A few thoughts on inflation

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rhornback
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A few thoughts on inflation

Post by rhornback »

I have a few thoughts on inflation I wanted to share. I guess the bottom line is I am not convinced that investors are as worried as they should be. That being said I am not sure there is a safe harbor from inflation in investments. A problem with a possible solution it not very helpful.

I grew up in the 70s and while I was a child I remember the Carter years, inflation, and stagflation. I remember gas lines. I remember when Regan went into office and interest rates were raised dramatically to fight off inflation.

Two generations have occurred since then (I define a generation as 20 years). I think there are many even those on this web site who have never experienced inflation.

Interesting I see lots of messages about asset allocation, diversification, 4% rule, how much do I need to save to retire, etc. But not as much discussion about inflation. Maybe it is time to consider this.

I had a mentor when I was in my 20s who was close to retirement. He told me that in the 70s most people put their savings in the bank and inflation pretty much whipped them out (because inflation was higher than their bank passbook rate of return).

The challenge of inflation is it is not necessarily visible. Sometimes it occurs slow enough that you don't notice the prices rising. And the manufacturers sometimes hide their price increase by decreasing product size. Also I think the government doesn't do a very good job of reporting inflation numbers when the exclude 'volatile' food and gas because these are not optional expenses for most people.

But I see no safe harbor for inflation. I think it is pretty clear that bank accounts and CDs are losing to inflation. I would include bonds also, especially long bonds. IMO they are not paying a rate for the risk that you are taking on. And it is quite possible that inflation will effect stocks as I explain further below.

The media is reporting that the Fed thinks that this inflation bump is temporary. That may be so but there is a stickiness to price increases. When someone gets a higher wage or the price of a product goes up, rarely does it go down.

Which brings me to my next random thought. While it is clear that wage growth is occurring at the low end it is less clear to me if wages are growing at the professional salary level. I usually get a cost of living adjustment from my megacorp job at the end of the year. It will be interesting to see what percent much I get. Frankly I suspect it will not be enough to keep up with 'real' inflation numbers. In part because HR may want to use the inflation rate the Fed uses.

Thinking about stocks, inflation can be both good and bad for companies. It largely depends on how much of the inflation rate can the producer pass onto the consumer. Right now it seems that many companies are successful at increasing prices. However, even with a price increase inflation can impact profits when the direct costs of purchased raw materials and subassemblies is growing faster than the price increase of the sold product. And if we see profits go down we might see pressure on the arguably lofty PE ratios of US stocks.

Another radon thought is tariffs. I do not want to get into politics but I find it interesting that the current administration has rolled back many of the executive actions of the previous administrations, but I am not seeing much action in decreasing tariffs. The reason why this is important is globalization seems to smooth out inflation by providing additional alternative sources of company inputs (raw materials, purchased sub-assemblies, and labor). But these actions are muted by tariffs when the imported products cost more than the domestically created or products from non-tariff countries due to tariffs.

Perhaps a safe harbor would be i-bonds. But IMO an i-bond keeps up with inflation. It will not increase your net worth enough to allow for retirement. Still I guess it is better than losing money.

That being said I have about 20% bonds and yes it helps me sleep at night. And I understand the argument that a bond is not necessarily bought for investment purposes. Still I do not like the idea of losing money (after inflation). BTW I mostly own Vanguard Total Bond Market.

I myself, I am not doing anything. I tend to stock to my longer term strategies. I have found when I make frequent adjustments I make things worse instead of better.

I am watching though. And while I am not alarmed, I am concerned.

I hope I have provided some food for thought for some. Please let me know when you find my analysis incorrect or where it need further expansion.
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nedsaid
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Re: A few thoughts on inflation

Post by nedsaid »

A good post. What I will say is that I share your concerns but this is a much different world from the 1970's. What I would have done is load up on TIPS but even TIPS are priced at real negative interest rates. If inflation spikes, this will hurt both stocks and bonds. Not too many places to hide. Not ready yet to buy Gold and/or Commodities, not sure even that would work. I Bonds are the best place to park savings now but there are purchase limitations and you still lose purchasing power when you take taxes into account. Sad.
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MishkaWorries
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Re: A few thoughts on inflation

Post by MishkaWorries »

nedsaid wrote: Sun Jun 06, 2021 4:59 pm A good post. What I will say is that I share your concerns but this is a much different world from the 1970's. What I would have done is load up on TIPS but even TIPS are priced at real negative interest rates. If inflation spikes, this will hurt both stocks and bonds. Not too many places to hide. Not ready yet to buy Gold and/or Commodities, not sure even that would work. I Bonds are the best place to park savings now but there are purchase limitations and you still lose purchasing power when you take taxes into account. Sad.
I agree with nedsaid. A good and thoughtful post.

We use intermediate treasury as our bond fund. But last year I started worrying about inflation so all new bond money is going to I-bonds and Tips. We're almost at 30% inflation protected bonds and that was my target. But now I think I should be 50/50 nominal vs Tips bonds. After that it's in the hands of the government and market.
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RickBoglehead
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Re: A few thoughts on inflation

Post by RickBoglehead »

I remember getting 18% interest on a 90 day CD around 1982/83, with a bonus to 21%. First house in 1987 had a 7.5% mortgage that went up to 12%.

