Inflation Is Here. Are You Ready? Show 59

We did something new this past Saturday. When I was in school in Virginia, I frequented the Blue Ridge Parkway, mainly for cycling. The Parkway’s tagline is “America’s favorite drive,” and I agree. I’ve wanted to go to Mt. Mitchell for quite a while, so I talked Mallory and Amelia into going. We got on the Parkway in Asheville and drove on it up to the top of the mountain.
If you’re unfamiliar with Mt. Mitchell, it’s the highest mountain peak east of the Mississippi River. It tops out at 6,684 feet above sea level. If you’re looking for something to do one day, I highly recommend checking it out.
We discussed coming back to camp at Mt Mitchell when the weather cooled off and it put me in mind of another camping experience.
When I was about twenty years old, I went with my buddy to the Outer Banks near Morehead City to kayak and camp on an island called Shackleford Banks. We had to kayak out to the island to camp. The island is known for its wild horses, but it also has another inhabitant. Raccoons are everywhere! The fury creatures aren’t a problem during the day, but when dusk arrives, they start coming out in droves.
We took an extra tent to put all of our supplies in at night so they didn’t wipe our food out. It required diligence to make sure all of our things were inside the tents at night. We made a fire at night to cook our food, and as we sat around the fire, we would shine our flashlights into the brush and numerous sets of raccoon eyes stared back at us. If we sat quietly, they would get closer and closer. We had to yell at them to scare them away.
We were fastidious about zipping the supply tent up each night before we went to sleep the first night or two, but then we forgot one night. We didn’t hear a thing that night. The raccoons must have been discreet, because the next morning there was a string of food and wrappers and trash strung down the beach coming from our tent. We had a huge mess to clean up and less food to eat!
The raccoons are a lot like inflation. We know it’s a possible problem like the raccoons. We read about the raccoon problem beforehand. That’s how we knew to take a supply tent. We are hearing about the inflation threat in the news. We were fine the first few nights because we were prepared, but the night we became complacent we got wiped out.
Inflation simply defined is when our money buys less than it used to buy. Conventional wisdom says we need equity exposure to keep up with inflation, and I don’t disagree in principle. But where it gets tricky is when we have an over exposure to stock market investments and a correction happens. A down stock market portfolio plus biting inflation is like a one-two punch to knock you out. Some people will have a hard time getting back in the fight after that.
This is why we recommend having a safety net of investments that cannot lose value. These are our fallback positions when times get tough in the economy, because taking distributions off our stock market portfolio in a down market may cause us to run out of money even quicker.
On the Ziglar podcast Shaunti Feldhahn was recently interviewed. She’s an author and researcher, and has done research on how to find joy. She said on the podcast that the number one reason people are unhappy is that they have expectations that were not met. Here is the link to the show. Check it out. We have the expectation that we are going to have a nice stable retirement, but will our expectations be met?
I don’t mean to harp on stock market corrections or preparing for the worst, but in retirement major losses to your portfolio matter a lot in whether you’ll financially make it or not. What’s worse is that the government has figured out how to lessen the impact of stock market corrections buy using quantitative easing. The problem is that this ultimately devalues the dollar and causes inflation.
Quantitative easing (QE) is when the government buys securities and increases the money supply to incentivize lending and investing. It increases the government’s balance sheet and the government is essentially creating money to facilitate this. This causes inflation.
It’s a double edged sword. Should the government allow the markets to naturally correct and create an unknown amount of financial pain for people or do they use QE to stabilize markets today but create a potential inflation problem later?
I read recent commentary (I’ll forward it to you if you email me and ask for it) that said that between the dotcom bubble and September 11th attacks the Dow Jones Industrial Average dropped by 36%.
The government lowered interest rates by 5.5%, increased spending, cut taxes, and turned a $236 billion surplus in 2000 to a $377 billion deficit by 2003. These measures pushed the Dow up 87% between 2002 and 2007. The national debt went from $6.2 trillion in 2002 to $9 trillion in 2007.
The mortgage meltdown fiasco that led to the Great Recession caused the Dow to crash by 53%. Again, interest rates went down 5% and held its rates near zero for six years. The government bought $4 trillion in Treasury and mortgage bonds and the deficit went from $162 billion to $1.4 trillion in 2009. Over the next eight years the Dow went up 304% between 2009 and 2018. The national debt went from $9 trillion in 2007 to $21.5 trillion in 2018.
Last year we saw the Dow go down 37%. The Federal Reserve cut interest rates by only 1.5%. There was no more room to cut as in previous examples. In fact, the Fed tried to raise rates in late 2018 and we saw Dow drop by 20%. The Fed even went so far as to say that rates would stay near zero for years into the future which is another first. Last year the Fed bought an astonishing $4 trillion in securities! Of course, the Dow rallied by 57% between March of last year and December. Our national debt increased by $6 trillion.
Each time the government has stepped in to help stabilize the markets it has required more resources and more effort than the last time. Since interest rates can’t be cut again, what will the Fed do next time there is a problem? Will they go to negative interest rates? They’ve not ruled it out.
These issues necessitate a new approach of active portfolio management. Last week, I explained our methodology for using algorithmic models to mortgage risk in our equity positions. What that means is that we are not riding the Dow to its low, but rather through computer programs going in and out of investments to mitigate against major losses.
We have a unique approached to portfolio management that you’ll be hard pressed to find elsewhere. When you’re ready to experience active portfolio management with less fees and a comprehensive approach to your whole paradigm, please let us know. As always you can reach us by calling 864.641.7955.
Until next week,
David C. Treece,
Financial Advisor
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Clients Excel, LLC are not affiliated companies. Investing involves risk, including potential loss of principal. Any references to protection, safety, or lifetime income, generally refer to fixed insurance products, never securities or investments. Insurance guarantees are backed by the financial strength and claims paying abilities of the insuring carrier. This podcast is intended for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet particular needs of an individual’s situation. Clients Excel is not permitted to offer and no statement made during this show shall constitute tax or legal advice. Our firm is not affiliated with or endorsed by the U.S. Government or any governmental agency. The information and opinions contained herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Clients Excel.

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