Inflation_will_self-correct
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai.
00:00:02.680 | And in this episode, I want to talk about inflation and the future of inflation and
00:00:06.560 | why things should be okay.
00:00:09.360 | Don't panic.
00:00:10.360 | I think things will be all right.
00:00:11.920 | The US Bureau of Labor Statistics reported prices have gone up 6.2%, which was the highest
00:00:17.460 | annual increase since 1990.
00:00:20.360 | People are pissed off because meat is up 20% in terms of prices.
00:00:24.980 | Gas prices are up 50% from 2020.
00:00:29.040 | And people are just flustered.
00:00:30.040 | So you see that being reflected in the presidential rating and also the vice president rating.
00:00:35.420 | People don't find Biden and Kamala Harris to be doing a good job.
00:00:40.480 | And so President Biden has said he's going to make it one of his missions to get prices
00:00:45.520 | back down.
00:00:47.160 | And the reality is, prices will come down, folks.
00:00:51.260 | And do you know why?
00:00:52.260 | Well, it's because we live in a capitalist society where we all want to make more money.
00:00:58.740 | And so when prices are high, what happens?
00:01:01.260 | Supply increases, right?
00:01:02.560 | Because if you're a company, you are going to try to capture that excess profit margin
00:01:08.000 | by producing more goods.
00:01:09.880 | But there's always this whiplash.
00:01:11.800 | It's called a bullwhip effect, where you recognize prices are high, and then it takes a while
00:01:16.560 | to ramp up production.
00:01:18.600 | And then by the time you ramp up production, everybody else and every other company is
00:01:22.620 | ramping up production.
00:01:24.080 | And then there becomes excess supply, and then prices actually crash.
00:01:29.300 | So we're right now in the thick of inflation frenzy, and people are upset about paying
00:01:34.740 | way more money at the pump and at the grocery store.
00:01:37.960 | But we should be thinking forward over the next 12 months about a potential excess supply
00:01:42.980 | scenario where prices crash.
00:01:45.260 | So we've talked about this with housing market, for example, many of the Texas City housing
00:01:51.860 | markets like Austin have upcoming supply.
00:01:55.940 | That supply is coming and prices are up massively, right?
00:01:59.240 | So I would be a little bit careful about buying real estate or investing real estate in Texas
00:02:04.780 | cities.
00:02:05.780 | On the flip side, I want to look for cities where prices haven't increased as much and
00:02:09.880 | have really restrictive supply.
00:02:12.380 | So a lot of people here in San Francisco complain about government bureaucracy, bloated budget,
00:02:17.220 | inefficiency, corruption, and so forth.
00:02:19.980 | But as an investor, you got to think, well, actually, that's pretty good, because all
00:02:23.900 | that stuff really slows down the process of creating more homes.
00:02:28.460 | And that's good for pricing.
00:02:29.460 | So you always got to think yin yang when it comes to finance.
00:02:32.940 | And as a financial samurai reader and podcast listener, you should think about inflation
00:02:38.180 | also as a positive, because you own real assets.
00:02:42.220 | You own stocks, you own real estate, you own other assets that benefit from inflation,
00:02:48.380 | because these assets are part of the inflation index.
00:02:52.420 | So if prices are going up, inflation is going up, that means your assets are going up as
00:02:56.420 | well.
00:02:57.420 | And frankly, stocks, real estate, and other assets have gone up much higher than the stated
00:03:02.900 | inflation rate.
00:03:03.900 | The S&P 500 is up around 25% so far year to date.
00:03:08.900 | So 6.2% inflation, you're still way winning.
00:03:12.940 | You're really winning on a real level.
00:03:15.300 | The median national home price is up something like 15% to 17%.
00:03:21.100 | So again, you're winning.
00:03:22.500 | You're real winning.
00:03:24.140 | And the thing to think about is what's next.
00:03:26.980 | So you want to compare the inflation rate, which came in at 6.22%, which is the highest
00:03:32.500 | in 30 years, to where the 10-year bond yield, which is at about 1.6%.
00:03:38.580 | In other words, the real yield for the 10-year bond yield is temporarily negative 4.6%.
00:03:44.580 | 1.6% minus 6.22%, negative 4.6%.