I remember.
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livesoft
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Re: A few thoughts on inflation

Post by livesoft »

rhornback wrote: Sun Jun 06, 2021 4:53 pm... He told me that in the 70s most people put their savings in the bank and inflation pretty much whipped them out (because inflation was higher than their bank passbook rate of return).
Only in 1974 and 1980-1981 was inflation above 10% after WWII

I had a passbook savings account in the 1970s and it paid 7% interest. I looked up the rate of inflation then and was over 7% at about 9% and 12% when I had that passbook account. In the 1980s I had a CD paying 12% interest. I was a college student, so I rented a room in a house. I had a job where I got free dinners. I do not know if most people put their savings in the bank because I was already aware of mutual funds in high school and certainly opened a Vanguard account in 1982. Everybody knew about the Vanguard Prime Money Market fund which had as much buzz as shown for I-bonds in that current Bogleheads thread on I-bonds.

Inflation is not good, but there is more news about it nowadays I think than back then, so people can be ready for it.
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Northern Flicker
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Re: A few thoughts on inflation

Post by Northern Flicker »

Deciding on a macroeconomic outcome that you believe is likely, and investing to defend against it is what I call the Maginot Line method of asset allocation and portfolio construction. I think you should hold a retirement portfolio that you believe has a good chance of enabling you to meet your needs across all plausible outcomes. This includes being prepared for inflation being higher or lower than expected regardless of what the expectations might be.
My postings are my opinion, and never should be construed as a recommendation to buy, sell, or hold any particular investment.
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JoeRetire
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Re: A few thoughts on inflation

Post by JoeRetire »

rhornback wrote: Sun Jun 06, 2021 4:53 pm I have a few thoughts on inflation I wanted to share. I guess the bottom line is I am not convinced that investors are as worried as they should be.

I myself, I am not doing anything.

I am watching though. And while I am not alarmed, I am concerned.
So investors should be more worried?
But you are only concerned. And you are not doing anything.
Okay.

I guess I would ask how you could possibly know how worried investors are? Perhaps they are at the exact same level of concern as you are.

I myself, am not doing anything (regarding inflation) either. Unless you count not paying off the mortgage and delaying my social security benefits until 70 as doing something.
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nedsaid
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Re: A few thoughts on inflation

Post by nedsaid »

Northern Flicker wrote: Sun Jun 06, 2021 5:20 pm Deciding on a macroeconomic outcome that you believe is likely, and investing to defend against it is what I call the Maginot Line method of asset allocation and portfolio construction. I think you should hold a retirement portfolio that you believe has a good chance of enabling you to meet your needs across all plausible outcomes. This includes being prepared for inflation being higher or lower than expected regardless of what the expectations might be.
It is the fighting the last war problem. What would have worked in the 1970's to combat inflation might not work now. Lots of things have changed since then. For one thing, TIPS and I Bonds didn't even exist back then.
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iceport
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Re: A few thoughts on inflation

Post by iceport »

nedsaid wrote: Sun Jun 06, 2021 6:05 pm
Northern Flicker wrote: Sun Jun 06, 2021 5:20 pm Deciding on a macroeconomic outcome that you believe is likely, and investing to defend against it is what I call the Maginot Line method of asset allocation and portfolio construction. I think you should hold a retirement portfolio that you believe has a good chance of enabling you to meet your needs across all plausible outcomes. This includes being prepared for inflation being higher or lower than expected regardless of what the expectations might be.
It is the fighting the last war problem. What would have worked in the 1970's to combat inflation might not work now. Lots of things have changed since then. For one thing, TIPS and I Bonds didn't even exist back then.
This is true. I watched an interview with two economists who didn't agree on everything (one was more concerned about inflation than the other), but one thing they did agree on was their estimation that the globalization that has taken place in recent decades has significantly reduced at least one source of inflationary pressure — higher wages.

So what hurts some US workers might also help to stave off inflation, maybe?
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Big Dog
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Re: A few thoughts on inflation

Post by Big Dog »

Concerned as well.

Two things to add: 1) higher rates seem to hit tech companies stock prices harder, so folks tilting in that direction....2) methinks the Fed will overshoot its 'transitory' inflation target by focusing more on obtaining full employment, and thus, the ~2% inflation goal will be well established throughout the economy before the Fed takes action. (and thus, my 'concern')

I also de-risked (slightly) by moving from Total Bond to Treasuries for the bond portion of my AA. (Fortunately, all in tax-deferred accounts, so not tax impact to make that change.)
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steve roy
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Re: A few thoughts on inflation

Post by steve roy »

We were lucky enough to get our home mortgage hammered down a few months ago.

It's now 2.7%. Saves us a few hundred bucks every month.

