Believe it or not, the following is taken from October 2022 (with a couple of updates). Inflation almost always takes longer to tame than we think.
A question that may be on a number of people’s minds is: How long will it take to tame inflation? Unfortunately, there is very little telling how long it will take the US Federal Reserve, or any other entity or force, to tame inflation, especially in the short-term. Part of the reason is because inflation is always part of a complicated economy – with diverse people, businesses and governmental/fiscal forces in action. Timing (and hard-landing/soft-landing) predictions about inflation are nearly impossible.
Currently the limit on the amount the US government can borrow is a mind-boggling $31.4 trillion. This limit was reached this past January and since then the US Treasury has been using “extraordinary measures” to continue to pay government bills. Funds from these measures, such as using available tax revenue or borrowing from the retirement accounts of federal workers (not allowed by private employers), are said to become exhausted by about June 1st or so.
The government borrows (or issues debt) because it spends more than it takes in via tax revenue. These borrowed funds are used to pay government workers, but for numerous other critical reasons including:
For a bond that must be held for a minimum of five (5) years for full interest to be received and can only be bought in amounts of $10,000 per year, I get a lot of questions.
To put the situation in perspective, for clients and friends with high levels of income, in the hundreds of thousands and much more, and high tax rates – marginal rates of over 32% – the interest at stake with an I-Bond is currently $600 to $800 per year and that is before taxes! That level of net interest may pay a portion of one car lease payment per year or weekend gas for a boat (in 5 years). BUT nevertheless, I get questions.
More and more lately, perhaps as a result of the post-pandemic world, I am being asked for basic financial advice – from both young people AND those in the over-55 crowd. By the way, the over-55 crowd who ask this question are typically wealthy with comfortable lifestyles. The basic financial advice they seek includes the question, “Are we OK financially?”
A handful of smart people ask for further definition of “OK” and then ask the same question, “Well then, are we OK financially?” The answer comes down to super-basic elements, and thus today’s short edition of TGIF 2 Minutes.
From the Archives of TGIF 2 Minutes – with an update on cash.
One of the most critical factors of long-term personal financial success is…. guess:
A) The markets
B) Spending
C) Interest rates
D) Stock selection
E) Income level
And the answer is… SPENDING. This fact is why a truly competent financial planner will spend the most time on discussing spending, both today and future projected. Spending can also be expressed as “lifestyle” or “the basics of food, shelter, and transportation plus lifestyle”.
However, the inevitable will happen. And YOLO (“You Only Live Once”) will creep in.
The most basic factor that can soften a huge spending blow is CASH savings
This topic has become far more complicated post-coronavirus.
Back in 2017, 2018 & 2020 TGIF 2 Minutes explored “Caring For Aging Parents”… which then became “Caring For an Aging Friend”. Whether caring for a family member or friend, finding and putting into action Care (with a capital “C”) may be more stressful than ever – both for Care-receiver and Care-giver.
Recent news features the danger of the United States defaulting on its Treasury debt. Longer story short, the US Treasury is very, very, very, very unlikely to default, and “cooler minds” would be educating the American public about why this is the case. The explanation is beyond the scope of TGIF 2 Minutes. (Please note that none of the following is a political statement or meant to be.)
Of course, there are plenty of reasons why the US finds itself, once again, in this position. The last time it was this serious was in 2011 when Barack Obama was President. Then came the coronavirus in 2019 and responses by Presidents Trump and Biden. Entitlements and social program spending, along with eventually replenishing US defense spending, became and are still beyond expensive. As The Wall Street Journal notes, “…U.S. debt held by the public is now about 100% of GDP, up from 39.2% as recently as 2008 and 77.6% in 2018” and “…The cost of financing that debt is rising fast along with interest rates, and interest on the debt will take up an increasingly large share of federal revenue. Priorities… will be squeezed.”*
The country is witnessing a high stakes political fight that will likely play out over the next five months and feature the Republicans and Democrats in the US House of Representatives negotiating and attempting to call “chicken” on who gives in first, with trillions of dollars in the offing. The primary matters at hand are the government’s overdue and needed discipline on its spending cap – and determining how much debt is manageable for the country over the short- and long-term. The next generation of Americans, among others,is who should be watching most closely.
From the recent archives of TGIF 2 Minutes – especially worth a second look as the year 2023 unfolds. Inflation recently came in at a still very high 6.5%… which seems “low” only because several months ago inflation was at 9.1%. Shelter and services (including daycare) remain the areas with highest inflation; gas, autos, computers, and sporting goods saw slower rises in still high prices. Employment remains an oddly strong component of the economy – leaving the likelihood of a “soft landing” type of economic slowdown a possibility.
Sept 2022: It is fairly safe to say that the US has entered a recession, even if the backwards looking, narrowly focused, official “National Bureau of Economics Research”, or NBER, has not declared it yet. The NBER is a private, non-profit organization founded in 1920 that somehow came to possess the distinct “responsibility” of declaring recessions in the US. Seriously?
What is in store for 2023? Is the stock market overvalued? In answer to the second question: perhaps yes, perhaps no. When most people ask, “Is the market overvalued or undervalued?” what they really are asking is, “Where is the market going next?”
Of course, no one knows for sure. But a bit of historical data can offer information for comparison. Below (top) is a chart showing how over-priced US growth stocks (yellow-ish line) have been over 100 years and how over-priced US value stocks (greenish-blue line) have been over the same period. It would seem that growth stocks are still over-valued. But look at the period for growth stocks between 1974 (the last time inflation was as high as it is today) and 1998. Can you say that it was obvious in 1992 that growth stocks were overvalued? Probably not.
Fast forward to 2023. What could happen next? See the bottom chart for more data.
Year-End 2022 may be leaving us with more questions than answers. In addition to a prior posted list of questions, here are more:
Will interest rates continue to increase?
Will the US officially enter a recession? If so, how bad, and how long will it be?
Will there be more bankruptcies related to cryptocurrencies and trading?
What will become of the unbalanced employment situation?
The list can go on and on. For as long as most experienced investors reading this post can recall, there have always been questions that economists (similar to the weatherman/woman) attempt to answer. Readers and investors who are newer or younger can learn over time that questions regarding the economy and government/fiscal policy are what make markets operate. Everyone is entitled to her or his opinion, especially in investing:
