About a month after the Cares Act was signed into law and the first checks were sent out, I wrote an article that I saw inflation coming, that handing people money will become inflationary at some point. When I wrote that article, I didn’t know about the future rounds of stimulus checks, the supply chain damage of being shut down for a year or that consumer confidence would remain so high during a pandemic. At the time, the concern was on the country shutting down and falling into a great depression. That money, through PPP, unemployment and direct checks, helped many Americans. Some of that money was given to people who didn’t need it as well. Six trillion dollars later and now the opening of America is in full swing. Inflation has been rearing its ugly head for months now—from the gas stations and the grocery store to housing. To really every aspect of life. And our national debt now sits at over $28 trillion.
(If you want to see some interesting numbers, go to usdebtclock.org. Kind of scary but interesting!)
So, here are the biggest questions that I am getting as a financial planner, and my answers are as follows.
1. Why Is Inflation So Big Right Now?
There are three main reasons.
- We are seeing many supply-chain issues that were affected by the shutdown. This is showing in lumber for new houses, microchips for cars and parts for washing machines, among many other items. Simply, shorter supplies and higher demand equals higher prices. With some of the lower wage workers getting paid more to stay at home, this is also causing many delays in the supply chain. This will get fixed over time, and it is the biggest reason why the Federal Reserve is not raising interest rates or moving too fast to unwind their accommodations.
- Discretionary spending is huge right now. People were trapped inside for a long time and now want to get out to spend. Supply and demand again. How long will this last? Time will tell. Have you tried renting a rental car? Good luck!
- $6 trillion being injected into the economy. Never been done before. This is obviously having a huge effect and is part of inflationary times. More money to spend than you had last year, why not spend some. Common sense. There are many “experts” on TV who guessed one economic event accurately prior to it happening. These are the people who are supposed to guess this one right, but none of them have ever seen this before. Which one would you like to listen to?
You have a three-headed monster here coming all at once. At least the supply chain issues will get resolved in time. But inflation will have to be dealt with eventually, and the Fed will need to step in.
2. Home Values Are Going Crazy. Will They Continue or Are the Answers to the First Question the Answers to This Question?
Yes, and more. All of the reasons listed above but also many other reasons. One main reason that I think home values should continue going up, especially in zero income tax states is this: For 12 years now, we have been building less homes than are needed due to population growth; 1.5 million homes a year were built, and a need for 5 million homes a year existed. With supply chain issues slowing down, new projects have been put on pause by many home builders. This is also hugely increasing the value on current home sales. Not all areas are seeing this, but this is happening in many areas, including states with state income taxes.
The SALT deductions are also a very big reason, and it is why states like Florida and Texas are seeing huge increase in valuations of higher price homes. But it is not the whole story. Factor in “work from home” as a way of life going forward, and you are seeing a housing boom with longevity and vigor.
For those of you who think this is a boom like 2006 and it will come down and stay down, I want you to keep in mind that getting a mortgage is tedious and very hard to get done without great credit, good income and low debt levels. There are no subprime mortgages happening like back then. I can tell you, as I am personally going through the process now, and it is very time consuming and stressful.
3. So You See Inflation and You Gave Us the Reasons Why. Now, What Should I Do Regarding Investments?
Every client is different and the reason for meeting with a financial planner is normally to cover multiple topics, such as need for assets, taxability, time horizon, income needs, etc. But here is what tends to do well during inflationary times and how I am allocating portfolios.
- Stocks—the market is normally more volatile during inflation. Long term, it tends to do well during this time and helps to combat inflation. It’s highly likely there will be market shocks when the Federal Reserve raises rates and stops the support it has been providing. Get ready for them! Sectors that tend to do better during these times include financial companies, material companies, REITs and industrials companies. I do want to make it clear that many company earnings have been phenomenal for the most part and are growing in valuation. We feel this is one of the biggest reasons the market has done so well!
- Real Estate—see question 2.
- Treasury Inflation Protected Securities (TIPS) and Convertible Bonds—fixed income portfolios tend to do a lot better historically having a weighting here during inflationary times.
- Structured Income Notes—flatter markets potentially are the right kind of market for structured notes, and the yield is significant to traditional fixed income. There are risks, but the potential risk-reward ratio on these can be appealing if done right.
- Commodities—this goes without saying but gold, silver, copper, etc., have done well during inflationary times historically.
The problem with emails or articles is that things change quickly, and with one major decision or event, the author’s point can change dramatically. The best thing to do is make sure your diversified and not in danger of over allocating towards one thought such as “inflation is going to go rampant.” The point of this piece isn’t to say I think inflation will continue at this pace. I hope not. I tend to limit even my best ideas to a small portion of a portfolio, meaning I may love something, but I don’t go all in on a thought or concept. Buy solid and live solid is a mantra that I have lived by the last few years of managing assets. During any time, good investments and a wide variety helps reduce volatility and will help to keep the path smooth to your portfolio. Stay prudent. The ride of the unknown continues!