Beyond asset allocation (The Permanent Portfolio, real estate, TIPS, etc.) being careful about how you use your day-today cash is about what yuo can do. If you have the means and opportunity to jump on a Good Deal when it rears its pretty head, by all means do that. We waited sixteen years to purchase a discounted house. We try not to buy at market highs, but sometimes that's hard to do.
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increment
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Re: A few thoughts on inflation

Post by increment »

rhornback wrote: Sun Jun 06, 2021 4:53 pm I grew up in the 70s and while I was a child I remember the Carter years, inflation, and stagflation. I remember gas lines. I remember when Regan went into office and interest rates were raised dramatically to fight off inflation.

[...]

I had a mentor when I was in my 20s who was close to retirement. He told me that in the 70s most people put their savings in the bank and inflation pretty much whipped them out (because inflation was higher than their bank passbook rate of return).
Do you remember that, unlike now, those bank savings accounts were prohibited from offering interest rates anything like the inflation rate? A quick search suggests that the limit was a mere 5.25%.

(By the way, I think that most attribute the raising of interest rates to Paul Volcker, not to Ronald Reagan. Volcker was appointed by Carter.)
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Re: A few thoughts on inflation

Post by frugalecon »

I have no special insight into where inflation is going, but I do think that firms have more options now to substitute capital (esp. technological capital) for labor. If increasing wages drives firms to make investments/adjustments to increase labor productivity by as much as or more than wages increase, then prices need not increase, or at least not increase by much. As an example, it is interesting how at Whole Foods they have moved much more than I might have thought to self-checkout (which also entails self-bagging!). That has definitely increased the productivity of at least some of their labor force. After a year of Covid, I am even still bagging my own groceries when I go through a line staffed with a human checker. I have gotten pretty good at it!
RAchip
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Re: A few thoughts on inflation

Post by RAchip »

I believe that it is NOT the govts job to control the economy. Their job is to make rules providing for a level playing field, enforce the rules fairly and get out of the way. A free capitalist economy has ups and downs. Trying to manipulate the economy so it is always up and never has any down-turns is not going to end well. It balances itself.
Somethingwitty92912
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Re: A few thoughts on inflation

Post by Somethingwitty92912 »

At first I thought this was a good post.

On a second read it just feels like fear porn. There’s something to be worried about, okay. What good does that do anyone? Zero actionable information. You yourself say you’ve done nothing. I guess you want someone else to value add, so here’s my contribution.

Inflation is not a bug it’s a feature. It’s doing what it’s suppose to do. That’s how I feel about it.
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dodecahedron
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Re: A few thoughts on inflation

Post by dodecahedron »

frugalecon wrote: Sun Jun 06, 2021 6:27 pm I have no special insight into where inflation is going, but I do think that firms have more options now to substitute capital (esp. technological capital) for labor. If increasing wages drives firms to make investments/adjustments to increase labor productivity by as much as or more than wages increase, then prices need not increase, or at least not increase by much. As an example, it is interesting how at Whole Foods they have moved much more than I might have thought to self-checkout (which also entails self-bagging!). That has definitely increased the productivity of at least some of their labor force. After a year of Covid, I am even still bagging my own groceries when I go through a line staffed with a human checker. I have gotten pretty good at it!
Good point! And it is not just *firms* that have more options to substitute capital for labor these days. Consumers also have options they did not have before.

Consumers can substitute technology and DIY to replace commercial services they previously used to pay other folks to do for them. (E.g., back in the day, you had to pay travel agents to search for comparison shopping good prices on airline tickets and good deals on lodging reservations; you had to pay high commissions for full-service brokerages to buy and sell securities; etc.) Also you can find all kinds of free online videos demonstrating how to DIY simple home repair/maintenance tasks that one might have once paid a handyman to do.

Technology has dramatically reduced my cost of living in many ways. Free bill-paying, for example, simplifies my life and eliminates need to pay postage. Comparison shopping for so many things is easier on internet. I can easily request library books online and have them waiting for me for easy pickup within 24 hours. Many periodicals and books are available free on-line through my libraries. I used to pay hundreds of dollars for hard-copy delivery of print editions of NYT and WSJ. Now I get free access to electronic editions of both of those through my college library. I can also indulge in reading the electronic version of my hometown paper (WaPo) for a modest $5 per month subscription fee.
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Re: A few thoughts on inflation

Post by frugalecon »

dodecahedron wrote: Sun Jun 06, 2021 6:44 pm
frugalecon wrote: Sun Jun 06, 2021 6:27 pm I have no special insight into where inflation is going, but I do think that firms have more options now to substitute capital (esp. technological capital) for labor. If increasing wages drives firms to make investments/adjustments to increase labor productivity by as much as or more than wages increase, then prices need not increase, or at least not increase by much. As an example, it is interesting how at Whole Foods they have moved much more than I might have thought to self-checkout (which also entails self-bagging!). That has definitely increased the productivity of at least some of their labor force. After a year of Covid, I am even still bagging my own groceries when I go through a line staffed with a human checker. I have gotten pretty good at it!
Good point! And it is not just *firms* that have more options to substitute capital for labor these days. Consumers also have options they did not have before.

