Episode 13: Inflation Worries!

Isaac Wright: Welcome back to Wright Money Tips. Today we’re going to talk about the things that you all are finding each and every day when it comes to the store, getting food, groceries, all the above, gas and cost of living is constantly going up. That’s called inflation and there’s definitely some legitimate inflation worries that are out there today.
But I’m really happy to have a guest that I feel can bring some good insight to the world of inflation. Today we have John Buchanan. John is the vice president and senior portfolio specialist for Savos Investments. John, welcome to the show and glad to have you. And I think this is going to be a topic that a lot of people are going to take interest in.
John Buchanan: Thanks, Isaac. Glad to be here.
Isaac Wright: So, John, let me just start off if you don’t mind. I mean, granted in the world that you’re in today, because I know you’re communicating with a bunch of professionals across the country, communicating with the investment committee with Savos. Right now, I don’t remember exactly where Savos stands as far as assets under management, but they are really growing quickly and more importantly is information like inflation in terms of that topic has been a big, let’s call it, definitely a big consideration.
John Buchanan: It definitely has. Assets under management, we run just over 7 billion, which puts us in the boutique category. When you think about Elias and Wall Street, Goldman and JP Morgan and others, BlackRock, these firms will clock in well north of a trillion. But we really like our size because it gives us the opportunity to invest in an array of different investments without moving the markets and what we’re trying to actually be a shareholder in or an owner of.
Isaac Wright: Yeah, that’s awesome. That’s good for people to know that because I still think you know and the world we’re in today and of course, the amount of money that’s being pumped in through stimulus, the litany of legislation and political moves that are being made right now.
I think being nimble helps tremendously. So, I wanted people to hear that. I knew you guys were in that kind of status, if you will, but let’s jump in and let’s talk a little bit about inflation. I think, if we could, let’s just talk about it in relation to today’s economy. We have food, commodity prices, gas prices, people are obviously seeing these go up a lot faster than their paychecks right now. Anything you want to kind of offer as a forecast or any thoughts around whether or not, you see this slowing down going through the second half of this year?
John Buchanan: I mean, there’s two components right now that are driving a lot of it. One is you’ve got an enormous supply of new money into the system.
I mean, you think about how much money has been created out of thin air. I oftentimes now hear people refer to it as confetti because it’s just so volumous in the amount of money. And that’s chasing obviously a limited supply of goods because of COVID. You had lockdowns shutdowns, massive supply disruptions on the supply chain side.
You couple that with a liquidity event. You know, think about inflation incurs from two mechanisms. You always have to have two ingredients to really populate inflation. You’ve got to have demand and a lack of supply. You go back 40 years in the U.S. economy. We really have not lived through any type of elevated inflation in 40 years.
Yet our debt money supply has all grown exponentially. And that’s why you’ll have folks on TV and other publications say, “Well, we can just keep printing and printing because it’s never really a bit us in the bud yet.” But that’s largely because we always had an infinite supply of cheaper and cheaper goods.
Keep mind, in the eighties and nineties it was Japan. Then it moved to Taiwan and Hong Kong, and then it moved to China. And now we’re in Southeast Asia on manufacturing of cheaper goods. So, you could always roll into a Walmart, buy a $3 t-shirt, buy a 25-cent plastic cup. You never had to have this either a supply chain disruption, or a cost of supply that would be relevant on say the U.S. manufacturing scale.
But now we’ve got the storm of over 6 trillion in new money, out of thin air, hidden into the system, simultaneous to complete supply chain disruption. Look at lumber prices, up 400%. Lumber mills were shut down. We do get some of our lumber from Canada and they continue to keep their border closed. Granted there is commerce trade, but they had really draconian lockdown measures compared to us.
So, you’re seeing of course with the money supply, a lot of people going out and buying houses. Massive renovations going on across the United States on existing homes. All of that is substantial demand for lumber, and yet there’s not enough by any stretch to meet the demand.
Isaac Wright: Let me say then just listening to you, John and thank you for that. I think that’s an excellent way to kind of personify what’s going on right now. But in listening to that, I have to tell you, I don’t see that slowing down. I don’t see demand slowing for sure right now, because people are coming out of COVID. And then supply wise, unless things reopen fully and even with that being said, I can’t imagine the delay and the disruption in the supply side, because I can’t imagine that’s going to get fixed in a week or nothing. It’s going to be interesting to see how much inflation hits and how when we talk, and I think maybe this is good to talk about and listen to the federal reserve say they’re going to start tightening up monetary supply potentially. But you know, right now they just want everything to ease through 2022 and let people come out of COVID feeling the least somewhat confident about going out and spending money and money will be plentiful. The stimulus packages, whether or not all of them get passed or some kind of medium in between, I just see a situation where things are going to continue to ramp up.
