All About Inflation


In today's episode, Bruce Hosler of Hosler Wealth Management sits down with Jon Gay to talk about the one topic on everyone's mind in 2022 - INFLATION.

What is causing this inflation? 

  1. Demand/Supply imbalance
  2. More money chasing less products. (Supply chain)
  3. Shortages of availability (Housing)

What is Demand Destruction?

  1. Higher mortgage interest rates (Already reports of sellers lowering their asking prices)
  2. Higher gas prices (Less Travel)
  3. Higher Diesel prices make the costs of all good that must be transported by ship or truck or train more expensive due to much higher transportation costs.

How long will we have this high inflation?

What about the rate inflation increasing or decreasing?

What is the major risk that affects us in retirement with high inflation rates?

What can people do to protect their future retirement from high inflation?

  1. They need to make sure they are not investing too much money in the wrong asset classes.
  2. Fixed income with the rising interest rates has lost value more than 9% in 2022.  That is not what helps a retiree have growth in their retirement portfolio when we have high inflation like we are experiencing now.
  3. Retirees need to make sure they have a retirement income plan that protects near term income, while still leaving them exposed to asset classes that can respond to inflation and raise their prices.  This can provide growth even when there is inflation (  These asset classes that include , Stocks, Real estate, Commodities like energy, and investment vehicles that can provide down side protection while still allowing the investor to participate on the upside when the markets recover.

To contact Bruce Hosler and the team at Hosler Wealth Management, visit them online at https://www.hoslerwm.com/

Or call them in their Prescott office at 928-778-7666 or their Scottsdale office at 480-994-7342.

Limitation of Liability Disclosures:  https://www.hoslerwm.com/disclosures/#socialmedia

© 2022 Hosler Wealth Management, LLC  All Rights Reserved

Transcript

All About Inflation

Jon: Welcome in episode, number three of Protecting and Preserving Wealth with Bruce Hosler. I am Jon Jag Gay joined by Bruce Hosler from Hosler Wealth management, Bruce. Great to be back with you.

Bruce: Thank you, John. It's great to be with you this morning.

Jon: I would be remiss if we did not cover this in one of our episodes.

It's what everybody's talking about. We're recording this on May 31st of course. And that is inflation seems to be the big topic dezure in the first half of 2022.

Bruce: Oh man. It is on everybody's mind. It is front and center.

Jon: So let's start right with the basics bruce. What's causing inflation?

Bruce: You know, John, I don't wanna get political on this because we don't want political stuff.

But if you think back to when we went to college or when someone goes to college and they take that first class, econ 110 and they talk about demand and they talk about supply,

Jon: right?

Bruce: The situation going on right now is, we have more demand in our economy for certain things- services, supplies, things like that.

There's more demand than there is supply and that's creating this inflation, but foundational to all of it, is there's more money chasing less products that are available because it's this supply chain. You look at what's going on in China right now. And they've got those ships all waiting out there to deliver things.

And you go to the shelves in the stores. I went into the Best Buy the other day to buy a little piece of technology, and a lot of things were missing. That's what's going on is we're looking for things and there are supply chain shortages. And then of course, you look at the shortages in housing right now.

We got all the millennials, we got the generation Xers, they're all looking for houses to form families now. And we just haven't built enough houses since 2010, over the last 10 years. And so these kids are coming outta their parents' basements. They're trying to form a family. They can't find housing. And so there's housing shortages all through the country.

So that's, what's going on. There's not enough supply for the demand in all of these areas and then foundationally for all of this, is oil, and we'll talk about gas and oil I'm sure, next.

Jon: Absolutely. You mentioned millennials. The crazy thing to think about now as time marches on, millennials, uh, basically depending on who you ask are born between 1980 and 1995.

The next generation gen Z is 95 to 2010. So some of those folks are actually finishing school and looking at housing and stuff, right now. There's a whole nother generation coming up behind the millennials, which is wild to even think about.

Bruce: Wow, wild, and these kids are, they're all looking and, and trying to form families and, and find houses,

and so the low interest rates, we're helping them to do that. Now with the higher interest rates that we have. That's also fueling this inflation.

Jon: I'm sorry, did you say higher interest rates are fueling inflation?

Bruce: They are because what's going on is this, the higher interest rate causes houses to be less affordable.