Consumers can substitute technology and DIY to replace commercial services they previously used to pay other folks to do for them. (E.g., back in the day, you had to pay travel agents to search for comparison shopping good prices on airline tickets and good deals on lodging reservations; you had to pay high commissions for full-service brokerages to buy and sell securities; etc.) Also you can find all kinds of free online videos demonstrating how to DIY simple home repair/maintenance tasks that one might have once paid a handyman to do.
Indeed. I recently fixed both a dryer and a refrigerator. The parts cost about $30, and I am sure I saved a good $400 on service calls, at least. My own inflation rate is pretty modest.Setting aside mortgage, most of my spending is discretionary, so I am very able to substitute for other experiences or goods. I also changed my shopping habits during COVID, when I was at least initially concerned about shortages. I now purchase things on sale even if I don’t need them quite yet, and just keep them in reserve.
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Re: A few thoughts on inflation

Post by Jaymover »

I think it is human nature to dwell on the worst possible outcome, eg a heightened level of inflation during the years after retirement, or a spike in interest rates when you are already maxed out on your mortgage.

I think predicting one way or the other is simply another way of timing the market and people's intuition is wrong at least half the time. I know some people are maxing out on TIPS as they have convinced themselves that there will be runaway inflation. The best thing is just to stay the course and not trying to time the market diving in and out of TIPS etc.

All authoritive sources expect a spike in inflation due to pent up demand, supply side constraints etc and then it will come back down to normal circa 2%. They may be wrong but are probably looking at things unemotionally.

If inflation spikes I intend to work more, ride my bike and avoid motorised transport, avoiding eating out and take away, not buy anything unnecessary and fix things myself rather than getting the tradesman in. I'm staying in majority shares as they do really well with inflation averaging 2.5 percent.
Last edited by Jaymover on Sun Jun 06, 2021 7:10 pm, edited 1 time in total.
Tingting1013
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Re: A few thoughts on inflation

Post by Tingting1013 »

The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.

The irony that those most worried about inflation around here are also the ones most eager to pay off their mortgages.
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Re: A few thoughts on inflation

Post by Jaymover »

Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.

The irony that those most worried about inflation around here are also the ones most eager to pay off their mortgages.
Trouble is that they are people currently struggling to pay their mortgages now with two incomes and a mortgage rate at 3%. In my country the average mortgage rate was 10% when the inflation rate was nearing 4%.
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Re: A few thoughts on inflation

Post by palaheel »

My first mortgage (1978 or 1979) was 13% adjustable. I couldn't afford a fixed rate. I remember those days. They scare me still.
Nothing to say, really.
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Re: A few thoughts on inflation

Post by Tingting1013 »

Jaymover wrote: Sun Jun 06, 2021 7:11 pm
Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.

The irony that those most worried about inflation around here are also the ones most eager to pay off their mortgages.
Trouble is that they are people currently struggling to pay there mortgages now with two incomes and a mortgage rate at 3%. In my country the average mortgage rate was 10% when the inflation rate was nearing 4%.
I’m not talking about folks who live paycheck to paycheck.

I’m talking about Bogleheads who have millions in liquid assets at risk of being inflated away yet at the same time prepay their 2.5% mortgages as fast as they can because it “feels good”. Hope it works out for them.
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Re: A few thoughts on inflation

Post by Jaymover »

I’m talking about Bogleheads who have millions in liquid assets at risk of being inflated away yet at the same time prepay their 2.5% mortgages as fast as they can because it “feels good”. Hope it works out for them.
Is it a good time now to leverage against ETFs? I think margin loans run at around 5% fixed for 5 years
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Re: A few thoughts on inflation

Post by midareff »

95% of this Board only knows about the devastation of inflation to a working class by reading about it on a page about Venezuela. Spoilr alet, it weas here before and it may come again. You simply can't imagine how that impacts everything we do every day. How would you like a $30 copoked grocery store chicken?
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JoeRetire
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Re: A few thoughts on inflation

Post by JoeRetire »

Jaymover wrote: Sun Jun 06, 2021 7:11 pm
Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.

The irony that those most worried about inflation around here are also the ones most eager to pay off their mortgages.
Trouble is that they are people currently struggling to pay their mortgages now with two incomes and a mortgage rate at 3%. In my country the average mortgage rate was 10% when the inflation rate was nearing 4%.
Most people here are not struggling to pay their mortgages.
Just remember: it's not a lie if you believe it.
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JoeRetire
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Re: A few thoughts on inflation

Post by JoeRetire »

midareff wrote: Sun Jun 06, 2021 7:22 pm 95% of this Board only knows about the devastation of inflation to a working class by reading about it on a page about Venezuela. Spoilr alet, it weas here before and it may come again. You simply can't imagine how that impacts everything we do every day. How would you like a $30 copoked grocery store chicken?
I worked in a grocery store when inflation was running hot.

I had a customer tell me that it was illegal to change the price of an item once it was on the shelf, then throw a can of soup at me.

Fun times...
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Jaymover
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Re: A few thoughts on inflation

Post by Jaymover »

Most people here are not struggling to pay their mortgages.
But isnt that just because they dropped interest rates absurdly low despite the fact that most middle class folks kept their jobs and cut their expenses? I think the reserve banks run the cash rate quite alot above the inflation rate when inflation increases, so interest rates at 10 percent when inflation is at 4 percent,or 17% when inflation is at 8%. So as long as you can survive a much higher interest rate or when you have no mortgage at all, inflation is great.

