Q: With inflation readings spiking in recent months, we’re starting to worry about its long-term effects on our portfolio. We remember the 70’s and runaway inflation has been a concern of ours for some time. Should we be this worried?
A: Inflation’s impact on your wealth is not unimportant. In the end, wealth is defined by how much you can buy with your money. Inflation can be an invisible threat. Sometimes, like the 1970’s, it can feel more than obvious. Lately, the recent attention-grabbing headlines reflect the fact that inflation has been on the rise.
But, I think it’s very important to note that today’s inflation readings are a direct result of a drop in prices from March to July of last year. The effects of the shutdown during the pandemic’s early days has thrown the inflation data for a serious loop.
While not a perfect analogy, it’s a lot like comparing the weather last June to the sweltering heat we’ve experienced this year. For the first ten days of June in 2020, the average high was about 67 degrees. In comparison, this June has averaged a high temperature of about 86. I wouldn’t read a lot into that trend when trying to guess about the weather for the rest of this summer.
To smooth out the pandemic’s impact on prices from last spring, it might help to compare today’s prices to 2019 or even 2018. Instead of seeing inflation rate readings of 4% and 5%, the annualized inflation rate over the past two or three years is sitting at about 2% or so. The dip in prices last year, like the cooler start of June of 2020, is undoubtedly distorting today’s inflation data.
Like the Fed, I think the next six-to-twelve months will smooth out the pandemic’s unusual effects and there certainly have been a few!
Q: I couldn’t help but notice that Bitcoin and other crypto-currencies have declined a lot in just the last few weeks. Do you think they are “ready for primetime” as a true investment vehicle for regular people, like me?
A: You’re right, Bitcoin took a 40% nosedive from mid-April to late-May. Ethereum, the other major crypto-currency of note, also crashed about 50% over just twelve days from mid- to late-May. Those are some wild swings.
In my view, crypto-currencies are not even close to being “investable” assets for regular people. They’ve become trading vehicles for those willing to gamble with their money. For those who choose investments based on some measure of fundamental value, this digital currency game is something to safely ignore.
Frankly, I’d lump the current obsession with crypto-currencies with the equally crazy trading of “meme” stocks like Gamestop, AMC Entertainment, and now, Clover Health. The financial media loves to talk about this stuff, that’s for sure. It catches eyeballs. Ultimately, advertising revenue follows. While it might be fun to gawk at it all, it shouldn’t be confused with investing in any traditional sense.
Jason P. Tank, CFA is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com