Ep # 37: Consideration and Education on Inflation Information
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Benjamin Haas 00:02
Hi everyone and welcome to A/B Conversations, where we will help you CFP your way out of it. A podcast where you get into the minds of a couple Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now!
Adam Werner 00:26
And we're back.
Benjamin Haas 00:34
The sun is shining, it is warm here in Pennsylvania. We'll take it though.
Adam Werner 00:38
Yes, so if there's a little bit of a white noise in the background, it's the air conditioners blowing.
Benjamin Haas 00:44
Yes, it is. Needed in these old buildings. No central air, right.
Adam Werner 00:50
That's for sure.
Benjamin Haas 00:51
Yeah, so let's chat inflation today. We're going to go down maybe a little bit more of a technical path than we typically do in these A/B conversations than I think are more financial planning centric. That's what we want to talk about but we certainly recognize that when buzzwords kind of hit headlines and people start to get nervous about what they're hearing, we want to be a voice of reason here on framing that in a way that goes, yes, here's what's being discussed. But here's how we think about it and then maybe most importantly, here's how we hope you recognize it, does or does not play a role in your financial life. How is that for a lead in? Good enough?
Adam Werner 00:57
Fun! Sounds perfect, let's take it from the top. Do it over again. No, that was great. I think clearly where I think the headlines are the most obvious, you hear about home prices and the cost of lumber increasing the cost to build the home. We have a couple of clients that either just built or in the process of doing major home renovations and as they're going through the process getting like the surprise bills, hey, guess what raw material costs went up. Inflation, your bill just went up too. So it's bleeding over into things and in our clients’ lives, obviously, in our own lives too. If you were looking to buy a car right now, again, inflation. It's supply and demand, right? There were shutdowns that happened with COVID that are now impacting, I wish Devon was here, the logistics, right, the supply chain and now we have to make up for that. And it's pure supply and demand, if you can charge more because there's more demand, that's the way things are going.
Benjamin Haas 01:48
Yeah and I think that's also happening, clearly, because the government has taken a pretty strong stance here on trying to put money, increase the money supply, put it back into the system to get the economy moving. So yes, we are printing dollars, maybe a separate conversation but it's somewhat natural that when that money starts to hit the system, that prices are going to change.
Adam Werner 03:05
Yeah, and I think that's certainly where we hear feedback from clients that it's the printing of money, the increasing the debt, the budget was just released recently and it's $6 trillion, which, again, it's just hard to wrap your mind around that. That many zeros, it just becomes theoretical at that point but I guess that that fear of continuing to print money is that is that going to lead to inflation? And I guess the answer is maybe. It doesn't necessarily have to and there's so many other factors at play but I think that's one of the things that we hear linked by clients the most.
Benjamin Haas 03:50
Yeah, so I guess there's two sides of this for the conversation today. I think it's what we certainly feel as consumers. If I want to go refinish the basement, like two by fours that are already warped should not be costing, like 12 bucks a piece. So as consumers, there's concern on how we spend our money. But then, I guess we also need to discuss today, the Federal Reserve is there to control the interest rate environment and oftentimes their focus is on trying to keep inflation reasonable. So the interest rate environment has the potential to change when we're seeing prices kind of change, there's that investment side of things where if the economy gets overheated, the Fed needs to react to it. Stock Market likes to try to predict these things. It certainly doesn't like uncertainty. This is the other side of the inflation conversation that investors are probably focused on.
Adam Werner 04:46
Yeah, and it's the long-range predictions of trying to figure out where the Fed is at right now saying it's transitory inflation and what does that mean? It's temporary. Why they can't just say use the word temporary? Who knows? They want to look smart, I guess right there, this is some of the smartest financial people in the world but the point is trying to determine what inflation is going to look like 10, 15, 20 years down the line because for us and our clients, that's what we're looking to project over and trying to preserve the purchasing power of their dollars. We wouldn't want to see inflation run away, like it kind of did in the 70’s and 80’s. And now not only feel like your $1 in the future is going to buy way less than it could today but there's usually economic fallout from that just on top of inflation by itself.
Benjamin Haas 05:46
Yeah, I think it's the uncertainty factor there. You know, certainly when there seems to be some changing variables around the price of goods, supply and demand, you mentioned it, well, supply chain disruptions. Right now, there's just a lot of uncertainty not only for the consumer, but you think about how businesses need to think about the trickledown effect of their hiring, their capital, spending their investments, especially when we don't often think about how many different things go into product creation and how many different supply chains linked to that one item that you're purchasing. So it becomes hard I think, to make projections on should I be investing, should I be borrowing with that high degree of uncertainty. So that in itself has a way of kind of maybe slowing down economics or creating different hurdles.