Agree that in those conditions retirement savings are probably toast.
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Re: A few thoughts on inflation

Post by steve r »

Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.

The irony that those most worried about inflation around here are also the ones most eager to pay off their mortgages.
This is not quite right. Debt is debt, and needs to be paid back. Yes, it is paid back in less valuable currency in the future, but it is not clear higher inflation will lead to the higher wages needed to make the loan easier to pay back. Supply driven stagflation of the 1970s suggest it might be harder to payback.

I suspect we will agree that what you do with the debt is what is far more important. Hording cash is a loser (read about hyper inflation). OTOH, a home (or larger home) may provide some protection. In 1974 and 1980 (two peak inflation year) median housing prices rose, but modestly failed to keep pace with inflation. Corresponding higher interest rates made homes less affordable. These episodes of inflation came with high unemployment, which may or may not occur again and clouds what might happen in the future. Add to it that interest payments and taxes that must be paid on real estate. Overall, housing as a perfect/solid inflation hedge is not clear to me. That said, I do view it as my biggest inflation hedge -- although an imperfect hedge.

How about a 60/40 style portfolio as (talked up in many BH threads on paying off mortgage or not); is this a good inflation hedge with money from a mortgage? Well neither stocks nor bonds should do well in a rising interest rate environment when interest rates rise due to inflation (as opposed to a robust economy increasing the demand for borrowing). I would add that some of those who do pay off mortgage early reduce bond holdings by a corresponding amount. The maximize mortgage to buy a 60/40 style portfolio makes some sense to me and was a strategy I engaged in as a younger man; but I am not sure that it is a great inflation hedge.

---

Color me concerned. I suspect most on this sites biggest assets are some combination of stocks, bonds, real estate. All of these have benefited from falling interest rates and low inflation.
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DTalos
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Re: A few thoughts on inflation

Post by DTalos »

With low interest rates and inflation, more people might be persuaded to invest their savings in high dividend stocks that have very little volatility vs the meager yields of a CD.
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Re: A few thoughts on inflation

Post by EddyB »

midareff wrote: Sun Jun 06, 2021 7:22 pm 95% of this Board only knows about the devastation of inflation to a working class by reading about it on a page about Venezuela. Spoilr alet, it weas here before and it may come again. You simply can't imagine how that impacts everything we do every day. How would you like a $30 copoked grocery store chicken?
I don't think I would like any copoked chicken, but maybe I'm missing something.
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Re: A few thoughts on inflation

Post by UpperNwGuy »

rhornback wrote: Sun Jun 06, 2021 4:53 pm I grew up in the 70s and while I was a child I remember the Carter years, inflation, and stagflation. I remember gas lines. I remember when Regan went into office and interest rates were raised dramatically to fight off inflation.
I grew up in the 1960s, and I lived through the inflation years of the Nixon, Ford, Carter, and Reagan presidencies, but I do not share your pessimism about inflation in the post-covid era.

I also lived through the gas lines of 1974 and 1979, and these were not caused by the same forces that caused inflation.
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Re: A few thoughts on inflation

Post by UpperNwGuy »

steve r wrote: Sun Jun 06, 2021 8:16 pm
Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.

The irony that those most worried about inflation around here are also the ones most eager to pay off their mortgages.
This is not quite right. Debt is debt, and needs to be paid back. Yes, it is paid back in less valuable currency in the future, but it is not clear higher inflation will lead to the higher wages needed to make the loan easier to pay back. Supply driven stagflation of the 1970s suggest it might be harder to payback.
I agree with Tingting1013. Sometimes bogleheads get themselves confused with the followers of Dave Ramsey and Mr Money Mustache.
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Re: A few thoughts on inflation

Post by UpperNwGuy »

palaheel wrote: Sun Jun 06, 2021 7:15 pm My first mortgage (1978 or 1979) was 13% adjustable. I couldn't afford a fixed rate. I remember those days. They scare me still.
I had a 12% fixed, and it seemed onerous at first, but as inflation continued, my mortgage became more and more affordable.
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Re: A few thoughts on inflation

Post by UpperNwGuy »

livesoft wrote: Sun Jun 06, 2021 5:14 pm
rhornback wrote: Sun Jun 06, 2021 4:53 pm... He told me that in the 70s most people put their savings in the bank and inflation pretty much whipped them out (because inflation was higher than their bank passbook rate of return).
Only in 1974 and 1980-1981 was inflation above 10% after WWII

I had a passbook savings account in the 1970s and it paid 7% interest. I looked up the rate of inflation then and was over 7% at about 9% and 12% when I had that passbook account. In the 1980s I had a CD paying 12% interest. I was a college student, so I rented a room in a house. I had a job where I got free dinners. I do not know if most people put their savings in the bank because I was already aware of mutual funds in high school and certainly opened a Vanguard account in 1982. Everybody knew about the Vanguard Prime Money Market fund which had as much buzz as shown for I-bonds in that current Bogleheads thread on I-bonds.

