Hello everybody, it's Sam from Financial Samurai. And in this episode, I want to talk about inflation and the future of inflation and why things should be okay. Don't panic. I think things will be all right. The US Bureau of Labor Statistics reported prices have gone up 6.2%, which was the highest annual increase since 1990.

People are pissed off because meat is up 20% in terms of prices. Gas prices are up 50% from 2020. And people are just flustered. So you see that being reflected in the presidential rating and also the vice president rating. People don't find Biden and Kamala Harris to be doing a good job.

And so President Biden has said he's going to make it one of his missions to get prices back down. And the reality is, prices will come down, folks. And do you know why? Well, it's because we live in a capitalist society where we all want to make more money.

And so when prices are high, what happens? Supply increases, right? Because if you're a company, you are going to try to capture that excess profit margin by producing more goods. But there's always this whiplash. It's called a bullwhip effect, where you recognize prices are high, and then it takes a while to ramp up production.

And then by the time you ramp up production, everybody else and every other company is ramping up production. And then there becomes excess supply, and then prices actually crash. So we're right now in the thick of inflation frenzy, and people are upset about paying way more money at the pump and at the grocery store.

But we should be thinking forward over the next 12 months about a potential excess supply scenario where prices crash. So we've talked about this with housing market, for example, many of the Texas City housing markets like Austin have upcoming supply. That supply is coming and prices are up massively, right?

So I would be a little bit careful about buying real estate or investing real estate in Texas cities. On the flip side, I want to look for cities where prices haven't increased as much and have really restrictive supply. So a lot of people here in San Francisco complain about government bureaucracy, bloated budget, inefficiency, corruption, and so forth.

But as an investor, you got to think, well, actually, that's pretty good, because all that stuff really slows down the process of creating more homes. And that's good for pricing. So you always got to think yin yang when it comes to finance. And as a financial samurai reader and podcast listener, you should think about inflation also as a positive, because you own real assets.

You own stocks, you own real estate, you own other assets that benefit from inflation, because these assets are part of the inflation index. So if prices are going up, inflation is going up, that means your assets are going up as well. And frankly, stocks, real estate, and other assets have gone up much higher than the stated inflation rate.

The S&P 500 is up around 25% so far year to date. So 6.2% inflation, you're still way winning. You're really winning on a real level. The median national home price is up something like 15% to 17%. So again, you're winning. You're real winning. And the thing to think about is what's next.

So you want to compare the inflation rate, which came in at 6.22%, which is the highest in 30 years, to where the 10-year bond yield, which is at about 1.6%. In other words, the real yield for the 10-year bond yield is temporarily negative 4.6%. 1.6% minus 6.22%, negative 4.6%.

So as an investor, you think, "Well, why the hell would I buy a 10-year bond yield yielding a real negative 4.6%?" I wouldn't. Most people wouldn't. So they would put that capital in more risky assets to try to hopefully earn a greater real return. Now thinking about the future, and if you look at the historical inflation numbers, it ranges since, let's say, 2012 between a low of about 1% to a high of about 3.8% to now 6.22%.

So rationally, you can think, "Well, inflation will probably moderate over the next 12 to 18 months because supply chain issues will be figured out." We talk about, again, companies being profit-seeking, and they're going to launch new supply. So you can see the scenario where inflation comes down to maybe 3.5%, 3% right back into that historical channel, and the upside of that channel is about 3.5%, 3.7%.

And then you can see, as the economy improves and how inflation continues to stay higher than average, how the 10-year bond yield could creep up to maybe about 2%. This is what Wall Street economists and strategists have been forecasting for years and years and years. Not to great success, let's be frank, but that's what their jobs pay them to do, and so that's what they're going to do.

And I don't have this job, but I'm telling you that inflation is likely going to come down and normalize, and the 10-year bond yield will probably creep up, but it's not going to creep up as high as you think. So let's say inflation rate at 3%, 10-year bond yield at 2%, this is 12 months from now, that still is a negative real yield, which means in this scenario that money is going to continue to flow to risk assets like stocks, real estate, cryptocurrencies, alternative investments, and so forth.

So your goal, if you've been negatively affected by inflation, is to hold on and to adjust. Hold on for continued inflation in your investments, but adjust in terms of finding alternatives to save money. For example, food inflation may be up 5.3%, but are you going to let it get you down?

No, you're going to find ways to consume less, buy more in bulk, and eat more leftovers to save. You can make it even a fun game where you try to intermittent fast or skip a meal as long as food inflation is above 3%, because it's not going to be at 5.3% forever, it's going to moderate.

And who knows, during this time while you're playing your game and having a challenge, you might even lose some weight in the process. Hey, that's what I would do. I would happily lose 5 pounds, 10 pounds even. That'd be great. And yes, you could try and replace caloric intake with cheaper, unhealthier foods, which is what a lot of people say will happen.

But why not turn a negative situation into a positive challenge? That is the financial samurai mindset. Always think about the opportunities that may arise from suboptimal situations. All right, folks, I hope you enjoyed this latest episode. I am going to be finishing up my book this month. I'm really excited.

I've worked so, so hard on this book, but it's going to be great. And I think it's going to provide a lot of value. So by the end of this year, the editors will be done, the art will be in, the stories will be written, and things are going to be great.

And I'll send you guys the link in the newsletter to pre-order. The URL is financialsamurai.com/newsletter if you want to sign up, and I'll talk to you all later.