The latest news and articles from Financial Poise, plus a new free webinar every week.
The Federal Reserve raised short-term interest rates for the first time since 2018, by .25% yesterday, in its effort to fight inflation. No surprise there (which is why the stock market did not react worse than it did).
We’ve been predicting a period of increasing inflation for over a year now (see our November 11, 2021 edition, referencing other past issues since March 11, 2021, if you don’t believe us).
One key reason for higher inflation remains the havoc that COVID wreaked on the global supply chain, one result of which is that a lot of shipping moved from sea to land. And a lot of that overland travel was through Russia.
Russia’s invasion of Ukraine doesn’t exactly bode well for that. Eh? And speaking of COVID, it ain’t over till it’s over... Did you know that China has imposed new lockdowns to fight the worst surge of COVID infections since early 2020? It’s true. Read more in this article from Tuesday’s New York Times by Keith Bradsher. And, yes, the lockdowns include the huge tech hub of Shenzhen, which is also home to one of the largest container ports in the world.
Another key reason for inflation has nothing to do with Russia or China, or the supply chain. Rather, it’s a known side effect of the medicine the U.S. Government gave to all of us earlier in the Pandemic. We’re talking about the nearly $1.9 trillion relief package that Congress enacted about a year ago. The Wall Street Journal published an article on March 10, 2021 that said, in part, that the relief package will “help propel the U.S. economy to its fastest annual growth in nearly four decades, reduce poverty and revive inflation.” The next day, we advised our readers to “take heed of that bit about rising inflation when deploying your investment capital.”
The Fed also signaled yesterday that up to six more rate hikes are likely in 2022. This was not surprising, either. It’s just not possible to inject nearly $2 trillion into the economy without inflation happening as a result. As Bankrate chief financial analyst Greg McBride said yesterday, “[b]y raising interest rates, the Federal Reserve has begun the process of unwinding their pandemic-era stimulus measures in an effort to tame inflation. This isn’t a one-and-done but the start of a series of rate hikes for the remainder of this year and well into next.”
So, how does one invest when inflation is high and expected to go higher? Real estate is generally considered a good hedge against inflation. As pointed out by Joshua Olshin in his recent article, Real Estate as an Inflation Hedge? Bidders Beware!, “[t]he basic hypothesis is that real estate should be a great haven during high inflationary times because it uniquely combines increasing income, appreciating value, and depreciating debt. Plus, one gets an added bump from the ‘psychology of the crowd.’” Read the article. It’s elucidating.
Confused? If you read the above and don’t understand it, then let us try it this way:
Inflation measures how much $1 can buy. In 2020, assume $1 could buy ten widgets and assume that today $1 can buy only eight widgets. That’s inflation in action.
What causes such a price increase? If the supply of widgets goes down, the price is more likely to go up. Even if the supply does not go down but the widgets cannot get to you from where they are made (say because the global supply chain is messed up), then the fewer widgets that make it to near where you are will be likely to be more expensive (assuming demand for them has not gone down). Why? Because the potential buyers will be more likely to bid up the price to get some of the limited supply. And if all of a sudden the Government decides to give everyone lots of money, then such potential buyers will have more money with which to bid the price of widgets (and everything else) up.