Inflation is not good, but there is more news about it nowadays I think than back then, so people can be ready for it.
I'm a few years older than livesoft, and my experience was similar to his.
Makefile
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Re: A few thoughts on inflation

Post by Makefile »

I'm among the group way too young for that environment, but something I do remember reading about a few years back was buying a car in the 1970s and then selling/trading it in for more than you paid for it. So at least that aspect of the 1970s might be back already :D
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Re: A few thoughts on inflation

Post by DTalos »

I wonder if there has been a flurry of high volume lately in high dividend stocks as people seek higher yields than a CD?
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dodecahedron
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Re: A few thoughts on inflation

Post by dodecahedron »

Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.
Disagree. As a mostly retired person in late 60s with a conservative 30/70 allocation, I can't imagine why I would want to carry a big mortgage balance even at the current low mortgage rates. To borrow at say, 2.5% and then invest the proceeds in fixed income paying much less than that would be absurd.

I think the most impactful thing an ordinary person can do to hedge against inflation is to invest in cultivating a flexible low cost but enjoyable lifestyle. Develop enjoyable hobbies that are practical and low cost, like cooking, vegetable gardening, water color painting, upcycling, walking, poetry, storytelling, ... Cultivate simplicity.
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JonnyDVM
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Re: A few thoughts on inflation

Post by JonnyDVM »

Good post.

I’m avoiding bonds right now. The best place to protect ones money from inflation is equities. Sure there’s more risk, but I’m looking at total bond right now as a guaranteed negative real return. In addition, I refinanced my mortgage and I’m in no hurry to pay it off.
I’d trade it all for a little more | -C Montgomery Burns
Nathan Drake
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Re: A few thoughts on inflation

Post by Nathan Drake »

A hedge against inflation would be to invest in international stocks (materials/commodities, tangible goods) as well as value stocks. Growth will not do as well with a sustained inflationary uptick, and US equities highly slant growth at market cap weights.
MarkRoulo
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Re: A few thoughts on inflation

Post by MarkRoulo »

Jaymover wrote: Sun Jun 06, 2021 7:19 pm
I’m talking about Bogleheads who have millions in liquid assets at risk of being inflated away yet at the same time prepay their 2.5% mortgages as fast as they can because it “feels good”. Hope it works out for them.
Is it a good time now to leverage against ETFs? I think margin loans run at around 5% fixed for 5 years
You may want to read the details of whichever margin loan you are expecting to take out.

Margin *calls* are made against margin loans and if you do not put up more collateral, your position is sold out whether you like it or not.

You also want to be sure you understand how the interest rates on margin loans are set. I don't think you get a five-year flat rate guarantee most of the time.
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Re: A few thoughts on inflation

Post by Tingting1013 »

dodecahedron wrote: Sun Jun 06, 2021 9:57 pm
Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.
Disagree. As a mostly retired person in late 60s with a conservative 30/70 allocation, I can't imagine why I would want to carry a big mortgage balance even at the current low mortgage rates. To borrow at say, 2.5% and then invest the proceeds in fixed income paying much less than that would be absurd.
If inflation happens, those bonds would be paying a lot more than 2.5%. And if you wait to take out a mortgage until inflation shows up, it’ll be too late. Which is exactly the point, a mortgage is inflation insurance.
I think the most impactful thing an ordinary person can do to hedge against inflation is to invest in cultivating a flexible low cost but enjoyable lifestyle. Develop enjoyable hobbies that are practical and low cost, like cooking, vegetable gardening, water color painting, upcycling, walking, poetry, storytelling, ... Cultivate simplicity.
This is not a hedge; it’s lowering your standard of living. Which you can do at any time, inflation or no. A true hedge allows you to stay the course in the face of the event you are hedging against.
Last edited by Tingting1013 on Sun Jun 06, 2021 10:24 pm, edited 1 time in total.
curmudgeon
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Re: A few thoughts on inflation

Post by curmudgeon »

DTalos wrote: Sun Jun 06, 2021 8:34 pm With low interest rates and inflation, more people might be persuaded to invest their savings in high dividend stocks that have very little volatility vs the meager yields of a CD.
Dividend stocks have their own risks in today's environment. Once the fed stops stomping on short term interest rates, the desirability of high dividend stocks drops considerably unless they are in position to keep growing the dividend.

I'm starting to think of the current environment as akin to a "Wealth Tax" on those with large amounts of retirement savings. Bonds are positioned to take a significant haircut if/when the fed allows interest rates to normalize. Equities have a lot of risk in this bubble environment, and will cost you in taxes if they keep up with inflation when you sell. By dumping massive amounts of cash into the economy, the fed is essentially devaluing our savings (why should a business give us return on our savings when they can get money from the fed for free).