00:03:50.820 | So as an investor, you think, "Well, why the hell would I buy a 10-year bond yield yielding
00:03:55.060 | a real negative 4.6%?"
00:03:57.540 | I wouldn't.
00:03:59.620 | Most people wouldn't.
00:04:00.620 | So they would put that capital in more risky assets to try to hopefully earn a greater
00:04:06.020 | real return.
00:04:07.820 | Now thinking about the future, and if you look at the historical inflation numbers,
00:04:13.980 | it ranges since, let's say, 2012 between a low of about 1% to a high of about 3.8% to
00:04:23.420 | now 6.22%.
00:04:25.100 | So rationally, you can think, "Well, inflation will probably moderate over the next 12 to
00:04:29.740 | 18 months because supply chain issues will be figured out."
00:04:33.780 | We talk about, again, companies being profit-seeking, and they're going to launch new supply.
00:04:39.420 | So you can see the scenario where inflation comes down to maybe 3.5%, 3% right back into
00:04:47.140 | that historical channel, and the upside of that channel is about 3.5%, 3.7%.
00:04:52.540 | And then you can see, as the economy improves and how inflation continues to stay higher
00:04:58.780 | than average, how the 10-year bond yield could creep up to maybe about 2%.
00:05:04.060 | This is what Wall Street economists and strategists have been forecasting for years and years
00:05:08.840 | and years.
00:05:10.260 | Not to great success, let's be frank, but that's what their jobs pay them to do, and
00:05:16.300 | so that's what they're going to do.
00:05:17.980 | And I don't have this job, but I'm telling you that inflation is likely going to come
00:05:21.700 | down and normalize, and the 10-year bond yield will probably creep up, but it's not going
00:05:26.060 | to creep up as high as you think.
00:05:27.900 | So let's say inflation rate at 3%, 10-year bond yield at 2%, this is 12 months from now,
00:05:34.300 | that still is a negative real yield, which means in this scenario that money is going
00:05:40.660 | to continue to flow to risk assets like stocks, real estate, cryptocurrencies, alternative
00:05:47.020 | investments, and so forth.
00:05:49.020 | So your goal, if you've been negatively affected by inflation, is to hold on and to adjust.
00:05:55.460 | Hold on for continued inflation in your investments, but adjust in terms of finding alternatives
00:06:01.340 | to save money.
00:06:02.780 | For example, food inflation may be up 5.3%, but are you going to let it get you down?
00:06:08.380 | No, you're going to find ways to consume less, buy more in bulk, and eat more leftovers to
00:06:15.580 | save.
00:06:16.580 | You can make it even a fun game where you try to intermittent fast or skip a meal as
00:06:21.340 | long as food inflation is above 3%, because it's not going to be at 5.3% forever, it's
00:06:27.180 | going to moderate.
00:06:28.400 | And who knows, during this time while you're playing your game and having a challenge,
00:06:32.420 | you might even lose some weight in the process.
00:06:33.940 | Hey, that's what I would do.
00:06:35.060 | I would happily lose 5 pounds, 10 pounds even.
00:06:38.220 | That'd be great.
00:06:39.540 | And yes, you could try and replace caloric intake with cheaper, unhealthier foods, which
00:06:45.100 | is what a lot of people say will happen.
00:06:48.020 | But why not turn a negative situation into a positive challenge?
00:06:51.980 | That is the financial samurai mindset.
00:06:54.300 | Always think about the opportunities that may arise from suboptimal situations.
00:06:58.820 | All right, folks, I hope you enjoyed this latest episode.
00:07:03.020 | I am going to be finishing up my book this month.
00:07:05.660 | I'm really excited.
00:07:06.660 | I've worked so, so hard on this book, but it's going to be great.
00:07:10.020 | And I think it's going to provide a lot of value.
00:07:12.580 | So by the end of this year, the editors will be done, the art will be in, the stories will
00:07:16.580 | be written, and things are going to be great.
00:07:19.380 | And I'll send you guys the link in the newsletter to pre-order.
00:07:22.660 | The URL is financialsamurai.com/newsletter if you want to sign up, and I'll talk to you
00:07:29.140 | all later.