thinking about inflation

[OldShooter]

... at the moment we can borrow at or slightly below the local rate of inflation and invest in assets that yield more than the rate of inflation (with an acceptable level of risk). ...

And what would those assets be?

 

[Oz investor]

i have been expecting a credit crunch since 2013 ( and tweaked my investments towards that scenario )

will that credit crunch trigger runaway inflation , i think it might

after Cyprus ( and Greece ) i have very little in interest bearing securities much that is offered at acceptable returns is 'dressed up ' junk debt

or worse still ETFs which are 'sausage debt ' securities chopped up finely with no product disclosure on the individual debts

 

[97guns]

Trade war could turn into a currency war with China, they are the largest holder of our bonds and debt. A currency war will crunch credit for sure

 

[Oz investor]

97guns,

yes i agree , although i suggest China will be discrete about it ,

perhaps , not bother to rollover maturing debt , and just take cash ( or buy gold with it )

 

[traineeinvestor]

And what would those assets be?

Probably of little interest to those on this forum, but there are some unrated USD bonds issued by small HK/PRC property companies and REITS with maturities of around 3-4 years with yields around 5%.Lai Sun Development's 2022 bond is one example. With debt ratios less than 50% and the underlying assets being real estate, I am comfortable with the associated credit risk. Liquidity sucks on these though.

If I want to take on more risk, Hua Xian REIT (HK87001) currently offered a dividend yield of 8.4% but is in RMB so I am taking FX risk.

 

[Oz investor]

i did very nicely with Australian corporate bonds ( and preference shares ) from 2011 to 2015 , but then the quality and discounts declined so i let them mature and invested elsewhere ( including the last solar array )

i am not completely against international investments but it is hard to be able to research them properly , i normally use them to offset movements in the Australian Dollar

 

[traineeinvestor]

i did very nicely with Australian corporate bonds ( and preference shares ) from 2011 to 2015 , but then the quality and discounts declined so i let them mature and invested elsewhere ( including the last solar array )

i am not completely against international investments but it is hard to be able to research them properly , i normally use them to offset movements in the Australian Dollar

Pretty good yields on the big Australian banks at the moment + franking credits for onshore investors.

 

[Oz investor]

i entered investing ( i inherited 4 stocks ) in 2011 and knew i wanted to retire in 2020

so i knew i had to HURRY ( and take sensible risks )

so i looked at the Australian banks ( all of them not just the big 4 ) and asked myself a question where can the big 4 grow sensibly ( not just cut costs ) my conclusion was NOWHERE

.... so i bought a handful of Westpac ( WBK for the US ) as the best of them in my opinion but bought HEAVILY MacQuarie Group ( MQBKY for the US ) AND the MacQuarie preference shares ( now redeemed , sadly )

i was hoping MacQuarie Group would grow about 50% by now , instead it grew 330%

but the issue with the big 4 remains where can they grow sensibly they are probably a bit risky as a bond proxy ( a straight div. yield play )

but wise people will crunch their own numbers on that .

international investors will face some currency risks as well

maybe something to watch if there is a big downturn

the Australian dollar should get hammered at the same time

 

[boatfishandnature]

Most withdrawal schemes have already built into them 'inflation protection'. So this is 'doubling down' on the problem, and will result in even more money left on the table when you die.... Even the '4% rule' will usually leave a Pile on the table about 80% of the time. You are making this more complicated than need be....

That is it, in a nutshell! You either believe the (extensively researched) withdrawal schemes or you don't. All those 30 year periods that still made a 4% withdrawal adjusted for inflation safe, included the high inflation periods. Same for the 40 year periods that still result in a safe withdrawal rate of 3.1-3.7%.

It is hard to imagine a long-term scenario where equities would not go up with inflation, after all, the same companies will be selling the now more expensive products. It can of course happen over the short or middle term, but again, it is a question of whether you trust the 30 or 40 year calculations. TIPS offer good protection (not perfect because of the capital gains on inflation that you pointed out, sounds like you know your stuff ), but as with any insurance, that comes at a price in terms of lower yields. Bond yields reflect the current view of the market about future inflation, which of course is just a forecast and could be wrong.

 

[morriss003]

Frankly it may depend on who is the next President and his/her trade policies. If tariffs continue to be enacted worldwide then inflation will rise. If the present policy changes, and tariffs are frozen or reduced, inflation will moderate, due to the influence of huge sovereign funds, especially Chinese, buying US treasuries.

 

[ERD50]

... If tariffs continue to be enacted worldwide then inflation will rise. ....

I don't understand this comment. Tariffs have been enacted for, well, just about forever (in modern times). Why would they cause inflation to rise now?

Frankly it may depend on who is the next President and his/her trade policies. If tariffs continue to be enacted worldwide then inflation will rise. If the present policy changes, and tariffs are frozen or reduced, inflation will moderate, due to the influence of huge sovereign funds, especially Chinese, buying US treasuries.

Just FYI, in the recent G7 meeting, the US suggested that all tariffs be dropped. Of course, all countries would have to agree. I don't think that went too far, but supposedly there was serious discussion of it.

I don't want to get accused of linking to articles on this subject that also have political content, but if you are interested, enter " G7 US drop tariffs " into your favorite search engine.

-ERD50

 

[USGrant1962]

I don't understand this comment. Tariffs have been enacted for, well, just about forever (in modern times). Why would they cause inflation to rise now?




Just FYI, in the recent G7 meeting, the US suggested that all tariffs be dropped. Of course, all countries would have to agree. I don't think that went too far, but supposedly there was serious discussion of it.

I don't want to get accused of linking to articles on this subject that also have political content, but if you are interested, enter " G7 US drop tariffs " into your favorite search engine.