I did want to ask you your opinion about the federal reserve and whether or not you think they’re going to be able to clamp down a little bit on inflation? Because I know that their target is still right around that 2% range. But do you see that that’s going to be a tough ask?
John Buchanan: Oh yeah. Enormously tough ask. When you think about we’re well over 2% at this point, anyway. Food prices could easily look at a double digit inflation. On the construction side, same as you just mentioned. You’ve got triple digit inflation on the lumber side currently. Now, that may calm down as supply starts to come back in.
But for the fed at this point, to really taper back and start to try to reign in, it’s a very difficult task because they’ve pushed so much into the system. The system, you could make the argument, is quite artificial because of the nature of support the Fed’s been coming behind everything with. A bigger risk is that the inflation gets away from them and that they won’t be able to keep rates at these low levels. That’s going to be the biggest challenge. Can they keep rates low enough without inflation running away from them?
Isaac Wright: What is your take on then with seeing what’s going on out there with cost of living, but then at the same token, you go to the bank and you’re lucky to make a half a percent in a money market account. Are you sensing that interest rates around bank CDs, treasuries, I mean that whole situation. What are kind of your thoughts around that?
John Buchanan: The biggest challenge is going to be the math involved. Your second-grade arithmetic. You think about the U.S. right now, we’re at 28 trillion in national debt growing dramatically.
I mean, what’s been proposed just in the first four months now going into the fifth month of the year, we’re at 6 trillion in proposals. We’re not even at the halfway mark. So, the debt levels and the budget deficits, steady level debts, you don’t even have to talk about the potential of say 160 to 180 trillion in unfunded liabilities between Medicare and Social Security and Medicaid and so on, say pensions. Just the basic math associated with low let’s round up and call it $30 trillion in national debt. That’s currently being financed at sub 2% interest rate. So, when you look at a 30-day treasury T-Bill out to a 30-year long bond, the blended interest rate is just under 2%. So that puts that figure somewhere just under $600 billion a year.
Now pre-COVID, the entire budget of the federal government was $4 trillion, pre-COVID in January 2020. So, just envision, that rates to your point, Isaac, if you were able to go in your local credit union, local bank, get a 3%, 4%, 5%, let’s go 5% CD to your example. 5% CD would also imply that the treasury market would be yielding also somewhere around 5% and that would also mean that that’s going to be basically our cost as taxpayers for lending. 5% on 30 trillion is 1.5 trillion dollars interest on the debt on an annual basis. I just mentioned the entire budget pre-COVID was four. How’s that 30%, 40%, almost, right? That’s not a number that anyone could actually say is palatable.
Isaac Wright: So, do you see that? I guess, based on that, I guess obviously the government, the Fed and everybody else seems to want to keep that interest rate as low as possible for the following reasons. The battle that’s about to ensue and whether that actually takes place or not. Maybe to turn this around a little bit, because obviously that can sound fairly scary, but also on the flip side to take advantage of what I would call monetary policy that’s off the chart easy right now. Along with, Lord knows how much money is going to come down the pipeline here to support the reopening efforts, I would like to hear a little bit about what are some things that you feel in your opinion are opportunities to take into consideration if we’re are heading into, let’s call it a hot economy, that obviously will marry up with inflation to whatever degree that may turn out to be?
John Buchanan: I mean the first vehicle that you would always look at is being an owner of assets. You know, that’s going to be the house you live in. You might own a rental property or a vacation property.
And then you look at your financial assets, which are going to be your investments. I mean, the largest nest egg for folks are going to be your 401(k) plan or your IRA rollover. So, in the financial assets side, being an owner and not a lender and creditor I think is going to be quite important. If you’re trying to pursue an inflation hedge, or at least an ability to pace with inflation.
Great example of that is last week, I believe it was the head of Clorox, very basic home cleaning product company, right? They came out and said, “We’re going to have to do an across-the-board price adjustment on all of our products, up price, upwards adjustment.” So, if you’re an owner of a business that can actually pass the raw cost of inflation for those goods to manufacturer product onto the consumer, that’s a great asset class to be an owner. Meaning, a business that has the ability to withstand inflation and pass it on to consumer. It always reminds me of the famous quote, and I’ll slaughter it, but it’s from Warren Buffet right before he bought Gillette.
Now, Gillette is now owned by Procter & Gamble, but he bought Gillette before it was owned by P&G. An analyst asked him, “So why do you want a Gillette? What makes you excited about Gillette?” And he said, “I wake up every morning, excited knowing that millions of guys around the world have to use my product.”
