By SJS Investment Services President Kevin Kelly, CFA.
Have you ever had a flat? Re-inflating the tire is a good thing!
Ever over-inflated a tire? Or a balloon? Not so good!
Coming off the severe economic disruption from the early months of the COVID pandemic, you could justifiably argue that daily commerce had a flat tire - or four!
Never fear! Our duly elected leaders in Washington of BOTH parties were ready to help - a few trillion dollars in stimulus payments ought to do the trick!
A classic characterization of economic inflation, or its cause, is “too many dollars chasing too few goods.”
Of course, it is never quite that simple.
While “Money Supply” has increased measurably from this time one year ago, significant slack remains in our U.S. economy such that the “Velocity of Money,” or how frequently a dollar changes hands, has plummeted from the pre-pandemic rate. Both have an influence on inflation.[1][2]
Source: “Inflation, consumer prices for the United States“. Federal Reserve Bank of St. Louis, 03-Mar-2021, research.stlouisfed.org.
Anecdotally, we can point to price increases in housing, automobiles, some groceries, and fill-in-the-blank here based on your personal experience. Asset prices have increased as reflected by the stock market.[3] Producer Price Indices have surged, but this may not sustain as supply chains recover and stabilize.[4] The value of a dollar is on a downward trend compared to many foreign currencies.[5] The “breakeven inflation rate” indicated by the U.S. Treasury bond market suggests a 10-year rate of inflation approaching 2.4%, the highest this indicator has been in about eight years.[6]
But “what to do” quickly becomes the punchline, whether you anticipate inflation or not. SJS professionals believe economic inflation is a real risk - the other edge of the sword in contrast to the risk of stock-market volatility that is so often referenced in investment-risk discussions.
A primary motivation for taking investment risk to begin with is to maintain and grow the purchasing power of your assets. With cash deposits receiving close to a zero-percent rate of return, a general inflation rate of 2.4% will erode your purchasing power in a meaningful way over a period of years unless you invest beyond cash.
We recently “benchmarked” our model portfolios against the Consumer Price Index (CPI) to demonstrate
this inflation-beating characteristic of our investment strategies.
Benchmark: “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average (CPIAUCSL)”. Federal Reserve Bank of St. Louis, 31-Mar-2021, research.stlouisfed.org. See Important Disclosure Information.
Your MarketPlus Investing® design has allocations to inflation-adjusted bonds and inflation-hedging stocks for environments such as our current one. No hedge or adjustment is perfect, and inflation can put stress on your household budget no matter what. But as “professional worriers,” planners, and managers, your team at SJS has anticipated inflation and works daily on your behalf to align your investments with current valuations, our outlook on the markets, and your best interests.
We can all agree that a flat tire or a stalled economy is not a desirable state of affairs. Let’s hope the government stimulus spending, a resurgent economy, and inflationary dynamics find the right balance and keep us on a steady road of progress in the quarters and years ahead!
Important Disclosure Information And Sources:
[1] “M2 Money Stock (M2SL)“. Federal Reserve Bank of St. Louis, 25-Mar-2021, research.stlouisfed.org.
[2] “Velocity of M2 Money Stock (M2V)“. Federal Reserve Bank of St. Louis, 25-Mar-2021, research.stlouisfed.org.
[3] “MSCI ACWI IMI Index (USD)“. MSCI, 31-Mar-2021, msci.com.
[4] “Producer Price Indexes (PPI)“. Federal Reserve Bank of St. Louis, 25-Mar-2021, research.stlouisfed.org.
[5] “Foreign Exchange Rates - H.10“. Board of Governors of the Federal Reserve System, 05-Apr-2021, federalreserve.gov.
[6] “10-Year Breakeven Inflation Rate (T10YIE)“. Federal Reserve Bank of St. Louis, 31-Mar-2021, research.stlouisfed.org.
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