So the lower interest rate caused the great supply of, of availability, but now that's not the case. So, it's creating the higher interest rates, creating this demand destruction. But there's still a supply shortage. So even though there's money available, a lot of people cannot afford that. And so it's creating this inflation because there's higher prices in housing, but it's not coming down because of the shortage.

The contractors are busy.

Jon: Yep.

Bruce: The suppliers are busy. I have contractors telling me they can't buy windows. They can't get garage doors. And so there is inflation because of the higher interest rates. Eventually that will be destroyed with the higher prices of interest rates. Through demand destruction that's caused by those higher interest rates.

Jon: You mentioned contractors, my wife and I are looking to upgrade to a bigger house in the next year or two. Obviously we are staying put right now. We're not buying a house right now. We're waiting as long as we can, what we've also considered knocking down our house and rebuilding. But again, to that point, the idea of hiring a contractor and having he, or she get all the supplies that they need to build a house is terrifying right now.

It would definitely not be wanting to do that right now, if I didn't have.

Bruce: Oh yeah. And the delays that you may suffer, the unexpected delays are terrible. You know what maybe you think as a one year project may turn out to be three.

Jon: Yeah, exactly. You mentioned a term a moment ago, Bruce. That is demand destruction.

Can you walk us through that and what that means?

Bruce: So what's going on is the first of all, with the higher interest rates, mortgage rates, as we see have moved up. And so what's happening is we just see it in the news, just coming out this weekend. Is that we're starting to see people having to lower the prices on their houses because the people that are trying to buy them cannot afford the payments with the higher interest rates.

And so what we're seeing. Is that demand for housing is being destroyed because there's not as many buyers in the marketplace because they can't afford the higher house prices.

Jon: Okay. That also affects gas prices in oil, as you mentioned a moment ago, too.

Bruce: Right? So obviously, uh, we saw that there's not as many people traveling or they're not spending as much money on travel. Whether it's flying or driving, you know, we had the Memorial day weekend.

Those higher prices for gas are destroying the demand for those supplies as well. And then you look at, uh, the diesel prices. I saw diesel prices above $6 a gallon the other day. And you just think about everything in our economy. You know, we, we have a distribution economy in the United States.

Everything moves by boat, plane, train, or truck.

Jon: Yeah.

Bruce: And most all of these run on diesel. And so those higher transportation costs are being passed through by the businesses to the consumer, and you're just seeing the prices on everything go up astronomically - unexpectedly, and that is going to raise the prices at some point to the point where people are gonna pause.

And they're gonna say, do I really need to spend this much money on whatever it is they're buying? And that begins the demand destruction, and that then begins leading to what is potentially a recession because everybody slows down because they can't afford to be spending what they wanted to spend before.

Jon: So you talk about that on the macro level, when it comes to supplies and trucking and all these businesses, but even this cyclical nature of inflation, you look at something like a fast food restaurant. All of a sudden the fast food restaurant is having to pay more for their goods and the, and the food that they bring in and the employees are wanting more money and then the customers are paying more money.

And then all of that cycles on itself to just keeps perpetuating that inflation and everything going up.

Bruce: It's a upward spiral. Wages have to go up because the employees demand more and the employers can't find employees.

Jon: Yep.

Bruce: And so they're having to pay more to try and bribe more people to work for them.

Plus their costs of all their cost, food costs, everything were going up. And so that's what used to be fast food used to be inexpensive is not anymore.

Jon: Right.

Bruce: And there's no longer a $5 hamburger. It's 9, 10, 12, 15, $20. And that's what we see going on. Right.

Jon: So Bruce, how long is this high inflation gonna last? With the caveat that I know you don't have a crystal ball, but how long is it gonna last?

Bruce: You know, we don't know exactly, you know, we see oil approaching $120 a barrel today, and that price is gonna go up until we get to the point where there's alternative choices that people make.

Either they travel less, they choose more of an electric vehicle. Or other demand destruction like that. They choose other choices. They do other things. Now, certainly the things that are required for all of us to do, like if you have to travel for work, you have to travel. So you're gonna pay those prices.

