Author Topic: Inflation - Should We Be Worried  (Read 505 times)

EscapeVelocity2020

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Inflation - Should We Be Worried
« on: January 12, 2022, 07:49:56 AM »
Looking to start up a discussion on MMM's latest post.
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So What Happens Now?
The first rule of this situation is the same as all other situations: don’t panic, and enjoy this whole journey as a learning experience. Prices will fluctuate, and the world’s economy will adjust accordingly in the coming years. You and I will continue to prosper.

The big picture magic is already starting to happen: supply chains are starting to untangle themselves, and companies are making big new investments to increase production.
...

In typical MMM fashion, it is very rosy and optimistic - I'm not trying posting this as some kind of rebuttal or take-down.  I realize MMM's attitude is a good way to go about life in general, but at the same time, I would also have appreciated a bit of balance in his post that inflation can be one of the biggest hurdles to Early Retirement.  I go back to this post from GoCurryCracker - https://www.gocurrycracker.com/the-worst-retirement-ever/
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Pure 4% withdrawals for a retirement starting in 1965 were a disaster, with the portfolio dropping to $0 in about 25 years.  This occurred regardless of asset allocation.  A portfolio of 50% stock / 50% bonds failed just as surely as a portfolio of 100% stock.

Not trying to fear monger, and I hope that the coming years surprise me that the Fed is able to roll off much of the $9T balance sheet of mostly real-negative yield treasuries and risky mortgage backed securities with success.  I'm also predicting, at some point, investors will complain that continuing to raise rates while the stock market falters is 'unfair'...  I remember feeling this way in 2000 when my NASDAQ stocks were getting destroyed - if only Greenspan would STOP IT, he has no idea what he's doing!!!  LOL.

Mostly I'm interested to hear what others are seeing when it comes to inflation and what others think will happen in our FIRE circles.  It will also be interesting, as a global group, to get a bigger and more tangible picture of what is going on IRL.

I also predict that inflation and Fed tightening will be playing out for a long time...  but also hope to be proven wrong on that and get back to ~2% inflation and ~2% Fed rates without too much disruption.  I am doubtful, which is why I went to the trouble of posting a thread to help keep us busy in the meantime :)

Syonyk

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Re: Inflation - Should We Be Worried
« Reply #1 on: January 12, 2022, 07:11:34 PM »
Just don't ask about the near and literal slave labor involved in that amazing tech deflation... all supply chains lead to China anymore, and if people are being cagey about the details beyond there, they probably lead to labor camps.  What's a little genocide if you can get a cheap 96" TV, though, right?

I tend to remind myself that the current iteration of the FIRE movement has literally never seen a bear market.  It dates to sometime after the 2008-2010 housing market explosion, and developed in an era of The Market Will Never Go Down.  At least, not seriously, and Buy The Fleeping Dip!

How long that's likely to last into the future requires a better crystal ball than I have, but it's reasonable to figure that exponential growth on a finite planet is eventually going to come to an end.  In our lifetimes?  In 100 years from now?  Not sure, but at some point it's likely, and a lot of the "decoupling" people talk about is disturbingly close to "Well, we build it somewhere cheaper and take the profits here."  Eventually you run out of cheaper places to build stuff, or it turns out that it's basically all built by slave labor, which... not really new, but a bit harder to ignore lately.

The general point of "As long as your investments are going up faster than inflation, is no problem!" holds, as long as you're in the "most of my wealth is investments" world and not something like the "I still work for my money and am not getting 10+% raises per year" world... I suppose "just go find a different job" is a reasonable enough answer if you can find it, but it seems a bit "Oh, yes, well, how hard can the working world be, pip pip, cheerio!" to me.  Some markets are strong, others less so, and I certainly wouldn't want to be trying to relocate at the current moment and housing bubble...

I've generally been trying to take the more contrarian path of trying to drive down my long term expenses through productive property improvements - solar, gardens, eventually some root cellars, etc.  The goal is that regardless of where things go, I have the ability to cover a lot of my basic needs locally on the property, and, more importantly, have the experience to help scale this out when the needs come.  I also generally model the US, at least, as a dying empire on the way down its arc through history (a Trump-type politician wasn't a surprise, that he showed up in 2016 was about 8 years ahead of my estimates), so I question just how long the current kick the can game with the markets will be able to continue - and be backed by actual things to buy.  All the money in the world doesn't help if there's nothing of what you want, and knowing people far deeper into the fabrication side of things than I am, the random whiplashing shortages of basic things like box tube are pretty well concerning.  You can't get trailer axles either.