Adam Werner 06:39
Yeah, absolutely. So even to your point on like the supply chain and not knowing how many pieces of the puzzle actually go into the finished product. For me, that was automobiles. The fact that we have a semiconductor chip shortage is now leading to limited supply of new vehicles. Number one drives up the price of now trying to go buy a new car and now used cars are up significantly over the last 12 months. So that impacts me directly because I have a 16-year-old who's going to want to buy a car soon or I would like to buy a car soon, she can have mine. But this is me being me. I don't want to go out and buy a new car in limited supply, like it's just not a buyers’ market and that's what's trickling down to the consumer level.
Benjamin Haas 07:30
So all very good context and very well said, I think. Then let's talk a little bit, whether it's using pieces of history or not, how are we thinking and feeling right now? Are you, Adam Werner, overly concerned that inflation is going to mean we need to do something very different as advisors for our clients?
Adam Werner 07:51
Benjamin Haas 07:54
Okay, well, let's wrap it up.
Adam Werner 07:55
Benjamin Haas 07:55
So all right, then it's good. I share that sentiment and not yet, right, we can always say it will depend on the future. Right now it's not overly concerning. Maybe this is a little bit temporary but let's talk about why. Why do we feel that way and why does that matter?
Adam Werner 08:14
Yeah, so it goes back, for me, it's the Federal Reserve kind of has their interest rate policy and just their policies in general. They use a 2% target of inflation as their benchmark. We haven't really seen that in quite a while. We've seen higher numbers, we've seen much lower numbers but they tried to target that 2% average. So going back to the financial crisis, 2008, 2009, we haven't really had any real sustained inflation and even before that, we've been nowhere close to, we hear the stories, right? We were too young to really know it and feel it but talking to clients of ours, you know, the early 80’s, you went to get a mortgage and you were paying 12-13%.
Benjamin Haas 09:00
Adam Werner 09:01
Interest on a mortgage but you could put your money in the bank and you'd be getting 14% interest on your savings account. We haven't been anywhere near that and we don't expect that to happen now. Right, it ultimately comes back to it was an unprecedented just shutting off the economy in March of 2020. That is unlike any other business cycle that we've had before. So from just that standpoint, I think I have to agree with the Federal Reserve that a lot of the impact and the numbers that we're seeing from an inflation standpoint should be temporary until the supply chain and manufacturing can actually ramp back up to pre-COVID levels. Just even out that supply and demand dynamic from an investment standpoint. Then if we don't feel like inflation is going to kind of runaway then that usually means that we don't need to make any sort of knee jerk reactions to counteract something that we don't think is going to be a huge issue coming down the pike.
Benjamin Haas 10:10
Yeah, I think this probably just goes back to things that we've said, probably now multiple times on multiple different podcasts of being patient investors and being fundamental in the approach is what we always aim to do. While I certainly respect that we need to pay attention to these headlines and pay attention to the data. We're certainly not going to make any dramatic changes at this point and rarely would especially because I think we often think about, alright, if inflation is a problem, what does that usually mean for stocks versus bonds?
Adam Werner 10:48
Yeah, so that's a question to me? I thought that was a statement and then you're going to finish it up.
Benjamin Haas 10:54
Yeah, so here's the softball, Adam.
Adam Werner 10:58
So, yeah, obviously, bonds are impacted way more as interest rates and inflation is rising because they just think don't have the ability to really grow. Like a stock in a company has the pricing power to increase the price of goods sold the consumers. Just raise prices at the consumer level and that the rising tide can lift all boats if the inflation is rising, hopefully, the stock price is also rising and you're treading water essentially. Bonds don't have that ability. They are fixed income; they are fixed rate instruments for the most part that are negatively impacted as interest rates rise and inflation is rising. So right now, we've said it in countless conversations with clients that it's very hard to be a conservative investor right now because you can't really earn anything on your cash at the bank. If you're not in love with taking on stock market risk, then you're forced into bonds and even right now with interest rates as low as they are now the potential fear of inflation picking up steam over the next year or so, you're just in a really bad spot from that standpoint.
Benjamin Haas 12:11
So I think that leads me to say that the answer often is, you have to diversify. You have to dabble across the board. It's not to take unnecessary risk if you're truly uncomfortable with it. I think a big, big part of our job and what we would bring up in this inflation conversation or interest rate conversation is, we need to spread things out because often, a lot of these different instruments have inverse relationships. So if it is going to be a difficult time for fixed income, if inflation is going to creep up, even if it's not 70’s-80’s levels but if it's going to creep up, then one of the hedges to that is to continue to own a little bit of basket of stock. Where if the economy is still clicking along, stocks should do okay and we've certainly seen that. I mean, we continue to push all-time highs even as these inflation conversations are happening.