But if it's for leisure, you may choose not to do that. So how long do we have the inflation? Probably we're gonna see inflation. And the other question on that really is. How high and how long are we gonna see the inflation at this rate? Or is it going to ameliorate and soften up? But instead of being at eight or 10% a year, is it only at four or five or six, which is still very much higher than what we've been used to?

Jon: Absolutely!

Bruce: But we are gonna see inflation for a while until something's changed specifically regarding oil and the production of oil, because our economy runs on oil. And they're not gonna be able to make that transition to alternative energy quick enough. And so, we're gonna experience this inflation for a while, but we may not have it at the pace we're seeing.

You know, there is some projection that the rate of inflation may be starting to top in some areas, but other areas we haven't seen that top yet, but I don't know. Is it all of this year into 2023, does it run into 24? It's hard to say right now.

Jon: And so, when you talk about that demand destruction, that demand destruction that'll destroy that imbalance between supply and demand, that would theoretically curb, uh, inflation. But then at that point we're talking about a recession?

Bruce: That is exactly what I expect to happen. That these high rates are gonna push us into some sort of recession, and that is gonna be caused by the fed raising interest rates, raising interest rates, raising interest rates, and they can never measure exactly the rate at which they raise them and how far they go until they actually push us into this demand destruction, which creates a recession, and we're slowing up. We've already had a recession in the first quarter. Now, whether that continues into the second quarter, we don't know. But how deep the recession becomes and how long it lasts. Those are the big questions.

Jon: And the bigger question I think for our listeners, the million dollar question, pun intended, what can people do to protect their future retirement from this high inflation?

Bruce: Well, first of all, they need to make sure they're not investing too much money in the wrong asset classes. And when I say the wrong asset classes - in this type of market where the market has pulled back, everybody's very nervous about losing money. The SMPs,

Jon: oh yeah.

Bruce: Pulled back about 20%. They've lost money in their accounts.

And so their gut reaction is to run to what they appear to be safe and that's fixed income investments in bonds and, and the like. But the problem is, is that those fixed income investments have lost money this year, too. If you look at the AGG, just the, kind of the index of the fixed income market, it's already lost 9% already in the first five months of 2022, so that wasn't helping them protect against that loss.

And then it's not giving them growth in the face of inflation. So the inflation is causing them not to be able to keep up with it, with their wages. And so they're losing buying power and their investments are losing growth in the face of inflation. And so it's a natural reaction for people to choose the last thing.

And especially the retirees, they have to make sure that their retirement income plan is put together that provides them income in the near term, but provides them the opportunity for growth long term in the face of rising interest rates. And in the face of this inflation. And so, vehicles such as stocks, real estate, commodities, like energy, and investment entities that can provide some downside protection may be what they need to include in their portfolio while still allowing them to have the upside when the markets recover and participate in that to overcome this downturn that we've had in the market.

Jon: And I mean, the issue is that human nature, and when you're losing value because of inflation, I think there's a natural temptation to wanna get outta the market, but if you do that, if your investments are down or inflation is up, you're locking in that loss. You're not giving yourself a chance to recover down the road, correct?.

Bruce: Absolutely. This is not the right time to be panicking and trying to get out of the market and timing this bottom.

I think we'll probably go lower, but you want to be able to keep your money that is long term money invested and leave it in the market for the period of time to let it recover. Nobody knows how fast or when that recovery will take place. And so they have to keep their money separated between near term that they need for income and long term that they have for growth and just stay calm and be confident that these companies have the ability to raise their prices.

Just like the restaurant, the fast food that you talked about, they can raise their prices. And when they raise their prices, they make more profit. And when they make more profit, if they're invested in that company, they get a return on that investment and they're gonna be safe and protected in the face of inflation.

So that's the opportunity to stay put, not panic and to ride this out.

Jon: Bruce, I know you're having these conversations with your clients at Hosler Wealth management every day. If somebody listening wants to come talk to you and your team about their financial future, short-term, long-term, what's going on now, what's going on for the rest of their lives in their retirement. What are the best ways to reach you?

Bruce: Certainly they can call us. At our two offices in Prescott, 928-778-7666. And in Scottsdale, 480-994-7342. And of course they can catch us on the web at hoslerwm.com.

Jon: Bruce, I have a feeling this may not be the last conversation you and I have in 2022 about inflation, but good insight, and we'll talk again soon.

Bruce: Thanks, Jag.