Not a lot of good other options, though.
flyingaway
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Re: A few thoughts on inflation

Post by flyingaway »

I am just curious that if any current retirees are seriously worried about inflation? and
any soon-to-be retirees are seriously worried about inflation? and
what can you do about it?
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dodecahedron
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Re: A few thoughts on inflation

Post by dodecahedron »

Tingting1013 wrote: Sun Jun 06, 2021 10:08 pm
dodecahedron wrote: Sun Jun 06, 2021 9:57 pm
Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.
Disagree. As a mostly retired person in late 60s with a conservative 30/70 allocation, I can't imagine why I would want to carry a big mortgage balance even at the current low mortgage rates. To borrow at say, 2.5% and then invest the proceeds in fixed income paying much less than that would be absurd.
If inflation happens, those bonds would be paying a lot more than 2.5%.
Inflation IS happening and bonds are not paying more than 2.5% (unless you mean junk bonds.)

I do have a generous amount of TIPS fortuitously purchased in late 2018, when real rates were at a ten-year historical high with real rates slightly over 1%. And I have maxed out I bonds. And I have a good chunk my tax-deferred in liquid TIAA Trad paying a minimum 3%.

But at the margin, I am currently unable to buy any additional of attractive fixed income options and simply don't see the point in speculatively borrowing on my house on the guess that some day there might be attractive fixed income options in which to invest the proceeds at some indefinite point down the road.

If and when interest rates do go up a lot in the future, either my TIAA Trad will also pay higher rates or I can move it elsewhere opportunistically.
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Re: A few thoughts on inflation

Post by fatcoffeedrinker »

Tingting1013 wrote: Sun Jun 06, 2021 10:08 pm
dodecahedron wrote: Sun Jun 06, 2021 9:57 pm
Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.
Disagree. As a mostly retired person in late 60s with a conservative 30/70 allocation, I can't imagine why I would want to carry a big mortgage balance even at the current low mortgage rates. To borrow at say, 2.5% and then invest the proceeds in fixed income paying much less than that would be absurd.
If inflation happens, those bonds would be paying a lot more than 2.5%. And if you wait to take out a mortgage until inflation shows up, it’ll be too late. Which is exactly the point, a mortgage is inflation insurance.
Those bonds would be paying more than 2.5% because they would have dropped in value, resulting in a higher yield. It will take years (6 years for BND) for the value to recover assuming the coupon rates on new bond issuances went up with inflation.

I'm with dodecahedron. If one has nominal bonds paying less than the mortgage rate, the only reason to not pay off the mortgage is to retain liquidity, which may be a valid reason. We chose to pay off our mortgage in 3 1/2 years (while still maxing out all pre-tax retirement accounts) because we were holding munis paying a lot less and because we lost the benefit of the tax deduction when the standard deduction doubled in 2018.
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Re: A few thoughts on inflation

Post by Tingting1013 »

fatcoffeedrinker wrote: Sun Jun 06, 2021 10:40 pm
Tingting1013 wrote: Sun Jun 06, 2021 10:08 pm
dodecahedron wrote: Sun Jun 06, 2021 9:57 pm
Tingting1013 wrote: Sun Jun 06, 2021 7:10 pm The single most impactful thing an ordinary person can do to hedge against inflation is to keep as big a mortgage for as long as possible.
Disagree. As a mostly retired person in late 60s with a conservative 30/70 allocation, I can't imagine why I would want to carry a big mortgage balance even at the current low mortgage rates. To borrow at say, 2.5% and then invest the proceeds in fixed income paying much less than that would be absurd.
If inflation happens, those bonds would be paying a lot more than 2.5%. And if you wait to take out a mortgage until inflation shows up, it’ll be too late. Which is exactly the point, a mortgage is inflation insurance.
Those bonds would be paying more than 2.5% because they would have dropped in value, resulting in a higher yield. It will take years (6 years for BND) for the value to recover assuming the coupon rates on new bond issuances went up with inflation.

I'm with dodecahedron. If one has nominal bonds paying less than the mortgage rate, the only reason to not pay off the mortgage is to retain liquidity, which may be a valid reason. We chose to pay off our mortgage in 3 1/2 years (while still maxing out all pre-tax retirement accounts) because we were holding munis paying a lot less and because we lost the benefit of the tax deduction when the standard deduction doubled in 2018.
In a world with increased inflation and you having just sunk your liquid assets into your house, where are you going to get the money to buy the new bond issuances with the higher coupon rates?

Taking out a mortgage at 2.5% to put it in HY savings paying 0.5% (pre tax) sucks, I know. But I don’t see too many folks canceling their homeowners insurance because their house hasn’t burned down yet. If and when inflation shows up, you’ll be ready to capitalize.
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Re: A few thoughts on inflation

Post by dodecahedron »

Tingting1013 wrote: Sun Jun 06, 2021 10:08 pm
dodecahedron wrote: Sun Jun 06, 2021 9:57 pm I think the most impactful thing an ordinary person can do to hedge against inflation is to invest in cultivating a flexible low cost but enjoyable lifestyle. Develop enjoyable hobbies that are practical and low cost, like cooking, vegetable gardening, water color painting, upcycling, walking, poetry, storytelling, ... Cultivate simplicity.
This is not a hedge; it’s lowering your standard of living. Which you can do at any time, inflation or no. A true hedge allows you to stay the course in the face of the event you are hedging against.
I agree that I *could* do it any time, inflation or no. And I have been doing it proactively in noninflationary times to prepare for eventualities when it might be necessary due to inflation. So I do indeed feel quite prepared to stay the course in the event that inflation hits.

