last year, that bottle of wine, might've been $100 and this year it's $103. And that means, I know everyone who listens to this podcast now, things that were super bougie and drink $100 a bottle of wine on the regular.
I just want to clarify that Brian is. He got this story and that I was not asking to drink a hundred dollars bottle of wine prior to recording this app, is that a hundred dollars bottle of wine? So more like $50 bottle of wine. So, you know, if, if it, you know, if it goes up by $3, then inflation is 6%. I'm really glad that you're able to do those math conversions on the flyway.
That's that's impressive. That's inflation for you in a nutshell. So basically inflation is paying more. For the same thing I would have gotten for less previously. That sounds like a bad thing to me. But when I hear you talk about it, it's you seem a bit more like it's good and it's bad.
Like I don't get that. Help me understand. Is it good or is it bad? So it can be both. So most economists believe that predictable, low levels of inflation. That's why the fed has a 2% inflation target. So we want low, predictable, consistent inflation year over year. Why is that? There's two reasons. The first is that you're more likely to buy that bottle of wine.
If you think it might increase in price in the future. So it causes you to act and stimulate the economy by spending money now versus waiting for something to get more expensive. Yeah. The second reason is related to debt. So inflation actually helps reduce the burden of your debt over time. If you think about it, if you borrow $50,000 for college or to buy a car, then every year you get a raise the payment on the debt for college or for your car stays fixed, but it becomes a lower percentage of your income year after year, as you continue to get raises due to.
So the same thing is true at the corporate level and broadly across the economy. So low inflation helps everybody pay off debt, which also helps stimulate the economy over the longterm. So the natural question for me though, then is like, what is this delineator between good inflation and bad inflation because.
I get the sense. And I think everyone in the country feels like we've reached this bad insulation place. So like, how do you delineate the good from the bad and where are we today? So inflation is typically positively correlated with the economy and that's just big finance speak.
As economic growth occurs, inflation also occurs at the same time. That's a good thing for the reasons we've already talked about. It's when that relationship gets out of whack or becomes inverse. So we get really high inflation growth and we have an economy that slowing down our contracting that we have a problem, and that is what people call stagflation.
So. The eighties have come a column that we'll talk about that. I don't know that we're in the eighties yet, but that, that is what happened in the late seventies. The late sixties and most of the seventies in the very beginning of the eighties, before inflation was stamped out by them, by the fed raising interest rates inflation becomes a problem and it becomes so high that the price of goods and services, outpaces income.
And so that means you're burdened because I can't go spend in a discretionary basis. Some of those things that I want to go buy, I can't buy that a hundred dollar bottle of wine. I'd have to cut back the $25. My life is challenging. I can't go to a concert. I can't go on vacation. I can't do those things because I have to spend more.
On milk and gas and groceries. And my ride doesn't go as far as exactly my money doesn't go as, as far as it used to. And so that causes consumers to spend less money that reduces economic growth and eventually can lead to a recession. And so, so that's stagflation in a nutshell is when that relationship between inflation and economic growth becomes inverse and gets out of whack.
That's what we don't want to happen with. So what I hear you saying, honestly, sounds a lot, like what I feel like I'm hearing on the news today, in these days. So why is inflation? So what I would perceive to be high and would you agree that it is high?
So inflation is definitely high on a historical basis. So we're in the middle of may in 2022 in April inflation was more than 8%. That's extraordinarily high on an annualized basis. The reason though I think is less obvious. So inflation today is not actually caused by supply chain issues that stem from code and there's exceptions to every rule, but for the most.
The demand for goods has risen faster than even pre COVID supply chains we're able to handle. And we know this because we can actually look across the economy at a bunch of different sectors and say how much stuff is being produced. How many widgets, how many microphones, how many computers, how many chairs, how many homes are being produced by the economy and shipped and, and on a monthly basis, we're producing more as an economy than we were before.
So there's not actually a supply chain issue. It's not as it's this, the supply of goods went away and as prices went up, it's really that we have just stimulated, demand so much that people want more and more and more and more stuff. And we haven't been able to increase our ability to produce the stuff that people want.
