Real wages are dropping consistently … how do you fight inflation if you can’t afford hard assets like real estate? … a special event this Wednesday with some answers

Main Street Americans are about to get very familiar with the concept of “real” returns.

“Nominal” returns are usually what’s quoted to us – “that bond has a 5% yield” … “that CD is paying 2.75%” … “that dividend is 3.5%.”

But nominal figures only tell us the “headline” return. They don’t reveal the actual “purchasing power” return. In other words, the buying strength.

The missing ingredient is inflation.

When we take the nominal return then subtract the rate of inflation, that leaves us with a “real” return. And when it comes to your family’s budget, this is the only thing that matters.

Case in point: Would you rather have your money earning a healthy 7% return in an ultra-high-yield money market account, but the inflation rate is 8%…

Or would you prefer your money earns a meager 1.5% return, but inflation is running at just 1%?

Option A, the real return is a wealth-eroding -1%.

Option B, you’re on the plus side by 0.5%. It’s not much, but at least you’re not getting poorer.

For months now, the average American has been getting poorer.

***The typical U.S. wage earner has lost money to inflation 10 times over the last 14 months

Last week, we learned that U.S. consumer prices jumped 7.9% year-over-year. That’s the worst inflation in 40 years.

Of course, we’ve been struggling with inflation for many months. And to the point above, it’s been making most Americans poorer.

Here’s how that looks. Below, you can see real wages falling in 10 of the prior 14 months.

 

Our latest data come from February. Last month, for all workers, inflation-adjusted wages declined nearly 0.8%. And over the past year, real wages are down 2.58%.

Unfortunately, if Secretary of the Treasury Janet Yellen is right, don’t expect things to get better anytime soon.

Here’s Yellen from last Thursday’s interview with CNBC:

I don’t want to make a prediction exactly as to what’s going to happen in the second half of the year.

We’re likely to see another year in which 12-month inflation numbers remain very uncomfortably high.

 

***Historically, one of the best ways to preserve your wealth was though your home

For most people, their home mortgage basically serves as a massive, long-term piggybank.

Historically, Americans haven’t earned huge inflation-adjusted returns from their primary homes. In fact, over the last 100 years, housing prices have averaged out to be basically flat after adjusting for inflation.

However, because you’re, in effect, paying yourself with a mortgage, home ownership has still been a great way for Americans to offset inflation and keep their buying power steady – especially when compared to renting, in which your money just goes out the window and you never see it again.

Unfortunately, many Main Street Americans have been getting priced out of home ownership.

From The Wall Street Journal, last fall:

The dream of homeownership has grown more out of reach for middle-class Americans during the pandemic.

The surge in home prices and sharp decline in the number of homes for sale have made home buying more difficult for many Americans compared with two years ago, according to a study from the National Association of Realtors released Monday.

At the end of last year, there were about 411,000 fewer homes on the market that were considered affordable for households earning between $75,000 and $100,000 than before the pandemic, the study found.

At the end of 2019, there was one available listing that was affordable for every 24 households in this income bracket. By December 2021, the figure was one listing for every 65 households.

Homeownership is only getting more challenging as interest rates rise.

The average 30-year mortgage rate has now pushed north through 4%. This higher debt service cost will make being a homeowner even further out of reach for the average American.

***Meanwhile, those fortunate enough to be homeowners have been watching the value of their real estate surge

Even though average 100-year real returns are flat, that doesn’t mean there aren’t periods in which home prices can soar above the inflation rate.

We’re in one such period today.

For example, I live in Los Angeles. This past January, the average home price was up 10.9% in one year, putting the median home price at $915,000 – far beyond the budget of most Americans.

Anecdotally, I’ve heard from friends that they’ve ballparked the on-paper gains from their homes at anywhere between $200,000 to upwards of $750,000 – this is in just 12-18 months.

So, what’s the result of this?

Well, it exacerbates the growing wealth gap in our nation.

The reality is that if you own quality assets today, you can ride them higher on the wave of our nosebleed inflation rate. Imagine an inflatable beach ball cresting atop a rising surf.

But if you don’t have assets, that same inflation wave threatens to crash over your head, as your net worth in dollars has you anchored to the ground.

***So, if you’re priced out of today’s real estate market, and watching your paycheck lose its purchasing power month after month, how do you protect yourself against inflation?

Historically, the go-to has been stocks.

After all, even lower-income Americans can put money (albeit, perhaps modest amounts) into the stock market. Especially given that nearly all brokerages now offer commission-free trading.

Plus, whereas the long-term average real return on a home is flat, the average annual inflation-adjusted return of the S&P 500 is 5.4% (that’s over the past 50 years).

But if we zero in on stocks, then we run into the reality of investing in the market today, in the midst of geopolitical chaos, a bear market in the Nasdaq, and corrections in the Dow and S&P 500.

How do you thread the needle between aligning your wealth with an asset that can grow to offset inflation, while avoiding what could be deteriorating stock market conditions?

***The first thing is recognizing that “the market” is not some grand monolith that rises and falls in unison

It’s comprised of thousands of individuals stocks that climb or fall based in all sorts of market conditions.

For example, in our Sunday Digest, Louis Navellier highlighted grocery retailer, Kroger (KR).

As you can see below, Kroger is up 25% on the year. Arbitrarily, we compare that to former-high-flying stock Meta (formerly Facebook), which is down 44% on the year.

The issue with stocks always reduces to the core question of “well, which stock?”

With that in mind, put this Wednesday at 4 PM ET on your calendar.

Veteran investors Eric Fry and Louis Navellier will be hosting an important, live event they’re calling Tech Crisis 2022.

Eric and Louis know that stock investors face more questions than answers today:

• Do you sell and go to cash?
• Do you jump in and buy these lower prices?
• Do you take profits in stocks that are up, cut losses in stocks that are down, or both?
• Or do you just sit tight and do nothing at all?

On Wednesday, these experts will offer their perspective. They’ll be detailing the big events, trends and opportunities that will define the markets in the next 12 months… how you can leverage this info to not only outpace inflation, but potentially beat the S&P 500 by 10X… and most importantly, what you should be doing with your money right now.

It’s a free event; just click here to reserve your seat.

Inflation could be here for far longer than we want. It’s time to gameplan how you’re going to tackle this problem.

Have a good evening,

Jeff Remsburg