A week ago we were driving son one to the airport and he said something along the lines that no one could afford houses with the current prices and nothing would change. That got Kea going. She said that yes, no one could afford rent and house mortgages at our current low interest rates and these rates will increase which will drive people into default, dropping house prices and that's when to buy... in two years or so. My oldest son thought he was a cynic. But the voice of experience was bleaker.
We should be in deflation. We are not: things are inflating, and this is NZ government policy as well as the US. We have no silver to sell to get out of deficit financing, so the reserver bank is buying treasury bonds, creating money. It's not just the congresscritters in Washington DC. It is world wide.
COVID-19 is just a convenient excuse, a fig-leaf, to hide the policy decisions that are really responsible for the mess we're in. What's more, it's not just a Democrat or Biden administration problem. Politicians on both sides of the aisle are in thrall to (and in the pockets of) Wall Street and Big Money, all of whom want to make more money at the expense of ordinary Americans like you and I. Sundance's analysis makes that clear.
So we are now inflating nominally by debasing our currency in an economic depression with real costs for most things going down. The kicker in NZ is not trade: it is the green rump of the progressives stopping development of anything singificant and regulating what remains, which drives up costs.
Despite the pundit and financial class selling a counter-narrative, home prices will crash and unemployment will go up. I know this is directly against the current talking points, but the statistical reality is clear. CTH was the first place who said two months ago that home sales will plummet, that is starting to happen right now. There’s no way for it not to happen, the big picture tells us why.
You might remember when President Trump initiated tariffs against China (steel, aluminum and more), Southeast Asia (product specific), Europe (steel, aluminum and direct products), Canada (steel, aluminum, lumber and dairy specifics), the financial pundits screamed at the top of their lungs that consumer prices were going to skyrocket. They didn’t. CTH knew they wouldn’t because essentially those trading partners responded in the exact same way the U.S. did decades ago when the import/export dynamic was reversed.
Trump’s massive, and in some instances targeted, import tariffs against China, SE Asia, Canada and the EU not only did not increase prices, the prices of the goods in the U.S. actually dropped. Trump’s policies led the largest deflation in consumer prices in decades. At the same time Trump’s domestic economic policies drove employment and wages higher than any time in the past forty years. With Trump’s policies we were in an era where job growth was strong, wages were rising and consumer prices were falling… The net result was more disposable income for the middle class, more demand for stuff, and ultimately that’s why the U.S. economy was so strong.
The Joebama economic policies are exactly the reverse. The monetary policy that pumps money into into the U.S. economy via COVID bailouts and federal spending drops the value of the dollar and makes the dependency state worse.
With the FED pumping money into the U.S. system the dollar value plummets. At the same time JoeBama dropped tariff enforcement to please the Wall Street multinational corporations and banks that funded his campaign. Now the value of the Chinese and EU currency increases. This means it costs more to import products and that is the primary driver of price increases in consumer goods.
Simultaneously a lower dollar means cheaper exports for the multinationals (Big AG and raw materials). China, SE Asia and even the EU purchase U.S. raw materials at a lower price. That means less raw material in the U.S. which drives up prices for U.S. consumers. It is a perfect storm… Higher costs for imported goods and higher costs for domestic goods (food). Combine this dynamic with massive increases in energy costs from ideological policy and that’s fuel on a fire of inflation.
Annualized inflation is now estimated to be around 8 percent, and it will likely keep increasing. This is terrible for wage earners in the U.S. who are now seeing no wage growth and higher prices. Real wages are decreasing by the fastest rate in decades. We are now in a downward spiral where your paycheck buys less. As a result consumer middle-class spending contracts. Eventually this means housing prices drop because people cannot afford higher mortgage payments.
Gasoline costs more (+50%), food costs more (+10% at a minimum) and as a result real wages drop; disposable income is lost. Ultimately this is the cause of Stagflation. A stagnant economy and inflation. None of this is caused by COVID-19. All of this is caused by economic policy and monetary policy sold under the guise of COVID-19.
This inflationary period will not stall out until the U.S. economy can recover from the massive amount of federal spending. If the spending continues, the dollar continues to be weak, as a result the inflationary period continues. It is a spiral that can only be stopped if the policies are reversed….
At this point I'm turning to Nikolai, who starts by saying the smart thing to do now is to buy gold, housing, and defensive shares. In 2019. Most of us can't do that. So instead he suggests we be consistent and trust that sensible, frugal,humble, planned approaches to this time will get us through the issues our governments make.
A layman’s understanding of efficient market hypothesis is, you can only outsmart the market if you’ve figured out something that the market in general hasn’t. This is how the guy in The Big Short made his millions.
Inflation? Too late. Everybody knows. All those things I suggested, you should have already done. Unless they don’t work or inflation is lower than expected, in which case you shouldn’t have done them, unless you’ve already cashed out and profited.
If you did buy gold back in mid-2019, nice work. If you bought back at the perfect time, twenty years ago, I take my hat off to you.
‘But Nikolai, I didn’t do any of those things in time! What should I do, go buy a wheelbarrow before they become unaffordable?’
Chillax. If you weren’t smart enough to do things the Smart Way, instead join me in doing things the other way.
The Dumb Way
- Once you’ve paid off non-mortgage debt and saved an emergency fund, continue to invest in diversified index funds and your own home if you want one. Maybe some bonds if you’re nearing retirement or bit of a bedwetter about stock market volatility.
. - Increase your emergency fund. If inflation is 5% for the year, increase it by that much. Edit: bank interest rates are in the toilet at the moment. Check yours, they may have changed recently. If under 2% for your ‘high interest’ emergency fund account, which it almost certainly will be, consider transferring some of your emergency fund into bonds instead. Perhaps you could keep 3 months worth of living expenses in cash and the rest in bonds. Bond rates are rubbish too but you have to put it somewhere.
- If you’re worried that inflation will eat away at your long-term retirement savings, save and invest more. Consider reducing your proportion of bonds (if you have any) and increasing your proportion of potentially higher-return shares.
To clarify: Emergency fund – consider more bonds. Long term investments – consider less bonds.
Reason: average historic returns = shares > bonds > cash. In a time of high inflation and low returns we are forced to move to the left of this progression across the board.]
There are, as Nikolai said, no specail sauce or magic beans. You need to have a budget that is less than your outgoings and stick to it. Yes, food and fuel are getting more expensive and you might eat mince and sausage most nights when you used to eat steak. But until there is economic collapse don't panic and continue to follow senisble advice.
Because the smart boys at times lose everything.