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.
Quick trivia: Who is famous for the saying, “It’s only when the tide goes out that you learn who’s been swimming naked”?? Ironically just last week Warren Buffett’s 58th annual “Letter to Shareholders” was reviewed by TGIF 2 Minutes, and, yes, Warren E. Buffett first famously uttered these words back in 1992.
The timing of his utterance was, as CEO of the insurance conglomerate Berkshire Hathaway, just following Hurricane Andrew when the inadequacies of the insurance industry were negatively exposed. Buffett was describing “the rosy appearances that can mask financial recklessness until the good times end.”*
…”Daddy, Why are we not eating my favorite fancy meals and brands of food?”
It is not quite Chef Boyardee and Ramen Noodles yet, but there is data reporting higher-end households shopping at lower-priced food stores (i.e. Walmart).* There is a lesson for kids and adults here. First a few more details.
Inflation is no joke; and can be the great equalizer. For even the highest-earning households, nearly everything is more expensive. Namely, food. In addition, during the pandemic households became accustomed to ordering out for food and meals, taking delivery, and cooking at home less. For those households who chose to cook at home more often, the ingredients were and are now often delivered or shopped for by a “shopper” and picked up curbside at the grocery store or delivered to the doorstep. Food and service costs have skyrocketed (partly the result of further increases in wages for basic hourly workers).
Hurricanes can come in various forms. Whether they be the recent Ian and Nicole or the staggering Sandy of 2012 they tend to strike in the fall season. Also, in the fall come U.S. elections and historically a bit of stock market volatility. Like the weather, markets are anything but predictable. Elections can lend themselves to predictability but there are always surprises too.
This year has had a mix of all these factors. Currently amidst high inflation the stock and bond markets are trying to digest an environment of much higher and increasing interest rates – exactly how much higher is an unknown. Also unknown is the post-election reality of future policy making in Washington, DC. Interest rates are “driving the economic bus” for the time being, and government policy making will be an ongoing force running alongside. Both will affect the markets in positive and negative ways over time.
Getting through hurricane season can be a relief – but only if it is known that the storm is over. Is the storm over or getting close to being over, and where does all this leave investors and savers?
There is no sugar-coating it: investors in 2022 have experienced the biggest – and longest – down year for stock and bond markets since the 2007-2008 financial crisis. One of the only consolations is that over the past 13 years there have been tremendous gains overall, still with a few bumps along the way. Below I outline a few more consolations, or ways to make the best of down markets.
First a quick note: For newer, younger investors it may be difficult to not yet see long-term gains having accumulated in portfolios. Know that time horizon and future earnings potential are two huge positives working in your favor.
Here are a handful of ways to make the best of down markets – and to take advantage of higher interest rates (hint: there are more positives around higher interest rates than the media lets on).
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).
From the Archives of TGIF 2 Minutes (original post May 13, 2022) to reflect my recent purchase of I-Bonds and continued questions received:
“What are I Bonds?” The “I” in I Bonds stands for Inflation, which is why these bonds are so HOT at the moment. (Note: inflation overall is clearly not a good thing; I Bond interest rates may be one of the only things that benefit from skyrocketing inflation.)
You can skip this entire post and simply go to www.TreasuryDirect.gov and click on “How to buy Series I” under the column, “Individuals”. The website is written – literally – as if a third grader could understand it. See the * and ** footnotes below.
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.