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Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... Inflation is here.
You can see it everywhere you spend, whether food, travel, or used cars. Nobody is immune.
In normal times, you assume a dollar roughly holds its value. Prices generally rise, but slowly enough that it doesn't change your decision framework.
But recent inflation has risen so dramatically that it turns traditional investment strategy rules on their head (epochal change). Strong inflation means the Fed has to change policy direction to fight it. They now must tighten policy rather than loosen to stimulate economic growth. The Fed policy of the last 40 years was managed in a deflationary backdrop, but the backdrop now is inflation so that changes all of the rules. Strong inflation changes valid investment strategy because stocks and bonds can correlate to the downside thus removing the diversification benefit of traditional risk management. You need different risk management rules to control portfolio losses (see this investment resource for a smart solution). Stocks tend to perform poorly during inflationary periods, which is counterintuitive to most investor's expectations. And surprisingly, the greatest source of return for real estate can be the mortgage debt declining in real purchasing power terms because it creates a synthetic short on the depreciating currency. Inflation is such a deceptive game-changer that you can now profit from your portfolio growing in nominal value while owing taxes on those fat gains; yet, the purchasing power of your portfolio declines in real terms so your actually losing money while paying taxes for the privilege. Just to be clear, inflation isn't the only reason we've entered a period of epochal change, nor is it the most important reason, but it's certainly significant enough to merit deeper understanding.
Today's resource provides you with a deep dive into "The Taylor Rule" and implied Fed policy to show how mind-numbingly behind the curve the Fed is in fighting the current inflation. The result is negative interest rates, which has serious investment and retirement planning implications.
As the article points out, normal times would command that interest rates be pushing the teens to properly combat the already existing, proven inflation problem we face. That's not a misprint - the teens!
The inflation we have today is far worse for anyone building wealth than the last bout our country faced in the 1970s-1980s because real interest rates are horribly negative.
But it gets worse because the Fed has a serious problem it didn't have back then. They are stuck between a rock and hard place because they desperately need to raise interest rates dramatically and remove liquidity from the system to fight the inflation problem.
But the Fed can't do what they're supposed to do because two decades of artificially low interest rates has created a debt bubble at every level of the economy - consumer, corporate, and government. No such debt bubble existed during the last round of inflation so the choices are far more difficult now.
What that means is if they raise interest rates as required to fight inflation, then they'll convert the current liquidity problem into a much larger solvency problem debt collapse that would negatively impact every asset class from stocks to bonds to real estate.
But it keeps getting worse because they can't openly allow a large scale market decline either because it would result in an underfunded pension crisis as asset values declined, and our government is the guarantor of last resort for all of those underfunded pension liabilities.
The numbers are simply unmanageable. One path leads to an inflationary problem that's destructive to all wealth and society, and the other path leads to a solvency fueled asset collapse.
There are no good choices. And all of them lead to epochal change.
So analyze today's resource for what it tells you. And then remember the above explanation for the much bigger picture this article is not telling you. It's all connected, and it explains why the Fed is knowingly behind the curve on inflation as a conscious choice it's making. The pace of "epochal change" is accelerating. The rules of the game have already changed, but most people don't realize it yet.
I hope these resources help you prepare your portfolio... If you only have time for one resource this week, this is it. Dan does an excellent job of using the Taylor Rule to show how the Fed is far, far behind the inflation-fighting curve. What he doesn't include is equally important and explained above. These concepts are key to understanding my "epochal change" call and why smart investment strategy going forward will look very different from the past five decades. This review of Oliver Burkeman's concept of "four thousand weeks" delivers a counterintuitive antidote to the time anxiety that haunts and hampers our search for meaning in daily life. Productivity is a trap. Becoming more efficient just makes you more rushed. "Finitude" defines our lives, and that changes everything when the real game you're playing is fulfillment.
Onward and upward!
Todd Tresidder
Two Solutions For Epochal Change: This investment software solution shows you how to sleep peacefully and secure your financial future in good times and bad. I use the same to manage my own money. My flagship Expectancy Wealth Planning master course shows you how to maximize the expected growth of your wealth in every market condition regardless of epochal change... |
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