Inflation

Understanding it and Preparing your Investments

The first Be Prepared blog on July 8, 2024, looked at multi-generation historical cycles by opening and closing with a look at inflation and timeline-correlated stock market results.  This blog looks at current generation inflation to ponder whether we may be in another 10-year period of high inflation.

Understanding:

Inflation is more technically measured as the Consumer Price Index or CPI.  Canada’s CPI reports that we have experienced 17.6% increase from June 2020 to June 2024.  That’s 4.1% per year!  With this last year having been ‘only’ a 2.7% increase.   Always remember - it didn’t drop to 2.7%, it’s just up less than last year.  1991 was the last year prior to 2021 that Canada was over 3% for a full year and 20 of those 30 years were under 2%. (1)

Thus, Canada’s generational ‘normal’ is around or under 2%.  Yet the Bank of Canada cutting rates twice this summer should mean they believe the current 2.7% indicates they have inflation under control.   Has anyone buying groceries, or a car recently felt inflation is under control?  Me either.  This premature rate cutting combined with other factors probably tends to higher inflation for longer.  Maybe we Canadians live with 3-4% inflation on average for another five plus years?

I’m not alone in this thought.  Many of the smart money persons I follow, like the Outlook 2030 panel (2) and Lyn Alden in her April 2024 newsletter (3), believe we are in for an extended time with higher than ‘normal’ 2% inflation.  Potentially through the remainer of the 2020’s.

Jeff Rubin evaluates changes in the global economy thus far in the 2020’s in his recent book (4) and states “inflation is here to stay”.  His premise is that the continuing sanctions and conflict between competing nations will continue to drive the reversal in globalization of the economy we witnessed for the 3 decades since 1991.  Friendshoring product manufacturing will drive higher price inflation.  AI will have a counter-effect on wage inflation in the white-collar space but our fundamental needs like food, shelter, power, and all their feedstocks will still be made by real people doing real work for increasing real wages.

If we accept this probability of higher inflation for several years, what can we do about it?   We know higher inflation reduces the amount of funds we have left to live day to day, less to pay off debts, and, if we are fortunate, less to save and invest in our futures.

Preparing:

Our day-to-day personal finances tend to suffer from high inflation.  As costs go up faster than incomes our ability to spend, pay down debt, save or invest goes down.  For the balance of this blog, we’ll look at how to prepare your investments for inflation.

We have learned the best investments for high inflation are real assets.  Real assets are physical or tangible goods that can’t be created easily.  Real estate, farmland, commodities, infrastructure, utilities, and the producers of these assets like miners and some manufacturers.  While tech, financials and other growth stocks are still driving the stock markets today, they are not hedges against inflation.  The 60/40 stock/bond portfolio and its iterations are also less likely to reward investment through higher inflation periods.

We have prepared.  We personally have our entire investment portfolio in a diversified range of primarily real assets, some fixed assets and cash.  Given our age, the majority is tilted toward risk management with a minority focused on high return.  Only 20% of it’s in the stock market and none in the bond market.

What can you do?

·         Prioritize paying down debt before increasing your investments

·         Ask your financial advisor where you are positioned relative to inflation and real assets.  Remember, they work for you

·         Check your pension plan to see where they invest on your behalf

·         If you DIY invest, think about reviewing the references yourself

I’m happy to be a sounding board for any of you when you dig into where you are relative to being prepared for inflation.

1.      Worlddata.info/America/Canada/inflation rates

2.      Vancouver Resource Investment Conference – Outlook 2030 panel, February 2024, YouTube

3.      Balanced Portfolio Construction - Lyn Alden.com, April 2024 newsletter

4.      A Map of the New Normal – Jeff Rubin, 2024

History Rhymes

A storm is coming for our personal finances

Mark Twain is believed to be responsible for first saying “History Doesn’t Repeat Itself, but It Often Rhymes.”  What does that have to do with personal finances?

Whether you are a Millennial, a Gen X-er or an early 1960’s Boomer, our adult life experience until now with finance in Canada has been:

·         Inflation - dropped after its 1981 peak at 12.5%, then remained below 3% for 30 years 1

·         The Stock Market - always goes up, more than 10X since 1984 and only once spent five years below its previous high 2

The same life experience is true for all financial planner/advisors still in the workforce supporting your requirements.  Therefore, us as individuals and our planners are biased toward our life experience continuing.

But hold on a moment.  Something seems different in the last few years.  We’re experiencing higher interest rates and higher inflation.  Yet debt is still too easily accessed, and the stock market is still going up.  Is this just a blip or are we now living something outside our life experience?

To manage the risk for our financial plan, I went looking for information outside my life experience.  Could history tell us about what seems different?  What I found included:

·         Principles for Dealing with the Changing World Order, Ray Dalio, 2021

·         The Fourth Turning Is Here, Neil Howe, 2023

·         Broken Money, Lyn Alden, 2024

Changing World Order considers 500 years of rising and declining empires in world history.  A recurring cycle of good and bad finances is identified as one of the three most important determinants to the rise and decline of empires.  He argues that we are in the final years of an ±80-year debt cycle.

The Fourth Turning is Here re-evaluates 500 years of American demographic history and digs into our current position in the a generational cycle recurring every 80-100 years.  He argues we are in the last decade of that cycle, which is a social and economic winter before the arrival of spring.

Broken Money considers the origin and development of money through a technology lens.  It draws out how money has evolved through thousands of years from a tool that allowed society to grow and evolve in the last 100 years to a fiat currency whose quantity is no longer controlled by nature, and how that financial system is failing us.  Her thesis is today’s economic conditions are best related to the 1940’s and 50’s, not the 70’s or anything more recent.

Each of these information sources deserves their own Be Prepared blog someday.  I have reviewed many additional information sources that indicate a similar direction that something has changed. For now, suffice to say I believe we are living in a new paradigm, outside our life experience.

These sources all indicate our upcoming financial experience will most likely rhyme with some combination of Canada’s history from the 1920’s through the 1950’s. 

·         Inflation – experienced deflation for 12 years starting 1921.  Later high and volatile inflation peaking at 14.6% in the late 1940’s 1

·         The Stock Market - spent a full 20 years below its 1930 high, much of it 50% lower 3

That is very different compared to our bias from the start of this blog.  We have personally acted with our finances and investments for this new paradigm, as history rhymes over the next 5-10 years.

Future Be Prepared blogs will dig into actions you can consider.

Footnotes:

1.      InflationCalculator.ca/historical rates Canada website

2.      Yahoo.com/chart GSPTSE

3.      Financial Post, Stocks Through the Ages article, 2021