Adam Werner 13:03
Yeah, so and I'll use your comment familiar. I'm sure we've said this multiple times but when we say my answer of should we be making changes right now? And the answer is no, that's more of like wholesale changes, right? Should we completely sell out of A to buy B? And obviously, that's just not how we manage investments but there are some tweaks that can be made. To your point on at this point, maybe it's taking a little less bond exposure because we just feel like there's not much to really gain from that other than just the safety of not being in stocks, but overweighting a little bit more to stocks as they have that potential to dampen the effect of inflation over time.
Benjamin Haas 13:51
Yeah, so that's a good, I'm really glad you brought up that point. Let's peel back the curtain. We often talk about like a target allocation. A target retirement portfolio might be 60% in stocks and 40% in bonds? I'm getting a little granular here for audience. We would say that, we think it's our job to use the light dimmers, where in a time when we feel stocks really do have an advantage over bonds, we may let that grow to 65 or even 70% in stocks. So that would mean you only have 35 or 30% in bonds. That's the kind of thing that we would want to tactically shift based on the environment a little bit. But then oftentimes, you have to figure out like, what is the actual impact of that depending on the size of the investment? So, these are the types of conversations and things that you and I are and the team are continuing to kind of talk about and let evolve. But that's why you're saying, peel back the curtain, it's not a wholesale change to go from 60% in stocks to 100%. That's not appropriate.
Adam Werner 15:02
Yeah, so I have to add a note here to one of the things that sometimes gets floated and I'm sure we'll see the commercials, it's gold as an inflation hedge. That was the one thing that kept coming up, I listened to a lot of commentary have been on a lot of conference calls from the big investment firms and gold was a decent hedge 70’s and 80’s. But that may have just been more tied to the time that we were in, not necessarily that gold is the great inflation hedge just in general. And that certainly has been the case more recently that it hasn't really acted as a pure inverse relationship as inflation is going up, that gold is also rising in price. We haven't necessarily seen that relationship in the last 10, 15, 20 years. So it doesn't necessarily mean it's not going to be moving forward but just historically, gold in general, is just not a big asset class that we really get behind and really allocate anything to specifically.
Benjamin Haas 16:05
Yeah, there are things that I think we would talk about that typically do better in inflationary environments. Getting more granular than just saying stocks in general. But even there, I think we don't want to get too cute with the timing of things and that is to say that, if this is a bigger concern, we think economically where broadly the stock market may struggle based on inflationary pressures. Then let's talk about reallocating things and considering what that target allocation is but to make an individual bet on gold as the example, it's not something we would do.
Adam Werner 16:41
Yeah. So, that's a general rule of ours for the most part, right? We're not making outsized bets on any specific sector, asset class, right. That's just not the way that we manage money.
Benjamin Haas 16:56
So then let's wrap this up. Is there anything in particular that we should say clients should be paying attention to on this topic or is it just another one of those passing headlines that over time, things will normalize? And we're going to continue to watch this for you don't get overly worked up about it?
Adam Werner 17:17
Yeah, I think from an investment standpoint, we would certainly say it's like many things. If it's headline news, it's okay to listen to it to a degree but not act. That's our job to help filter all of the headlines, news, all of the data, all of the fundamental research that we do and determine if action is needed. Like we said earlier, it's probably not going to be anything major. Obviously, on the personal side, we talked about it. It's lumber, it's cars, it's chlorine for your pool, I've been hearing that from people too. You just can't get it. It's again, it's supply and demand. So on the personal level, there's certainly things trickling down but from a broad generalization, there's really not as of right now, a huge concern on our end, that it's going to continue to just run away from us. The Fed has made it very clear that this is their target that they're sticking to, they're going to let it run a little bit here to see if it actually does stay above that 2% target because we just, they've had this 2% target for a very long time and we've been well underneath that for the last 10 plus years. They're okay to make sure that this is actually going to stick around.
Benjamin Haas 18:37
Yeah, so I would summarize that too, with just two additional points. I think people that clearly lived through the 70’s and 80’s with some wealth, you're going to lean on that experience and say, if this happens again, I don't want the ill effects of that. What do I need to do? We just need to recognize the differences in the situation and the differences in the time, all the way down to how technology changes, prices are moving quicker these days. So recognize that and then also recognize other recent experiences with the market. The market does what the market does and it does it quickly. We all couldn't be made a fool by the market thinking that, well, if this is the headline, then this is what the market is going to do with that headline. More often than not, it would make a fool of us if we were to try to make some sort of major pivot. So stay in your lane, certainly be educated. Let's talk about these things but at this point, inflation is not in our opinion going to be the end of this bull market, at least not right now.
Adam Werner 19:38
Benjamin Haas 19:41
Thank you, sir.
Adam Werner 19:42
Benjamin Haas 19:43
We'll see you again real soon.
Adam Werner 19:45
You got it.
Benjamin Haas 19:48
Take care. Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you. Consult with your attorney, your accountant, and financial advisor or tax advisor prior to making any decisions or investing. Thanks for listening!
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