But I would not characterize it so much as "lowering my standard of living." For example, during the Pandemic, I have learned that I actually enjoy my own creative cooking much more than most restaurant meals. Some of it might be the Ikea effect. Some of it is reflecting on my true values and priorities, especially in this time when global climate change is an ever present challenge.

It gives me joy to cultivate a lifestyle which is sustainable, resilient, and robust both financially and environmentally. This was true before the spectre of inflation recently began looming, and has acquired even more salience as inflation has heated up.

I attended elementary school with the current chair of the Federal Reserve Board, and this fact has had me thinking about the dedicated women who taught us. They had taken vows of poverty but seemed filled with a joy and purpose that transcended the material. I am not prepared to live the way they did, but I certainly think it possible to reshape my utility function in a way that will keep me flexibly content in the future.
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Re: A few thoughts on inflation

Post by Tingting1013 »

dodecahedron wrote: Sun Jun 06, 2021 10:51 pm
Tingting1013 wrote: Sun Jun 06, 2021 10:08 pm
dodecahedron wrote: Sun Jun 06, 2021 9:57 pm I think the most impactful thing an ordinary person can do to hedge against inflation is to invest in cultivating a flexible low cost but enjoyable lifestyle. Develop enjoyable hobbies that are practical and low cost, like cooking, vegetable gardening, water color painting, upcycling, walking, poetry, storytelling, ... Cultivate simplicity.
This is not a hedge; it’s lowering your standard of living. Which you can do at any time, inflation or no. A true hedge allows you to stay the course in the face of the event you are hedging against.
I agree that I *could* do it any time, inflation or no. And I have been doing it proactively in noninflationary times to prepare for eventualities when it might be necessary due to inflation. So I do indeed feel quite prepared to stay the course in the event that inflation hits.

But I would not characterize it so much as "lowering my standard of living." For example, during the Pandemic, I have learned that I actually enjoy my own creative cooking much more than most restaurant meals. Some of it might be the Ikea effect. Some of it is reflecting on my true values and priorities, especially in this time when global climate change is an ever present challenge.

It gives me joy to cultivate a lifestyle which is sustainable, resilient, and robust both financially and environmentally. This was true before the spectre of inflation recently began looming, and has acquired even more salience as inflation has heated up.

I attended elementary school with the current chair of the Federal Reserve Board, and this fact has had me thinking about the dedicated women who taught us. They had taken vows of poverty but seemed filled with a joy and purpose that transcended the material. I am not prepared to live the way they did, but I certainly think it possible to reshape my utility function in a way that will keep me flexibly content in the future.
You are confusing standard of living with quality of life. You are happy and healthy without needing to spend much money, congratulations. But that is more or less irrelevant to inflation, which is an economic concept, like standard of living.
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Re: A few thoughts on inflation

Post by phantom0308 »

I’m not convinced. The fed spent over a decade trying to hit 2% inflation and largely failed. The fed announced they’re going for average 2% inflation, so rather than missing 3 out of 4 quarters for years on end they’re going to attempt to let it run “hot” at 3% for a bit before letting off. Their mandate is full employment and managed inflation. By always undershooting on inflation they’re trading off better employment which hurts those at the bottom that need it most.
Any transitory inflation from ending the pandemic will eventually get overwhelmed by the deflationary forces that have been pulling interest rates to zero and negative all over the developed world.
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Re: A few thoughts on inflation

Post by dodecahedron »

Tingting1013 wrote: Sun Jun 06, 2021 10:54 pm You are confusing standard of living with quality of life. You are happy and healthy without needing to spend much money, congratulations. But that is more or less irrelevant to inflation, which is an economic concept, like standard of living.
Both standard of living and quality of life are economic concepts, in the sense that economists study both of them. (I am an economist, by the way.)

Although the former is arguably easier to quantify (albeit in a flawed and imperfect way) and the latter is far more subjective and elusive, thoughtful economists acknowledge that the latter is inherently more meaningful.

The theoretical ideal (unattainable gold standard) way to define inflation is not the way that the Bureau of Labor Statistics has historically done it, which is to measure changes in the cost of a fixed market basket of goods over time. Economists have acknowledged that this approach overstates inflation because when relative prices change, so people can obtain the same level of well-being ("utility") by changing the mix of goods they purchase. The new "chained CPI" is an improved but still flawed approach to better measuring inflation by taking substitution effects into account.

For me, the cost of a reasonably satisfactory amount of utility/well-being is at least as operationally meaningful a concept for personal economic decision-making as the BLS official cost of living measure, even if it is not fully quantifiable.

So yes, I have a bunch of TIPS and some I bonds and some CPI-indexed Social Security and some stocks, but cultivating a flexible mindset about what makes me happy is at least as important as all of those, if not moreso. I am inspired by my parents and grandparents generation: they lived through War War II shortages AND inflation and before that the Depression. They figured out ways to be resourceful and flexible and creative.
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