The most significant. Cause for that is people. As you may have seen in the news, there's lower participation rates in the labor force. And labor force participation is just a big finance word for evaluating the number of people that are actually working or looking for work versus the number of people that potentially could work in the United States.
That labor force participation rate is lower than it was pre COVID. And it's it's substantially. And the result of that is there's more than two available job openings for every unemployed worker in America, which is really great if you're looking for a job, but it's really challenging if you're in a business, that means you have to pay more to hire people.
Okay. More demand, less supply. I E price goes up. I E inflation I'm following you. That's right. And that is why inflation is high today.
Okay. So I'm following you on more demand, less supply for a lot of things that I see, but it's, it felt to me, honestly, like one of the big places that I saw prices rise was at the guest comp and that didn't seem to have anything to do with demand and supply. It seemed like it was kind of launched maybe with the war between Ukraine and Russia and concerns about gas supply and that kind of stuff.
Is that true? Or is there something else going on? Yeah, it both things can be true at the same time. I think that's, what's, that's what's really happening here. So energy is absolutely a contributor to inflation. If you were to back energy out of the equation entirely, you would still have enough. That was running north of 6%.
So not quite as bad, but definitely a few points on top of what's already really high inflation is attributable to energy. And that's been, that has been really significant. Over the first half of this year, energy costs are up 40%. For last year. . Most of that is directly related to the situation in Ukraine. Some of that's also caused by increased demand in the economy, right. People are back out and driving more. They're traveling more, all of that. You have a supply. We're taking Russian gas off the market to some extent
we can have an argument about the extent to which that's actually happening. And then you couple that with more and more people going more places you need more energy and that causes the price to rise. The good news about energy in particular is that the world is capable of producing plenty of natural gas and oil.
Especially with prices above the 70 to $80 range. It's very unlikely that prices will continue to arise into oblivion and create something. That is, that is similar to the 1970s. It's, it's also important to note that because you have inflation year over year. Price shocks in energy are not always what they seem.
So a lot of people that are listening to this podcast probably remember when energy prices, oil prices in particular were a hundred, $125 a barrel back in 2008. Right? Well, now the same have the same impact on the economy. You'd have to have energy prices that were 150 or $175 a barrel. Right. And we're far from that and to get to a situation like we had in the 1970s.
You'd actually have to have energy prices. You know, if you measure it in the price of oil, that's several hundred dollars a barrel before you created something that was like the 1970s. So so the world can produce plenty of oil. It's likely that over time production will increase with slightly higher oil prices and the sort of the really high cost for energy that we have now will come down.
It's just going to take 10, 12, months for that to work.
Okay. So I feel like this was the part of the presentation where if we were meeting live, you put up a slide that was like a forward looking disclosure statement that says you can't be held accountable for anything that happens coming after this, blah, blah, blah, blah, blah. I think we've all seen those slides of legalees in any corporate financial presentation, but walk me forward from.
Because you started this episode talking about there's increased demand. There's reduced supply that makes the price go up. Got you economics. 1 0 1.
But as those things become expensive and we sort of this doomsday or news about potentially what could happen with the economy, it feels to me like people will kind of go back to the labor market for the security of having a job. And those who are in the labor market, won't be bopping around as much again for the security of having a job.
And that demands supply. The in congruencies between demand and supply, what kind of level out? Yeah. So I think all of those things are true. It's likely that workers will continue to trickle into the labor market as savings run off from COVID. Right. The reality is there were a lot of people that got a lot of actually made more money during COVID than they've ever made before.
So some of those people chose to exit. They may have started businesses. They may have stayed home with their kids. They may have done a lot of things, right. With that time. But, but those that time period is closing. We've seen consumers begin to take debt again, start using credit cards again.
As the financial position, Of those consumers change, then some of them will just go back to work. The other thing that happens is as the federal reserve raises interest rates to combat inflation what does that mean?
