The Crushing Weight Of Inflation
The "As A Matter Of Policy" post that I really wanted to (needed to) write has escaped me! Well, not really. I drafted the damn thing during the infamous power outtage or outage, so when we had our "onage" or power restoration, I wanted to refer to the draft, rather than recall my thoughts etc.
Anyway, here is a treat for a college chum who resides in NJ. A few months ago we were talking about bonds as a tool within the portfolio. I am a contributing editor (probably not doing a good job either) for an international journal. Don't try to find out who I am, because it won't work. Anyway, here is small piece on inflation I dispatched a few weeks ago. It was very brief, but I thought it put into perspective what inflation can do to us and how it really is starting to impact everyone. You have an advanced copy of the article! It is not technical or sophisticated, so don't worry. [ It was written in early July ]
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As a kid growing up in the early 1970s, the word "inflation" meant one thing to me: images of long gas lines on television. I grew up in a blue collar neighborhood. Therefore, inflation also meant, quite accurately, that prices in general could go up over time. During this period, prices of a very dear commodity were going up and up.
Today, some of us are experiencing inflationary pressures at the gas pump. I write, "some of us", because there are a few analysts out there who still believe that the consumer is so resilient that $3-$4/gal gasoline prices do not affect them. It is true that at $3, $4, and even $5 a gallon, we will find a way to pay, because we must drive. But it is equally true that something will suffer. The traffic in the malls will slow. And it is even possible that other sectors of the economy will cave in, because the consumer will finally give in to the crushing weight of inflation.
In any event, we are making sacrifices. My family is making sacrifices. (Darn, I had to cut back on my $3 latte’!) Over the past few years, Americans have been paring back on purchasing huge suvs and trucks. The Wall Street Journal recently reported that Starbucks had a "slight miss in its June sales performance". Yes, Starbucks! At the very least, inflation causes consumers to be aware of their purchases. It may take sometime before it happens, but when it does happen, the retail sector will feel it. When Starbucks starts to take a little hit, then inflation is making it way through the economy for sure.
The Federal Reserve met in June and raised the Federal Funds rate to 5.25%. Based on the trend of oil prices, the economic growth rate and the language in the FOMC minutes, it would appear that there may be some easing when the Fed meets again in August. I believe that the FOMC is hoping high oil prices will act as a real hedge against inflation so that they won’t have to raise interest rates again. There are already too many rate hikes in the system. One more rate hike, along with $80/bbl oil and you have a recipe for disaster.
Inflation, as you know, erodes purchasing power. In its most graphic form, we are seeing it at the gas pumps. I reject the notion that the consumer has been resilient. The American consumer was never really resilient. The American consumer was basically using borrowed equity from the dramatic appreciation of their homes to fuel the economy which gave a false sense of being "resilient". And now, with the adjustments of interest rates, home equity loans and other sophisticated mortgage notes coming due, many consumers are over leveraged and need to cut back on discretionary spending.
I believe that crude oil will head north of $80 a barrel by 2007. We are now into the hurricane season. We are at the beginning of what appears to be an interesting, if not, complicated conflict with North Korea. Oil is not an infinite resource. There is a shortage. You cannot plant an oil seed.
As an investor, it is important that you continue to consult with your financial adviser. Make sure that you carefully evaluate your objectives, tolerance for risk and cash flow. If you are looking for growth/returns, then you want real total returns after taxes. Long-term investing is predicated on the assumption that you have a plan, an objective. Part of that plan is to stay ahead of inflation. If you are not staying ahead of inflation, you are not winning. You cannot do this with a portfolio full of bonds. (Of course if your objective is income, then that is a different discussion)
If you placed your money in the best 500 companies (S&P 500) as of this writing, you would be up a paltry 1.4% YTD. If you are sitting in cash, talk to your adviser about a CD ladder. There are CDs out there that can certainly get you more than 2%. They are FDIC insured, and you don’t have to lock them up forever! My wife and I recent bought a few CDs that are getting north of 5.00%!! Check out GMAC Bank. No kidding. You will want to read all of their disclosures and as usual, make sure you are aware of the tax consequences etc. Naturally, I am not advising you to buy CDs, but I just want to create some awareness.
Another possibility that could work for you, depending on your individual situation are dividend paying stocks. Many of these stocks pay dividends - it’s true! - even when gas prices are at $3/gal. Think income while you wait. More importantly, think return. If you own a dividend paying stock and reinvest the dividends, think about what that does to your return. I found one stock that pays a dividend yield of 9.75%! The latest dividend shareholders were collecting was around $0.40/share. (I'm not tellin'......)
*The opinions expressed in this article are not recommendations. The author is not advising the reader to buy or sell any specific security. Past performance is no guarantee of future results. Always consult with your financial advisor and tax accountant before making any decisions as it relates to your investments.
