How Long Will It Take To Tame Inflation?

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 with respect to the short-term. Part of the reason is because inflation is always part of a complicated economy – an economy with diverse people, businesses, and governmental/fiscal forces in action. Making timing (and hard landing/soft-landing) predictions about inflation is nearly impossible.

To add to the confusion, believe it or not emotions – specifically people’s expectations of inflation – are part of what keeps inflation around. In this inflationary cycle, inflation has stuck around longer than at almost any time in US history; long enough to increase people’s expectations that inflation will not go away quickly. The US Fed had stated one of its original intentions was to lower consumers’ inflationary expectations (but the Fed may have missed this boat due to forces out of its control, namely, the pandemic aftermath).

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Crypto Quarterly – Vol. 3, Oct 2022

In this issue of TGIF 2 Minutes – Crypto Quarterly, a less rosy update with the bright spot being that fees to trade crypto have gone to “free” in some cases. Binance, a world leader in Bitcoin trading volume, introduced zero-fee trading back in June. (Note that as recently as July 2022, the “CEO” of Binance still says there is no headquarters for the company, as it is “decentralized”.)

Value-wise, in a year that has been unkind to stocks AND bonds, Crypto stands out as an even bigger loser relative to traditional asset classes – by over double in a number of cases. Take for example the price of Bitcoin which started the year at approximately $46,310 as measured in US Dollars. Most recent prices of Bitcoin are around $20,098, or down over 55%. Coinbase, not a cryptocurrency but a crypto trading marketplace (among other technology functions), went public in April 2021 and is down around 78% since then. Compare these crypto-related price declines to the painful year-to-date performance of -21% in the S&P 500, -29% in the Nasdaq and -21.5% in the Russell 2000 which tracks small company stocks.

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Hard Landing Recession or Soft Landing?

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?

In the case that the US has entered a recession (not yet “declared” by the NBER) then what does that mean for savers and investors? A quick bit of background: typically, economic cool-downs come in two varieties: hard landings and soft landings.

  • The hard landing ends a period of economic expansion in recession,
  • The soft landing ends a period of expansion with a smoother period of mere economic slow-down.

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What’s Important NOW?

Lately it seems that reaching Friday is a goal in itself. In markets like these it is not easy to “keep calm and carry on” as if there is nothing different going on. There are, in fact, multiple very different things going on. The coming weeks and months may bring even more different events and uneasiness – with a bit of good mixed in.

So, then the question becomes, What is important NOW? It may be tempting to answer:

  • Federal Reserve policy on interest rates
  • the coming November elections
  • mortgage rates
  • the level of inflation
  • energy prices
  • the US and world economies.
Photo by Kathy Jones on Pexels.com

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End of an Era?

Just as this week’s TGIF 2 Minutes goes to press, the news of the passing of Queen Elizabeth II, the longest reigning monarch in British history, is hitting the airwaves. God bless the royal family in their mourning of an amazing woman!

The “end of an era” closer to home is the end of 3% 30-year mortgage rates. Does this mean it is time to put off a home purchase? The simple answer is NO. The longer answer is, NO, IF. The “if” stands for:

Today’s 5%+ mortgage rates are more normal and reasonable in the longer-term picture than the media is making them out to be.

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A Little Paranoia Is a Good Thing

Record-breaking, big outlier events tend to move the needle the most in the economy and stock market.* Note the word, “outlier.” Outlier events typically are surprises and are indeed unlikely. In his beyond excellent book The Psychology of Money author Morgan Housel lists five events that were outliers with world-changing consequences:

  • The Great Depression
  • World War II 
  • The dot-com bubble
  • September 11th
  • The housing crash of the mid-2000’s.

A conclusion could be drawn from the book’s chapter titled, “Surprise!” that surprises are perhaps the most reliable thing going. But the irony of the reliability of surprises is we do not know what the surprise is until after it has unfolded.

Making room for error can be as simple as having a having a “Plan B” and “Plan C” – or being OK with starting completely from scratch – if “Plan A” does not work out. 

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Walking Up Interest Rates

To keep with the theme of walking, and because this week the US Federal Reserve “walked up” its benchmark interest rate, a brief discussion is warranted about interest rates, recessions, and the economy. By the way, the weather is HOT as heck, so today’s is a shorter post.

In the accompanying photo please note the mountains in the distance – which could be equated to higher ground, higher prices, and higher interest rates. The walkers seem not to be panicking (yet) because it is early in the higher interest rate progression. Think:

Higher interest rates in the short-term for,

  • Home mortgages
  • Car loans
  • Credit cards.

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A Game of Chicken?

Will the Fed raise interest rates aggressively? Or will the economic threat of recession force the Fed to slow its pace of rate increases? The outcome in what is shaping up as a sort of “game of chicken” remains to be seen.

Inflation is raging – there is no question. Prices of items as basic as eggs, butter and milk are increasing at crazy high rates. This is not to mention price increases for meat and produce. Gas prices have become crippling, just as workers return to corporate offices even part-time. Restaurants are still raising prices for diners. Home prices are still going up, although the recent rise in mortgage rates may cool the craziness. Wage increases are still happening (and not keeping up with inflation but also feeding into inflation) although there may be moderation in wages coming. The list goes on.

The Fed has good intentions to adjust rates to as ideal a level as possible to tame inflation while avoiding a deep recession.

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Can Walking Make Us Richer?

Long walks and successful long term financial & life goal setting go hand in hand. Lots of people have zero interest in long walks but even a walk to the mailbox can turn into a long walk – so stay with me here. A recent, rather long walk on the Camino de Santiago in northern Spain (pictured) taught me life-changing lessons about goal setting. Namely,

  • There is no truly right or wrong way to formulate financial or life goals. Yes, goal setting is easier when pen & paper are involved, but the process is more about quality of thought (meaning being honest and open with oneself) than any set of “rules.”
  • There need not be a rush to set financial, business or life goals. Although starting sooner rather than later can help – and momentum will develop on its own. The list of goals may then turn out longer and more exciting than ever imagined! (Dreams can become goals too.)
  • Accomplishing goals in a quality way becomes a series of decisions made along the way – seemingly small decisions and larger, more serious-feeling decisions.
A walk, short or long, can give space for free thought by separating us from the stress of beeping appliances, phones, laptops – even briefly from bosses and colleagues.

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Looking Back On… The Luck Factor

Despite all of the calculations involved in investing, there is still an element of luck involved. A specific term for this luck is, “Sequence of Returns.” What on earth is that? Answer: it is a risk and may be the most important concept in the world if a saver or investor ever wishes to spend their savings – and have those savings last.

The topic became relevant recently when a client asked me for assistance in defining what their “concerns” should be for the long-term now that they had accumulated a decent amount of savings and investments. The desire was to continue to accumulate savings and, more important, have the monies last at least long enough to see their plan to fruition for themselves and their kids.

There are ways to plan around both good and bad luck! 

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