We'll see.  I don't think the inflation is currently the end of the world, though it sucks an awful lot if you're fixed income with annual cost of living increases that come nowhere near inflation, and it will make accumulating wealth harder if you're not already substantially in the markets.

The whole "arc of empire" thing is a lot more concerning than inflation, though.

EscapeVelocity2020

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Re: Inflation - Should We Be Worried
« Reply #2 on: January 12, 2022, 07:46:16 PM »
Good points @Syonyk for sure.  Many of them come down to sustainability, a 'buzz word' in Norway at least.  It's great to have improvements in corporate financials that lead to better quality of life, but only if they are sustainable...  Americans seem addicted to the fast food version of this - I want to feel good, look cool, and be instantly gratified for as long as possible.  We don't care if it's unsustainable, we all want it and we'll all pay good old American dollars (the global reserve currency) for it.

Who would've ever thought Bitcoin would be a thing, but one of its reasons for having value is that fiat currency is self-destructing.  Another important thing to watch in this whole 'inflationary phase', is what happens to the relative value of the US dollar.

Syonyk

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Re: Inflation - Should We Be Worried
« Reply #3 on: January 12, 2022, 08:02:09 PM »
Americans seem addicted to the fast food version of this - I want to feel good, look cool, and be instantly gratified for as long as possible.  We don't care if it's unsustainable, we all want it and we'll all pay good old American dollars (the global reserve currency) for it.

Queen's chorus in "I Want It All" is quite applicable to American thinking: "I want it all, I want it all, I want it all, and I want it now!"

We had the whole corporate raiders thing in the 80s that would buy a perfectly reasonable company and strip it for pieces, leaving a lot of quick profit and a shattered wreck of what had once been a profitable company.

I do remain concerned about the whole "dollar as global reserve currency" thing - and the associated petrodollar.  If those end, the US is in for a world of hurt, partly from the dollars that have already been printed and spread, and mostly because I don't expect our politicians to recognize the fact, which means they'll do the only thing they know how to do in terms of monetary policy, and print more money.  When that doesn't work, they'll print yet more, because it's always worked before, so they just didn't do enough of it.  And by the time anyone has the sense to realize that it's not working, the damage will be done.

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Who would've ever thought Bitcoin would be a thing, but one of its reasons for having value is that fiat currency is self-destructing.  Another important thing to watch in this whole 'inflationary phase', is what happens to the relative value of the US dollar.

I keep meaning to put together a "priced in" website that grabs data in a variety of currencies for a variety of commodities and lets you compare and contrast their relative values - if you want the price of Bitcoin in barrels of oil, what does that look like?  Etc.

Travis

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Re: Inflation - Should We Be Worried
« Reply #4 on: January 12, 2022, 10:49:24 PM »

The general point of "As long as your investments are going up faster than inflation, is no problem!" holds, as long as you're in the "most of my wealth is investments" world and not something like the "I still work for my money and am not getting 10+% raises per year" world... I suppose "just go find a different job" is a reasonable enough answer if you can find it, but it seems a bit "Oh, yes, well, how hard can the working world be, pip pip, cheerio!" to me.  Some markets are strong, others less so, and I certainly wouldn't want to be trying to relocate at the current moment and housing bubble...

Pete did get taken to task by a handful of folks pointing out that his optimistic "just ride this inflation thing out" speech doesn't apply to a chunk of the population that either is on fixed incomes, doesn't earn much money, or can't find an affordable place to live. Housing costs will smooth out at some point, but this is a genuine problem for a lot of folks right now.  He owned up to not discussing that part of the population, but somewhere else in the article or comments threw out there that the point of his MMM persona was to get high earners to stop being wasteful consumers.

Telecaster

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Re: Inflation - Should We Be Worried
« Reply #5 on: January 13, 2022, 12:24:58 AM »
If I may blow my own horn (toot!) I've been talking about the wisdom of preparing for inflation for years on the DPOYM thread.  Owning a 3.5% mortgage in a 5% inflation world makes some sense to me. 

Should we be worried?  In my opinion no.  Not yet, anyway.  The Fed governors are all inflation hawks who are paranoid about a repeat of the 1970s.  I believe they will act in time to blunt the worst effects.  However, raising interest rates can be, and usually is, bad for the economy.   It is possible rising interest rates could trigger a recession, which is usually bad for the stock market.  But right now things are booming. 

That said, interest rates can go up a lot before they resemble something like the long term average.  So even if they go up, that might not be as good for some businesses, but history shows many others can function just fine.

So, IMO, no need to get worried just yet. 


chemistk

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Re: Inflation - Should We Be Worried
« Reply #6 on: January 13, 2022, 06:34:24 AM »
I think this forum has enough of a broad appeal to ask the question (that I enjoy asking) - if your worst fear is realized, what are you actually going to do?

There's a good chunk of people here who can quickly shift significant assets to different classes (or to different currencies) to hedge inflation. Plenty of people who can relocate or expatriate if that's the best long-term strategy.

But there's also a significant (majority, if barely I'd argue) of forum-goers who can't move enough assets to properly hedge inflation, nor with the ability to quickly relocate or expatriate. The bulk of Western society is in this boat.

Even though Pete writes his articles for the already-wealthy (relative to the rest of the country, if not the world) - the 'Circles' are always something to bring a crisis (real or perceived) into focus. What can YOU personally do RIGHT NOW to hedge inflation? We all know what the tools are, and the risks associated with leveraging them. Other than that, you could be more active politically to try and influence your local elections (which help regional -> state -> federal [obviously with diminishing returns the higher the level]). You can intentionally reduce consumption. You can make your household more self-sufficient. You can work a couple more years, or go back to work if retired.

Pete has unabashedly emphasized that he's deliberately optimistic about most things - and there's no reason not to be, if for no other reason than it's entirely out of your control. The only thing you can control is your level of preparedness, and no mater the extent of that investment (whether you're shifting asset classes or installing solar panels), you're hedging a bet on something that may or may not come to pass.

Should "WE" be worried? No. Should "WE" be aware of the tools we have to work against inflation - absolutely. 

Should YOU be worried? Depends on your risk tolerance.

EscapeVelocity2020

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Re: Inflation - Should We Be Worried
« Reply #7 on: January 13, 2022, 09:18:07 AM »
... if your worst fear is realized, what are you actually going to do?
...

One of the interesting aspects of inflation is that acting after the fact is sub-optimal.  You really should be forecasting what you think will happen and act in ways that hedge the impact.  For example, we've had a few neighbors gamble that inflation was transitory and sold their homes for about 20% more than 2020 values.  They are now renting and starting to sweat the fact that building / buying their new home is taking longer and costing more than they thought... 

Cranky

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Re: Inflation - Should We Be Worried
« Reply #8 on: January 13, 2022, 12:40:44 PM »
If you are poor, this is a big problem for you - it’s hard to keep up with steep inflationary increases if you don’t already have resources.

I’d say that for most people on this forum, including *moi*, it’s some degree of annoying. My housing prices are stable and Beyoncé that the big jumps seem to be travel related. But I’ve been through higher inflation than this.

sui generis

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Re: Inflation - Should We Be Worried
« Reply #9 on: January 14, 2022, 07:19:40 PM »
I hope this isn't too tangential, but I heard today (on a podcast, so sorry if it's paraphrasing rather than precise) that in a recent poll, only 30-some% of Americans said the economy is doing ok, which is apparently a very poor perception as compared to rankings over time.  However, 60-some% said their personal finances were good (or maybe it was even better like "quite good" or something like that).  And that's a better ranking than most times in the history of this polling.  And that the discrepancy between the two is absolutely remarkable.

So I do have the feeling, as my EOY financial summary tells me for my personal situation, that a lot of people are perceiving and panicking more than experiencing.  Not to discount those individuals that actually *are* "experiencing" but at a population level, it seems much more like a perception of damage from inflation**. 

Added to that that *labor* is one of the things that experiences inflation and that workers have historic amounts of power right now (esp in the absence of functional unions in the private sphere).  Again, not to say that every *individual* is getting a raise that matches or beats inflation of the goods they are buying, or that through the Great Resignation they've been able to secure a new job that does so.  But, I really haven't seen as many numbers reflecting how the inflation in the price of labor compares to other goods.  Of course, it gets circular real fast, with the the laborers also being the consumers of the goods that cost more due to increased labor costs as well as materials.


**At least today, less than a year in.  I certainly share concerns about multiple years of inflation or the cure being worse than the illness, depending on how the Fed and other actors proceed.