Should_we_be_worried_about_inflation_
00:00:00.000 | Now everybody is Sam from financial samurai and I'm bringing another episode to you from my hot tub because otherwise
00:00:06.860 | I wouldn't be able to record these episodes because I'd probably just go crazy
00:00:10.620 | Writing and recording all day. I'm tired. I don't know about you guys, but mentally
00:00:16.600 | Exhausted and I'm looking forward to a better July. The stock market has been going backwards
00:00:23.800 | It's down about 8% from its June highs
00:00:26.700 | The real estate market it's still pretty strong below or at the median home price of your city or below
00:00:34.000 | When you get to about 50% above the median home price of your city
00:00:38.040 | That's when the real estate market is starting to slow down and you're seeing more price cuts
00:00:43.080 | Conversely, you're finding more deals
00:00:45.600 | So if you want to find more deals, you may have to look for the price point about 50%
00:00:50.920 | Higher than the median home price for your city now in this episode
00:00:55.180 | I want to talk about inflation because some of you have asked should we be concerned about inflation given that the Fed is
00:01:01.940 | Printing so much money pumping in so much money
00:01:04.580 | The government is doing all this stimulus to keep our economy afloat and the short answer is no
00:01:11.840 | I don't think we have to worry about inflation at all for the next 12 months
00:01:15.480 | Maybe 24 months and the reason why is simply that there are tens of millions of people unemployed
00:01:22.140 | And if you look at the US personal savings rate, it's skyrocketed to 33% in April and for May and June July
00:01:29.700 | I'm sure it's gonna be over 20%
00:01:31.700 | Because the economy is still not fully open and when you're uncertain about the future you tend to hoard cash
00:01:38.380 | And when you hoard cash, you're not buying things which means demand is down
00:01:43.460 | Which means pricing pressure is down. So instead of worrying about inflation
00:01:48.460 | We should really worry about deflation, but I'm not worried about deflation either because I think there's a right balance going on
00:01:55.240 | Where the government and the Fed are really pumping in dollars into the economy to keep us afloat
00:02:01.000 | And if you think about a deflation, it's not so bad if you are cashed up and you're looking to buy assets
00:02:08.260 | for example if there's deflation in
00:02:11.140 | Property prices. Well, that's a good thing in terms of affordability
00:02:15.660 | Especially with mortgage rates at all-time lows if there's deflation in
00:02:19.740 | College tuition prices, that's great because they shouldn't be going up so much anyway
00:02:26.300 | And they should be going down for once goodness gracious if campuses are closed
00:02:30.900 | Why are you still charging max tuition and you saw USC raised tuition by another 3% a year. I mean, that's ridiculous
00:02:37.340 | So if you're looking to spend money and you have to spend money
00:02:41.580 | Deflation is pretty reasonable. So long as there's no stagflation where there's deflation as well as stagnation
00:02:47.780 | Then it kind of gets tricky because hey
00:02:50.940 | There's deflation your income is probably gonna go down
00:02:54.620 | Your existing assets are probably gonna lose value and so forth and it's a it could be a death spiral
00:03:00.980 | That is hard to get out of without a lot of government intervention and then on the flip side if there is inflation
00:03:07.760 | Well your existing assets will by definition inflate with inflation over time or inflate faster than inflation
00:03:15.220 | So for example stocks real estate if you could buy
00:03:19.120 | Private universities and earn the tuition dollars. They're probably going to continue to outperform
00:03:25.780 | Inflation inflation is that you should look at the Treasury bond market
00:03:31.380 | Bonds are all about inflation. They're predictors of inflation. They trade based off inflation assumptions
00:03:38.080 | and if you look back towards the late
00:03:40.900 | 1980s you can see the 10-year Treasury bond yield peak and
00:03:46.060 | Gradually go down for the next 30 plus years
00:03:50.720 | And that is a signal that inflation at least here in the United States is
00:03:55.480 | Under control because everything is relative when it comes to investing in bonds and investing in stocks
00:04:00.660 | But more specifically bonds because the yield that a bond pays
00:04:05.320 | Let's say it's 3% is all related to inflation and what the opportunity cost is
00:04:11.980 | Owning the bond and owning something else. So if the bond yield is 3%
00:04:17.120 | Well inflation is probably around
00:04:20.840 | 2% or 2 and a half percent because the bond yield needs to pay a higher rate of
00:04:27.520 | Inflation for an investor to own that bond. Otherwise, why would you bother right?
