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This morning, we learned that March’s U.S. consumer prices rose for the fourth straight month. Meanwhile, the pace of inflation notched its highest level in 2½ years. It’s an appropriate introduction to today’s special Digest, which features an essay from our CEO, Brian Hunt. Even though inflation is back on the radar, we’re being told that, on-the-whole, it’s mild. The Fed says any uptick we see will be transitory. In essence, the message is “don’t worry, this isn’t a big deal.” But for many mid-to-upper class Americans, this has been a big deal for a while now. From Brian’s essay below:
As Brian explains, for most investors reading this, inflation has already ramped-up all sorts of prices in recent years. The result is many supposed “wealthy” people are running as fast as they can, yet barely staying in place. In today’s must-read Digest, Brian pulls back the curtain on what’s really been happening with inflation and points toward how you can help safeguard the purchasing power of your wealth in the years to come. I’ll let him take it from here. Have a good evening, Jeff Remsburg |
Is Inflation a Problem in America? Not Yet, Unless You’re Wealthy
By Brian Hunt, InvestorPlace CEO
In the wake of the Great Financial Crisis of 2008, the U.S. government launched one of the largest stimulus packages in our country’s history.
When it was all said and done, the government spent a total of $2.8 trillion on stimulus and housing crisis relief. All in an effort to prop up industries, save jobs, and get people spending again.
That huge sum now seems small when we talk about government stimulus related to the Covid-19 pandemic. As I write in April 2021, Uncle Sam is on the hook for at least $5 trillion in spending. Trillions more will likely follow. It’s the largest spending program relative to the size of our economy since World War II.
As these spending programs rolled out over the past decade, scores of financial experts predicted the return of painful inflation.
After all, as the supply of money increases, so should prices, right?
Yet, conventional inflation has failed to materialize in the U.S. According to the government’s CPI statistics, inflation has increased at around 1.77% per year since 2010, which is substantially lower than the long term U.S. average of 3.1% per year.
But are we looking at the right numbers?
It’s easy to make the case that we are not. At least the wealthy aren’t.
History shows wealthy people spend their earnings differently than those with lower-incomes. For example, wealthy people tend to spend a smaller percentage of their income on gasoline than low income Americans do. The opposite is true for education (lower income earners spend less on it).
The wealthy also spend far more on financial services – like insurance and pensions – than low income earners. The wealthy are much more likely to use their earnings to accumulate investments in real estate and businesses (often purchased in the form of stocks).
When you take the differences in financial habits into account, a different “cost of living” picture emerges than the one people paint while quoting the government’s sub-2% annual consumer price inflation figures.
This picture shows inflation is here. It shows many supposed “wealthy” people are running as fast as they can just to stay in place.
We know the wealthy often own businesses and employ many people. The price of the business world’s building blocks has skyrocketed. The price of corporate assets – as measured by the benchmark S&P 500 index – has climbed 123% since 2014. This is another way of saying one dollar earmarked for the purchase of corporate assets in 2014 is worth about half as much today.
Or, take another area of major spending for the wealthy: Education.
Over the past decade, the cost of a public college education climbed 29.8%. The cost of a private college education climbed 25%. This is another way of saying one dollar earmarked for education is worth 25% – 30% less than it was in 2010.
Then you have the soaring cost of medical care. After all, what good is money if you’re not healthy enough to enjoy it? The cost of medical care (for people at all income levels) has soared 25% since 2012. That’s more devaluation of the money you socked away eight years ago.
Then you have homes. According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, home prices in America have climbed 58% since 2013. Yet more devaluation of your savings, manifested in higher prices.
That’s not to say we should feel sorry for the wealthy. Of course, it’s better to be wealthy than not. But let’s not kid ourselves about inflation, and how it affects people with $250,000 – $5 million in assets. These people help form the backbone of our economy. These people are not taking private jets to watch the Super Bowl in luxury suites. They are small business owners, dentists, doctors, teachers, firefighters, engineers, contractors, sales reps, pilots, and business managers. They have studied, worked hard, and saved. And the cost to live the life they want is soaring. Tell two mid-to-upper class parents working their tails off to provide their three kids with a good start in life that their cost of living is rising at just 1.77% a year. They will either laugh or curse you out of the room.
Thanks to the ever increasing costs of housing, education, medical care, and business assets, many families with $250,000 – $5 million in assets – the supposed “wealthy” – are working harder than ever to maintain their standard of living.
Since 2010, the Federal Reserve’s balance sheet (aka the money supply) has exploded by more than 200%. However, this huge increase in the money supply hasn’t caused conventional inflation because of a lack of something called “monetary velocity.” The Fed is getting money into banks, but all that money isn’t getting into the hands of regular people.
Instead, it has found its way into stocks, homes, the price of college, and many other things wealthy people tend to buy. Inflation for low income earners may be mild, but for higher earners it is raging.
To get an idea of how the cost of living is rising for relatively wealthy people, our firm constructed a proprietary price index for high earners. We placed heavy weightings on homes, tuition, medical care, food, transportation, and – this is key – business assets.
The government’s CPI calculations do not include businesses asset costs. It focuses on consumer prices. But we believe a useful measure of inflation for the relatively wealthy must include the price of the building blocks of capitalism. After all, starting, building, and/or owning businesses is how most people get and stay wealthy the first place.
Our rate of “inflation for the wealthy” (graphed below) shows their earnings and savings are losing purchasing power at a rate of 5% year.
When I show this chart to people, I often see a powerful thought register on their faces: It graphically represents a strong feeling many of us have: Counter to what our government says, the price of living the life we want is soaring… and the value of our money is going down. Losing your purchasing power at a rate of 5% per year makes it so every $1 of savings is worth just $0.66 after eight years (a 33.6% loss in purchasing power).
The next time you see a chart of stocks, homes, or tuition going from the lower left to the upper right, keep in mind that chart also shows the value of your earnings and savings going down. As the price of something increases, your ability to buy a unit of that something decreases.
The proponents of enormous government spending, borrowing, and money printing like to point out that the significant outlays of the past decade are not producing currency debasement, also known as inflation. The soaring prices of the things many of us buy in volume say otherwise.
If there’s one thing both political parties can agree on, it’s that their re-election chances are improved by a firm commitment to more government spending, more borrowing, and more money printing. And since the ideas in this essay don’t get traction in the mainstream press, the widespread belief that inflation is not a problem gives Washington political cover to spend without serious consequences.
Given this outlook, the investment implications for the relatively wealthy are clear: Avoid holding cash over the long-term. A large sum of cash held for years in the bank will prove to be a melting ice cube.
Instead of holding cash over the long-term, own shares of businesses (public or private) and real estate. We expect them to hold their value over the next decade just as they did over the previous one. We expect cryptocurrencies like Bitcoin will continue to be a good defense against currency debasement. And while gold hasn’t done much in the past year, we still like its prospects as a hedge against currency debasement. Call us old fashioned.
The trend driving the dollar’s devaluation is extremely unlikely to stop. The value of our money is going down. The relatively wealthy would do well to act on the facts in this essay, which put a point on what we intuitively know.
Regards,
Brian
CEO, InvestorPlace
