To those of us who eat, drink (yes beer and wine included), drive and turn on the heat, prices have been going up. Of course my running joke on my radio show is that no one in government or over at the Federal Reserve, which includes Janet Yellen, must do any of these because they keep saying there is no inflation.
That’s because their favorite gauge for inflation is the Personal Consumption Expenditures (PCE) Price Index which measure a basket of goods but makes adjustments for spending habits such as people substituting one good for another if the price rises to high or for seasonal factors. Up until 2000, The Fed focused on the CPI (Consumer Price Index), but changed it to PCE inflation.
This helps those that have rising wages to cover the extra costs but hurts those on a fixed income, such as those who are retiring or already retired. Unfortunately for us, our nation’s demographics are such that an overwhelming portion of our population is in or approaching those golden years faster than young people are entering the workforce.
This retirement crises is a serious issue that all of us need to address and one that I discuss at length in Facing Goliath – How to Triumph in the Dangerous Market Ahead. The reality is that over the next decade, more than 10,000 Americans a day are turning 65 years old. Therefore we had better understand what type of economy we are in and what our investments need to do about it in order to pay for the lifestyle we want. Prepare your portfolio properly, and you’re flying first class to see the grand kids. Do it wrong and you’re taking the bus!
We are all aware of inflation. For the record, Inflation is simply the general increase in the level of prices. Put another way, inflation causes the purchasing power of the currency to decline. That’s what all of us are used to and inbred in us to think that’s what we always have.
The reality is that for the last 6 years we have had Deflation and or Disinflation. We had a brief bout of deflation in 2008, which was quickly overcome with the Fed’s stimulus and Quantitative Easing programs. Before this we haven’t had deflation in the U.S. since the 1930s, which is the general decline in the prices. It may sound attractive, but consistently falling prices leads to declining wages which diminishes consumer demand. Keep in mind that debt levels would remain steady, so falling wages will lead to increased defaults. This then leads to consumers delaying purchases, anticipating lower prices tomorrow for everything, a frightening prospect for the Federal Reserve!
“The [FOMC] recognizes that inflation persistently below its 2% objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.”
Don’t confuse Deflation with Disinflation
In a disinflationary situation, prices are slowly rising, but below target. This creates the threat of falling into a deflationary environment, which is enemy #1 for a capitalist economy. Currently we are in a disinflationary situation. If it looks like we’ll fall back into deflation, expect to see more QE programs.
Understanding what’s going on in the economy from the top down is a the critical first step for successful investing. This economy and market is the most difficult I’ve seen in the 30 years I’ve been in this business and chasing returns with unnecessary risk can derail your retirement hopes and dreams. Investing to get the returns you need but with the least risk possible is easier said than down. That’s why it’s so important to graduate to a qualified retirement advisor as you plan for retirement or whether you are already there. Money sitting in the bank earning nothing can hurt you just as much as losing it by taking too much risk. Either way, you can’t replace this money.
…… and that’s where we can help. To learn more about The Springer investment approach, which is our powerful proprietary Investment Management Strategy designed to manage risk and deliver returns in any market…and/or get a free second opinion on your portfolio, simply reply to this email, or give me a call for a no-cost no-obligation consultation today at (916) 925-8900