Anyway, here is a treat for a college chum who resides in NJ. A few months ago we were talking about bonds as a tool within the portfolio. I am a contributing editor (probably not doing a good job either) for an international journal. Don't try to find out who I am, because it won't work. Anyway, here is small piece on inflation I dispatched a few weeks ago. It was very brief, but I thought it put into perspective what inflation can do to us and how it really is starting to impact everyone. You have an advanced copy of the article! It is not technical or sophisticated, so don't worry. [ It was written in early July ]
-------------------------------------------------------------------------------------------
As a kid growing up in the early 1970s, the word "inflation" meant one thing to me: images of long gas lines on television. I grew up in a blue collar neighborhood. Therefore, inflation also meant, quite accurately, that prices in general could go up over time. During this period, prices of a very dear commodity were going up and up.
Today, some of us are experiencing inflationary pressures at the gas pump. I write, "some of us", because there are a few analysts out there who still believe that the consumer is so resilient that $3-$4/gal gasoline prices do not affect them. It is true that at $3, $4, and even $5 a gallon, we will find a way to pay, because we must drive. But it is equally true that something will suffer. The traffic in the malls will slow. And it is even possible that other sectors of the economy will cave in, because the consumer will finally give in to the crushing weight of inflation.
In any event, we are making sacrifices. My family is making sacrifices. (Darn, I had to cut back on my $3 latte’!) Over the past few years, Americans have been paring back on purchasing huge suvs and trucks. The Wall Street Journal recently reported that Starbucks had a "slight miss in its June sales performance". Yes, Starbucks! At the very least, inflation causes consumers to be aware of their purchases. It may take sometime before it happens, but when it does happen, the retail sector will feel it. When Starbucks starts to take a little hit, then inflation is making it way through the economy for sure.
The Federal Reserve met in June and raised the Federal Funds rate to 5.25%. Based on the trend of oil prices, the economic growth rate and the language in the FOMC minutes, it would appear that there may be some easing when the Fed meets again in August. I believe that the FOMC is hoping high oil prices will act as a real hedge against inflation so that they won’t have to raise interest rates again. There are already too many rate hikes in the system. One more rate hike, along with $80/bbl oil and you have a recipe for disaster.
Inflation, as you know, erodes purchasing power. In its most graphic form, we are seeing it at the gas pumps. I reject the notion that the consumer has been resilient. The American consumer was never really resilient. The American consumer was basically using borrowed equity from the dramatic appreciation of their homes to fuel the economy which gave a false sense of being "resilient". And now, with the adjustments of interest rates, home equity loans and other sophisticated mortgage notes coming due, many consumers are over leveraged and need to cut back on discretionary spending.
I believe that crude oil will head north of $80 a barrel by 2007. We are now into the hurricane season. We are at the beginning of what appears to be an interesting, if not, complicated conflict with North Korea. Oil is not an infinite resource. There is a shortage. You cannot plant an oil seed.
As an investor, it is important that you continue to consult with your financial adviser. Make sure that you carefully evaluate your objectives, tolerance for risk and cash flow. If you are looking for growth/returns, then you want real total returns after taxes. Long-term investing is predicated on the assumption that you have a plan, an objective. Part of that plan is to stay ahead of inflation. If you are not staying ahead of inflation, you are not winning. You cannot do this with a portfolio full of bonds. (Of course if your objective is income, then that is a different discussion)
If you placed your money in the best 500 companies (S&P 500) as of this writing, you would be up a paltry 1.4% YTD. If you are sitting in cash, talk to your adviser about a CD ladder. There are CDs out there that can certainly get you more than 2%. They are FDIC insured, and you don’t have to lock them up forever! My wife and I recent bought a few CDs that are getting north of 5.00%!! Check out GMAC Bank. No kidding. You will want to read all of their disclosures and as usual, make sure you are aware of the tax consequences etc. Naturally, I am not advising you to buy CDs, but I just want to create some awareness.
Another possibility that could work for you, depending on your individual situation are dividend paying stocks. Many of these stocks pay dividends - it’s true! - even when gas prices are at $3/gal. Think income while you wait. More importantly, think return. If you own a dividend paying stock and reinvest the dividends, think about what that does to your return. I found one stock that pays a dividend yield of 9.75%! The latest dividend shareholders were collecting was around $0.40/share. (I'm not tellin'......)
*The opinions expressed in this article are not recommendations. The author is not advising the reader to buy or sell any specific security. Past performance is no guarantee of future results. Always consult with your financial advisor and tax accountant before making any decisions as it relates to your investments.
posted by Blueshift2 at
Wednesday, July 26, 2006
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