And if you’ve ever priced a Gillette razor, you know it isn’t cheap. So, it’s one thing to own an asset that may not have the cashflow or the ability to pace with inflation. It’s a different investment when you think about a business that can actually carry upwards, that cost point. Because inflation is crystal clear when you look on a historical basis. Asset owners prevail, lenders and creditors get damaged, right? Purchasing power greatly, greatly diminishes. Think about someone that on a $1,500 social security check today. If we were to experience 10% inflation for 10 years, that’s really not that toxic of inflation rate by world standards, but it wouldn’t be by our standards, certainly over the last 40 years.
But the purchasing power just in a 10-year window, would be diminished down to about $500. So that $1,500 check today would have the purchasing power of $500 to that person. That’s a big haircut. So, owning assets that can actually keep up is going to be critical.
Isaac Wright: I love it, man. The thing about owning assets and I tell people this, because people are worried about the market going down. Because the market’s been on such a hot streak, even coming out of COVID out of March of 2020, when the market dropped 30 plus percent in a month. We’ve had, unbelievable growth.
But I’m just having a hard time and by no means, do I have a crystal ball, but by no means, do I feel like when the Federal Reserve is basically saying they’re going to keep everything pumping. People are coming out of COVID, money’s being spent. I’m sure there’s going to be some outliers that potentially could take things the other direction.
But, I mean, people are just putting money into assets because why not? I mean, you can’t make any money at the bank. You can’t make money in fixed income, or it’s really hard to. You can use alternative asset classes. I don’t want to go into a whole laundry list here today, but just know what you said in my opinion makes total sense.
I think consumer staples and things that allow you to pass on a lot of that cost increase to the consumer that they know that they’re going to need and have to have to continue to use. I think that’s why you’ve seen a rotation, a little bit stronger back into some of the old school Dow Jones stocks and so forth in a little bit away from technology here for the last couple of months.
But, John, let me say this before we wrap up today. Anything you want to add, man? I was excited to have you on the program today because I know you’re pretty studious with any of this. I came up with a few thoughts, questions, things that we’re hearing from our families. But anything else you want to add to the fray before we wrap up today related to inflation? Maybe throw out, is there anything that you can see that could take the market down as overwhelmingly, many people feel like we’re still going to be in a hot market? Maybe just to play devil’s advocate as we kind of wrap up.
John Buchanan: I think there’s a bigger risk of the market crashing upwards because of everything you just mentioned, which is the Fed’s involvement and governments coalescence around the world. But you do run that risk, that outlier chance that the Fed were to enact some sort of tapering or take a step backwards, an asset purchase dwindle, right? They’re not going to buy as much on the open market. Or if they were actually to start sell some of their balance sheet assets, which is highly, highly unlikely, that would spook the markets. But there’s nothing that suggests that they’ve got that even in their thought process.
So, you know, the market has been really conditioned that the Fed is always going to be a backstop in this current environment. And until we’re really far out of COVID, it just seems highly unlikely that the Fed would do something to derail market conditions intentionally, at least.
Isaac Wright: Well, I kind of listened to you today and thinking to myself, not to say it should be an overly worrisome situation, but something to be highly aware of. Economically, I think that the forecast is probably going to continue to mean that we’re going to have rising cost of goods, services. With that in mind, I think John, having the backstop of being able to invest in assets and not necessarily keeping money in cash, obviously with inflation, like you said, I love the Social Security example you set as far as just getting eaten away with the income that you bring in.
Obviously, we’ll look forward to having you back on the program. I think my takeaway and from what you’ve said today, at least, people are going to have to go after and take a little bit of risk with what they’re going to own to keep up with some of the things that are going on.
I think sitting back and just getting a couple of percent on a bond fund or getting a couple of percent on a long CD, or I don’t even know if you can get that right now. That’s so crazy to say, isn’t it? But listen, man, I’m always happy to have you on. We’ve had some chats in the past and we’ll do it again soon and look forward to having you back. Thanks again.
John Buchanan: Thanks a lot, Isaac. Appreciate it.
Isaac Wright: If you have any concerns or questions, you can visit wrighmoneytips.com to request some time on our calendar. Or please subscribe when visiting wrightmoneytips.com to receive notifications on new episodes, our newsletter, and even upcoming events.
And for all of you today, hope this has been helpful to hear some of the realities around the world we’re in today in terms of what it’s going to take to possibly continue the lifestyle that you want to live. And we’re here to support that. You know John, I’ve worked with, but also more importantly is that we have a whole team here that can really structure out and help you with a financial plan that makes sense. So, with that said, look forward to having you on the next episode of Wright Money Tips and we’ll talk soon.