00:04:32.100 | It's called the risk premium the risk premium to own stocks or the risk premium to own bonds
00:04:38.940 | So let's say the bond yield declines to 2%
00:04:42.280 | Well, you can kind of guess that inflation is probably lower as well
00:04:45.940 | Inflation is probably below 2% Maybe it's 1% or 1.5%
00:04:50.300 | So that spread is the risk premium the bond risk premium you can say
00:04:55.900 | Because you need to be paid a little bit more in
00:04:58.660 | Interest to hold the bond for the risk of the bond not paying you back. So when it comes to US Treasuries
00:05:05.660 | Well, it's a sovereign as it can get the US Treasury bond market will pay you back
00:05:11.360 | and if it doesn't pay you back
00:05:12.660 | we've got bigger problems to deal with and you can move along the risk curve in the bond market and go from US Treasuries to
00:05:21.380 | Municipal bonds which are still very low risk to corporate bonds to junk bonds, right?
00:05:27.380 | And so as you move along the risk curve, these bonds will pay higher and higher yields
00:05:33.420 | But then there's higher and higher risk
00:05:35.820 | That the entity won't pay you back or won't pay you back in full after the duration is over
00:05:42.220 | So the US Treasury bond market is a great
00:05:45.020 | indicator of inflation and right now with the 10-year bond yield something at around
00:05:51.060 | 0.65%
00:05:51.940 | I mean that's close to an all-time low it is signaling to the world to investors or to anybody paying attention
00:05:58.660 | That there is no inflation on the horizon
00:06:02.180 | So ten years you can only earn point six five percent a year in other words
00:06:08.340 | Inflation is probably no more than zero point six five percent or it's probably a little bit less
00:06:15.540 | Now, of course many investors are hiding out in the US Treasury bond market for safety reasons because stocks
00:06:22.580 | Well, frankly are very very volatile right now and there's just a lot of uncertainty and so investors are saying well
00:06:28.980 | Might as well have a little bit more certainty actually a lot more certainty in the US Treasury bond market and earn hardly anything
00:06:36.100 | Then risk losing money in the stock market
00:06:39.580 | The stock market has had a great rebound a great run since its March 23rd
00:06:45.340 | 2020 lows and I personally believe we're probably going to be range bound over the next six months
00:06:52.260 | So we're talking maybe
00:06:54.260 | 2700 to 3,250 on the SP 500
00:06:58.900 | I think there's a 70% chance that we're gonna trade in this range until there's a vaccine as a result
00:07:04.900 | I don't think anybody should be anxious or feeling that FOMO
00:07:09.540 | That they're gonna miss out on some great investment instead
00:07:13.060 | I think it's perfectly fine to stack cash to save as much cash as possible
00:07:18.060 | And if you haven't done a cash audit yet
00:07:20.420 | Go through all your various accounts and add up how much cash you have in each account
00:07:25.780 | I think you'll feel much better if you do that and also shoot to have a cash target goal
00:07:30.960 | You know by quarter or by the end of the year or by this time next year
00:07:35.180 | Having these cash savings goals will motivate you to save more and also make you feel better about an uncertain time period
00:07:42.980 | There are clearly gonna be winners and losers during any year, especially a year with so much market dislocation
00:07:49.220 | It's up to us to be diligent to do our research to find those winners to plan ahead
00:07:55.860 | I personally I'm not really excited to put new money to work in the stock market when the SP 500 is over 3,000
00:08:03.420 | Yeah, I could go to 3,200 maybe 3,300 and hit all-time highs
00:08:07.900 | But I just don't see that happening so soon with all that's going on
00:08:13.460 | so instead I'm just gonna continue to look for real estate deals because
00:08:17.460 | Inflation is low, which means mortgage rates are low and there are deals to be had on the higher end of the price curve
00:08:25.100 | Further I think all of us should be thinking about ways in finding ways to make more money at home
00:08:31.940 | Finding a permanent solution to make more money at home
00:08:34.980 | And I've been making money technically at home since my first five cent Google Adsense check came in in 2009
00:08:42.380 | And so I'm probably gonna write about this in the near near future and talk about this, of course
00:08:47.660 | All right, folks
00:08:49.020 | I'm gonna wrap things up and turn on the Jets and turn on the bubbles if you like this podcast
00:08:54.100 | I'd love a positive review the positive review will keep my podcast going
00:08:59.740 | In fact, I think I might wait to record another episode until I can get 200 reviews. Hopefully all positive right now
00:09:07.580 | I think there are about 186 or so reviews on iTunes. So the more the merrier
00:09:11.940 | I think this is a way to pace myself and to shoot for new goals and barometers and you've got to find a way to
00:09:17.380 | Pace yourself as well. The name of the game right now is survival
00:09:20.980 | Forget about trying to outperform constantly and be just a hero and everything you do, you know
00:09:27.060 | We're going to the fourth month of sheltering in place who knows exactly what will happen in the future
00:09:31.900 | But I think if we can survive and survive some more we're gonna come out of this. Okay
00:09:37.700 | Thanks so much everyone for your support. I'll talk to you guys later