Month: February 2022

On a winter mountaineering expedition, the time to prepare for a summit attempt is when you’re safe in your tent below. Venturing above in foul weather in the manner you would on a calm sunny day will immediately expose you to numerous life-threatening perils. Investors neglecting preparation for the approaching stagflationary storm may soon face similar hazards. What is stagflation, and what causes it? What are its associative conditions, and by what means may it be successfully traversed?

Stagflation is a portmanteau combining the words stagnation and inflation. It depicts an economy with little or no growth, high unemployment, and high inflation.¹ 

The causes of stagflation are more complex. The natural business cycle involves periods of expansion, peak, contraction, and trough. Economic contractions are critically important because a) they displace marginal workers, giving them sufficient incentive to sharpen skills and more valuably re-enter the work force, b) they accompany stock bear markets, which weed-out speculation, and c) they accompany tight credit markets, which justly punish over-indebtedness. These cleansing processes prepare both the economic and market systems for healthy and sustainable expansion. Climbers who don’t rest and heal are a danger to themselves and others, and so are financial systems not periodically cleansed! Central bankers don’t suffer the inconvenience of principles, however, and choose rather to ‘inflate’ the money supply in an attempt to eradicate these painful cleansing processes. Since bankers can’t stop the natural economic cycle, when their conjured money meets economic contraction, stagflation is the contorted result.

The associative conditions to stagflation are:

• A weak economy: less available credit, corporate bankruptcies, and layoffs.

• Rising prices: not on some things, but on almost everything.

• An Increase in the probability of policy error: policy responses by both President Nixon (tariffs, price controls, and scrapping the gold standard) and ‘the Fed’ (knee-jerk rate hikes and cuts) to the 1970’s stagflation are universally seen as monumental failures today, but no new solutions have emerged.

It’s challenging to know what financial posture to assume in battling a set of conditions, when you don’t know what policy errors will soon change those conditions. Like the winter mountaineer, pack every survival item, but pack light, and stay nimble and alert:

• Establish a stronger cash position.

• Reduce risk everywhere you find it.

• Tighten the budget.

• Diversify income sources, and keep your day job.

• Think, don’t panic: stick with high conviction holdings.

• Look for great opportunities, and they are coming.

• Help others in need, if you are so blessed.

Stagflation is not a foregone conclusion, but it strongly appears to be the developing scenario. We’re still below tree-line, so take time to think about it, and prepare accordingly, Shaun.   

“Stagflation can only occur if government policies disrupt normal market functioning.” ~Kimberly Amadeo

“The prudent sees danger and hides himself, but the simple go on and suffer for it”. ~Proverbs 22:3 

1 The Balance, “What is Stagflation?”, by Kimberly Amadeo, October 29, 2021

https://www.thebalance.com/what-is-stagflation-3305964

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

You’ll never hear this from a central planner or a Socialist, but every individual is a fully-operational micro-economy, each making decisions they believe will best advance their own cause. It’s also true, based on the management (or mismanagement) of their own economy, that every person is either a wealth producer or a wealth consumer. Financial advisors understand this, and in their pursuit of wealth producing clients, commonly include the term, “wealth management” in their business name. Which of these two are you, and if the latter, what can you do about it?

Wealth production is superior to wealth consumption in both practicality and virtue. In practicality, wealth producers endure relatively low financial stress, the enjoyment of life’s adventures, and the blessing of helping those in need, while wealth consumers generally go from crisis to crisis. In virtue, wealth production offers gratification for good stewardship, and the privilege to demonstrate such for the next generation, but wealth consumption robs a person of both.

Financial success is almost never about how much money a person earns, and almost always about what a person does with the money they earn. I know people who have amassed great wealth on a modest income, and others who went broke after earning (or being given) huge sums of money. Discard every excuse to fail, and embrace the principles that will cause you to succeed.

The primary difference between these two “monetary types” of people is the simple fact that wealth producers consistently practice sound financial principles, and wealth consumers don’t. If you practice the following concepts it is highly likely you will soon begin to methodically accumulate wealth, at least throughout your working years:

• Maximize ‘net positive monthly cash flow’ (net income exceeds gross expenses) with strict budgeting, careful debt management, and thoughtful tax planning (your thoughts, not just your CPA’s; you need to own this!).

• Plug financial leaks by eradicating monetary waste. Understand the difference between your ‘fixed expenses’ and your ‘gross expenses’, and minimize that difference.

• Allocate your investable resources wisely, beginning with a) adequate emergency savings (equivalent to 9 months of household expenses), b) the right amount, in the right duration, of the right type of life insurance, and c) a specific plan to become debt free.

I believe these powerful principles should be in place before a person begins investing, and the people who don’t do so generally withdraw invested funds sooner than expected, often with painful consequences, and for things other than what was intended.

Think about it, Shaun.

“He who trusts in his riches will fall, but the righteous will flourish like the green leaf.” ~Proverbs 11:28

“Owe no man anything, except to love one another” ~Romans 13:8

“God loves a cheerful giver.” ~2Corinthians 9:7

“A wise man leaves an inheritance to his children’s children.” ~Proverbs 13:22

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Seldom is the winter wind blowing under 50 mph, and weekly over 100 mph, at Edmund’s Col (‘the winter Col’), found in the White Mountains of New Hampshire. Sound counsel for climbers contriving a first-venture through ‘the winter Col’ is a preceding and critical adjustment in both attitude and posture. Investors navigating a rising interest rate environment may be confronted by similar headwinds; hence, comparable preparations are advisable. What are the financial implications of rising rates, and what adjustments should you consider making?

America’s central bank (‘the Fed’), in response to the 2020 Covid-19 lockdown, unleashed the greatest money-printing experiment in world history, pushing inflation to fresh 40 year highs (so far). Shocked that inflation didn’t prove “transient”, as it proudly insisted throughout last year, ‘the Fed’ is now panicking to bring the inflation it created back under control. One of the means available to ‘the Fed’ in accomplishing this task is to raise interest rates, which restricts loan growth, which dampens business and consumer spending, which slows the economy, which reduces inflation.

The following are potential implications of rising interest rates, and keep in mind some of these effects are delayed:

• Higher loan costs

• Less corporate and personal borrowing

• Decreased corporate and consumer spending

• Higher mortgage rates

• Decreased demand for real estate

• Declining home prices

• Increased interest rates on fixed income accounts

• Decreased demand for stocks

• Rising interest costs on government debt (a 2% increase in rates, forecast by 2023, will increase government interest expenses by $750 Billion annually!)¹

• Higher tax rates to fund government debt

Prudent re-posturing might include the following:

• Be attentive to re-positioning short-term and emergency savings to higher interest rate accounts.

• Convert variable rate debt to a fixed rate, and better still, pay it off!

• Own fewer speculative stocks, especially non-dividend paying stocks.

• Diversify income sources creatively by engaging the charter economy (December 17, 2021 blog).

• Creatively cut household expenses by engaging the alpha strategy

• Avoid over-reacting to the new rate environment. Stocks have historically risen during the early and mid-rate hike cycles. Don’t hide in bank accounts, as they are still losing purchasing power at an alarming rate. Carefully think through each financial issue.

• Avoid low quality debt and long-term bonds like the plague.

• Avoid deferred payment plans and unnecessary consumer debt.

Think about it, Shaun.

“Wealth gained hastily will dwindle, but he who gathers little by little will increase it” ~Proverbs 13:11

1 Dr. Eifrig’s Health & Wealth Bulletin, “What Higher Interest Rates Mean For You…If They Happen”, February 10, 2022

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.