It’s unlikely that a battle can be won against a misunderstood enemy. What will swiftly defeat one opponent will be taken and used against you by another. In mid-2021, Jerome Powell proclaimed that surging inflation-the arch enemy of America’s middle class-was transitory. Several regional banks that believed him made large bets on long-dated Treasury bonds and no longer exist as a result. I have friends who are highly skilled in their professions, working full time, and yet slowly losing ground financially as inflation devours their saved capital year after year. Investing successfully in an inflationary environment requires doing so with the expectation that the dollar will lose purchasing power and asset prices will asymmetrically rise over time. Emergency savings serve several critical purposes. But positioning the bulk of one’s long-term capital in cash savings today, even at 4% interest, is to invest with the expectation of declining prices, not rising prices. Building real (after-inflation) wealth while investing primarily in cash is impossible, and retaining it over the long term is equally unlikely. Let’s consider the issue that places Jerome Powell in a pickle as he prepares to speak for perhaps the last time today, and what we can learn and apply from it as investors.
The Fed is split on whether to lower interest rates in response to a weakening labor market, especially given recent upticks in inflation reports. A rate reduction may fuel inflation while leaving rates alone in a weakening labor market might usher in a recession. While trade tariffs are the present impetus bolstering price increases, the truth is America needs constant inflation because the debt load can never be repaid on honest terms and the only resolutions are an honest default, which swiftly delivers the consequences but also forces immediate reformation, or dishonest inflation, which multiplies the consequences exponentially but maximizes a deferral of them. U.S. central planners have clearly selected the inflation option, making it difficult for the Fed to help the economy when it needs it and more challenging for investors to accumulate real wealth. Millions of hard-working Americans are emboldened as their nominal wealth grows, even as they become poorer in real terms! The following practices may prove effective as you strive for good financial stewardship and ‘real’ wealth building:
- Control spending. Every dollar not spent will help you fight inflation on both sides of the balance sheet.
- Mitigate catastrophic risks with the right amount of the right type of insurance and with the smallest possible premiums. Battling two formidable foes simultaneously is unnecessary and unwise. We must fight inflation.
- Always carry an adequate emergency fund and maintain a cash position in your investment accounts. Cash will minimize disruptions in your financial plan and enable you to capitalize on attractive investment opportunities as they arise.
- Diversify your investment holdings and maintain an exit plan on risky assets from the time of purchase to mitigate market risk. Warren Buffett says avoiding a catastrophic loss is the most important rule in investing, and he’s right. Manage risk the way a Great Pyrenees dog guards a herd of sheep, never removing its eye from the flock.
- Have a tax plan and follow it. It’s not gross income, but net income that influences wealth-building. Like reduced spending, a lower tax bill fights inflation on both sides of the balance sheet. Strive to minimize lifetime taxes, not necessarily taxes each and every year.
- Maintain a low debt/equity ratio and manage debt as you would a pet scorpion: cage it, starve it, and if it hisses at you exterminate it! Leverage only makes financial sense when the borrowed money is invested productively after taxes and inflation-a task that is not easy.
- Work hard, improve specialization in your field, and trade-up when you can to earn a competitive income. Never stop learning.
- Invest with the goal of building a portfolio that generates more income than your earned wages. Inflation says a dollar today (a dividend) is worth more than the promise of a dollar tomorrow (growth). Both are important, but behavioral studies have concluded that spending income is more comforting than selling assets to spend growth.
Inflation is not a game; it’s bloody financial warfare. Have a tactical plan consisting of these and other measures, and may God bless your inflation-fighting, wealth-building efforts!
Shaun
“Inflation is taxation without representation” ~Milton Friedman
“You have sown much and harvested little…and he who earns wages does so to put them into a bag with holes.” ~Hagai 1:6
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Old Forge Wealth Management, LLC (“OFWM”) is a Registered Investment Adviser located in Rhode Island. Registration as an investment adviser does not imply a certain level of skill or training. OFWM may only transact business in states in which it is registered, or qualifies for an exemption or exclusion from registration.
This material is provided for informational and educational purposes only and should not be construed as personalized investment, legal, or tax advice. The information contained herein is derived from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Certain statements contained herein are forward-looking in nature and subject to change without notice; actual results may differ materially from those anticipated.
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