People are talking about the 1970s again. Inflation is real and it hurts. Unless you made 6% more last year or were extremely smart with your buying habits, you lost purchasing power.
Social Security kept up. Working people did what they could (big unemployment benefits helped) but real hourly wages are down 1.2% over the past year and the work week is down a few minutes . . . just enough to sting.
When you’re working as hard as ever but losing ground . . . or can’t get as much work as you used to . . . it hurts. That’s the kind of “malaise” we saw in the 1970s and it’s probably part of what they’re calling the great resignation now.
People are just giving up. Quitting without a job to go back to. Exhaustion. Surrender. Ultimately that’s a good thing for people who want to figure out a new and better life, but now it’s a drag. Exhausted people are less productive. And corporate America needs them to be more productive in order to keep cash flowing.
The Pandemic Shock
Two types of inflation: persistent, the kind of “frog being boiled” you think about where money deteriorates for an extended period . . . and then there’s a shock.
It now looks like COVID was the shock. Makes sense. Suddenly supply chains break and you pay more when you can find the things at all. Think used cars. Think food and grocery delivery fees if you’re stuck at home.
In the 1970s, that shock was the oil embargo. Suddenly fuel was scarce and shortages meant gouging. This time, the shock is the pandemic.
The question is whether this shock turns into a trend. In the 1970s, the Fed as we know it was still new . . . they hadn’t dealt with this before and didn’t know the limits of their power to stop it. In a lot of ways the modern Fed formed to ensure that 1970s-style inflation cycles never happen again.
But fighting inflation requires an active Fed and they move slowly, the biggest battleship in the market. First need to slowly unwind $80 billion a month just buying new bonds. That’s happening now. Maybe in a year interest rates start inching up.
That’s another year for inflation to run its course. Get ready. If you want to PROTECT what you have, hold gold. If you still want to CREATE WEALTH, stay brave. Invest in companies that are growing faster than inflation.
Which Stocks Make Sense
You want either passive income higher than inflation or a growth rate higher than inflation. The first one will avoid losing ground . . . you’ll break even. The second one will keep you going in the right direction.
At minimum, inflation will stay above 3% for the next year. That’s the Fed’s goal. Don’t panic. It’s actually normal. It only hurts in the long haul . . . decades of retirement or a working life.
Lock in big pharma, big banks, big telecom when you can get a 3% dividend at least. Our old friend Verizon pays about 5% right now. Even if the stock goes nowhere, you protect your purchasing power.
Then there are growth stocks, which you want for that long haul. Right now assume the worst: 6% inflation might stick around for another year, so look for companies that can grow the bottom line at least that much. 6% growth minus 6% inflation = zero, stall. 7% growth minus 6% inflation = a pulse.
This is why people are crowding into big tech, which is historically where that kind of growth happens. Not good for consumer companies and retail. Rising costs are eating them alive. But GOOG, MSFT? Sure. Start there.