The federal reserve is a quasi government organization that helps manage the balance of inflation and employment in the economy. So if we, as a society were to do nothing going forward, it's likely that inflation would continue to rise significantly. At some point, everyday goods would become so expensive that consumers were not able to buy things beyond their basic needs, like groceries and gas and companies wouldn't be able to.
So that would cause sort of a bust and a big contraction in the economy. A significant rise in unemployment and that sort of cycle then reduces inflation naturally. That's a really powerful cycle and that's really capitalism sort of untamed. The fed helps tame that process by raising and lowering interest rates and manipulating their balance sheet.
In this case, we see rising inflation because the economy has too much. So the fed can raise interest rates, which makes borrowing more expensive. That'll cost consumers to buy a little bit less at the margin and companies to expand a little bit lower those things together, reduce inflation without hopefully the untamed boom and bust cycle that we talked about earlier.
So going forward, it's likely that inflation itself begins to cool off the extra demand of the economy and the fed raises interest rates to help that process along, which hopefully results in a slowdown without a recession.
Now that I kind of understand what's happening in the, the framework of inflation, the financial news today as a six-figure investor, what should I do about this? Yeah. So the first thing is, is that in adhering to your long-term investment plan is key. Inflation has created a lot of market volatility.
Obviously stocks and bonds. Down this year. And it's really important that you remain invested in the reason is that one of the best hedges against inflation is actually being in the stock market. And that's because companies generally increase their prices over time. And we've seen this, this has held true.
The first part of. In line with inflation. And so as companies increase their prices, their profits increase. And so in your portfolio, it nets out to an increase that that is above inflation. The other thing that's really important is a modern diversified portfolio, but that means you've got to think beyond just stocks and bonds.
Your portfolio should include things like real estate and commodities, which are things like oil and agricultural products. Metals like gold and silver an infrastructure which are things like data centers and cell towers. There are a lot, those are lots of assets that are they're real things, they're tangible things.
And so when the price of those real tangible things increases, those assets tend to perform well. And so we wrote at length about that back in January, and we'll link that article below in the podcast. And you can read more about modern diversified portfolios and how to invest in inflationary.
That was just, there's nothing that rolls quite off the tongue. Like what would you say? Modern portfolio construction. Oh yeah. Oh yeah. That's really good stuff right there. All right. That's the next Justin Timberlake song for your friends? Wow.
Let me read to you right. For your modern portfolio construction. So I think the best thing like plastic surgery. Go to our website. And you can sign up for our email list, the capital stewards.com. You can check us out there, learn more.
There's we publish a lot on there. You can read articles and inside of our email list. And then if you want to reach out and have a conversation with us, you can do that there as well. The capital stewards.com, the capital stewards.com. And we'll put a link to that in the show notes as well. Okay, great.
Anything else you want to share with our friends today? Or maybe just recap for us what we learned in today's. Yeah. So I think the key, the key things are this right. Inflation is simply the increase in the price of goods over time. Low levels of consistent inflation are a good thing. We want that in the economy.
When that becomes challenging, you have something called a stagflation. And that means that the relationship between economic growth and prices is sort of out of whack. And we need to fix that. We don't expect that that's going to happen in the, in the current economy, because we think. Rising prices will cost demand to go back down and we'll get a resolution of the sort of mismatch between the number of available workers and the job openings that are out there.
So we think inflation is going to be higher for the, for the longterm than we've seen over the last decade. But as I like to say, you can probably leave your disco pants in the closet because we're not going back to the seventies or the eighties and in terms of what to do about it, it's just really important to stick to your investment plan long-term and not make restrooms.
When you have volatile market times and check out our stuff on modern diversified portfolios, because there's a lot of stuff you can invest in beyond stocks and bonds and all of that is really important to, in an inflationary environment. Excellent way to bring it all together. That was a, that was a tough challenge.
All right. Friends, As always. It's great to have you listening along with us, learning along with me . Well, that's all we've got for you friends. Hope to. Have you back on the podcast again soon. All right. Bye for now.