Inflation is the topic of the day. How high will it go? How long will it last? In a special episode, of That Annuity Show, David Czerniecki, Chief Investment Officer for Nassau Financial Group shares his perspective on the drivers of inflation and the state of the global economy. Do you need content for your emails or social media to generate leads or reengage your existing clients? Use these 1-minute clips of David’s talk to help make your phone ring. If you need help using them, chat with us, schedule time, or give us a call at 800-420-5382.
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In this 20 minute interview, David provides a simple definition for inflation, why it may last longer than we expect, and how we should manage our portfolios to dampen the effect.
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Defend Your Portfolio Against Inflation
The big drivers of of how to position your portfolio or, you know..there are many, many, many, many factors. But you are correct. As rates rise, we would expect bond prices to fall. So you would be losing some purchasing power in your portfolio. Generally speaking, across history, stocks have been a decent hedge against inflation, but there can be periods where they are not, as you go through the transitions. Right. If you think about a sports analogy like basketball, there’s offense, there’s defense. But there’s transition, there’s changing from offense to defense. There’s changing from defense to offense as the ball as there’s turnovers, as you rebound and things like that. So I’m thinking NCAA Tournament here. And so so I think we’re very much in a transition right now. So making big bets in one direction or the other is a very high risk bet.
How To Explain Inflation
So inflation is a general and sustained rise in prices. Sustained is a really important point here. Any one little spike, we don’t worry about. You know, the cost of a loaf of bread goes up this week because there’s a wheat shortage or something like that. You don’t really care. What you’re worried about is a broad based and steady rise in prices that’s consistent and compounding over time.
Understanding Supply Chain Inflation
But some of those disruptions are actually, again, a little bit more fundamental. Our ability to get the volume of goods around the world that the world demands and consumes is definitely diminished relative to demand. We looked at an example, for instance, of ports. And I’m focused mostly on the U.S. here, our U.S. ports system. We don’t have a single port in our country that ranks in the top 50 in the world. They’re very antiquated We have a much higher labor cost and we have a more labor intensive port system. Most new ports built in the world are very automated. But in order to do that here where you have establishments, you have to make fundamental changes to Long Beach or Newark in the way goods come in and out of there. And the way everything’s managed at this port. So you’d literally have to shut it down for a long time and rebuild it or build a new one. Who wants a new port?
Could Inflation Hit Seniors Hardest?
Health care will be a big one. Transportation can can be larger. Housing to a lesser extent, although it can, but to a lesser extent. That tends to be a little bit more geographic, although presently we’re seeing it as a broad based rise in costs . And then services. Again, seniors are buying less goods and consuming more services, and those could be health care related services that might not get picked up in the health care basket. You’re your Uber driver because you don’t like to drive at night anymore. Right. These kinds of things can pick it up as well as, you know, out to dinner a little bit. You know, we tend to do that a little bit more when when the kids are out and we’re not floating their bills anymore. Right. So those can have a big impact. So services is another.
Labor Costs and Inflation
If you look at what happened, again, go back to the financial crisis when our auto industry was really hurting and cars… you know, units, units fell. I forget by how many millions of units a year dropped in the U.S. We caught back up. But when we caught up, we were doing it with 40% fewer employees*. They took that opportunity to re automate. So labor has had less leverage. That is changing. We just saw last week or this weekend Starbucks first unionized., you know, unionized an outlet or whatever you call it (podcast originally aired on 4.13.22). Right and and you’re seeing it, you know at Amazon Amazon. Right. And so labor power is returning. It’s not anywhere near where it was in the fifties, sixties, seventies. But it is it is recovering and so therefore, you can expect labor to squeeze a little harder and try to take a little bit more out .
*Smet, Aaron De, et al. “’Great Attrition’ or ‘Great Attraction’? the Choice Is Yours.” McKinsey & Company, McKinsey & Company, 28 Mar. 2022, https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/great-attrition-or-great-attraction-the-choice-is-yours.
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