-ERD50

I was thinking the same thing. Tariffs are a business tax, essentially a VAT or gross receipts tax on imported/exported goods. So in the U.S. we cut corporate taxes substantially and have proposed increased tariffs on a few items where countries are unbalanced. I don't see that leading to substantial inflation. If one does think that, wouldn't the corporate tax cuts lead to substantial deflation?

For the fundamental reasoning behind the current activity see the WTO tariff map here https://data.worldbank.org/indicator/TM.TAX.MRCH.WM.AR.ZS?view=map

The U.S. has one of the lowest average weighted tariffs of the major economies. Some pertinent examples:

Australia 1.18% - good job Ozzies!
Canada 1.56%
U.S. 1.67%
EU 1.96% - i.e., tariffs are 17% higher than the U.S.
Japan 2.55%
China 3.54% - 112% higher
Russia 3.62%
Mexico 4.35% - 160% higher
India 6.35%
S Korea 8.67% - 419% higher

 

[Oz investor]

That would be one (perhaps slightly snarky) way of putting it. Another way would be to say I am confident in my ability to retire comfortably absent very high inflation rates. But I am concerned about the potential impact of high inflation. I am thinking about the best ways to mitigate that risk, and seeking constructive input from thoughtful people.

As I said earlier, I have a pretty substantial cushion. So I probably have less risk than 99% of others. But it is still worth thinking about.

am less confident that i can fund the next 10 years of my life , but i am willing to put up a fight against abject poverty .

the aim is to not draw down on capital unless absolutely necessary

so far i need only part of my dividend returns , so several shares are fully dividend reinvested the plan ( made in 2015 ) was at the start of 2020 to switch some investment plans to paying 100% cash , and another group to 50% cash leaving about 20% of the portfolio still accumulating shares at 100% , until my budget was under constant stress

( some of my holdings pay dividends but do not have a reinvestment plan )

the two remaining interest-bearing securities i hold and both floating rate types .. so a little inflation resistance there ( as they are less than 2% of the total portfolio ).

my personal issue on buffer , is my budget has been torn to shreds ( but not in a seriously bad way , just very hard to predict going forwards )

i do expect inflation to rise , but how high and how fast ... and will there be an economic crash first

the Chinese may phrase it as ' interesting times ahead '

 

[Jeff76Canada]

Can the trade wars be a catalyst for inflation? Cost of goods increase on their own accord, add tariffs to the mix and we’ll see goods inflate quite a bit.

can go both ways, if dollar keep going up against other currencies, consumer power for American costumers might increase...

 

[Oz investor]

will the imports continue to flow to be attacked by tariffs ??

some nations might redirect trade elsewhere starving the US of potential export customers .

Canada is already showing signs of citizen level boycotts

things might get complicated

 

[97guns]

Trump's Tariffs Hit China


(NEWSER) – The US tariff hike on China took effect at midnight Eastern time Friday, and China quickly announced it is "forced to make a necessary counterattack" to the hike that affects billions of dollars of Chinese goods. It gave no immediate details of possible retaliation, the AP reports. The country's Commerce Ministry on Friday criticized Washington for "trade bullying" following the hike that took effect at noon Beijing time in a spiraling dispute over technology policy that companies worry could chill global economic growth. A ministry statement said, "the Chinese side promised not to fire the first shot, but to defend the core interests of the country and people, it is forced to make a necessary counterattack."

 

[Jeff76Canada]

about this tariff, I found this sequence of twetts very informative.

https://twitter.com/x/status/1014791235452588032

 

[flyingaway]

I think inflation is related to oil price. Rising oil price will cause many prices to rise.
The low inflation of the previous years was caused mainly by low oil price, IMHO.

 

[Oz investor]

I think inflation is related to oil price. Rising oil price will cause many prices to rise.
The low inflation of the previous years was caused mainly by low oil price, IMHO.

oil price ( and power and logistics costs ) will have some impact

the question will be how much , and how much will be from folks quietly increasing their margins of profit ( anticipating more rises in costs )

 

[USGrant1962]

I think inflation is related to oil price. Rising oil price will cause many prices to rise.
The low inflation of the previous years was caused mainly by low oil price, IMHO.

Oil was $100/barrel (+/- $10) for 4 years from late 2010 to late 2014 and there was low inflation.

 

[Nature Lover]

Regarding OP's original question:

I don't worry about it too much. I don't think we're likely to see "very high inflation" again. We had that in the 70s and it got everyone's attention.

But some inflation is beginning to rear its head again, so I do agree it's wise to keep an eye on it. I'm a 60/40 believer myself, but 50/50 is also very reasonable and seems safe both ways.

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+1. I agree with this completely, with the caveat that I generally worry maybe more than some, even though "very high inflation" is unlikely. Even modest inflation can ravage purchasing power over longer periods (doesn't have to be "very high inflation).

 

[OldShooter]

Inflation is a trend, not a place. When prices are rising broadly for the same goods, that is inflation. When prices stop rising, there is no more inflation even if the prices are twice what they were before a period of net 100% inflation.

So, old tariffs don't cause inflation because they are a constant in the equation, but new tariffs will contribute to inflation to some degree depending on how broad they are relative to the measured market basket prices.

New tariffs that increase consumer prices in the US, devaluation of the US $, increasing world population eating meat and bidding up the price of meat and grains, increasing demand for Lithium (aka batteries) causing prices to go up, a wealthier India potentially increasing demand for gold, ... It's that type of stuff that contributes to inflation.

There are also deflationary pressures from time to time. IIRC the price of pork in the US has been declining because demand from China and possibly Mexico is declining. Natural gas and alternative sources driving the price of electricity down (until electric car consumption starts driving it up.).

It's an incredibly complex soup, which is why consistently accurate forecasting has been proven over and over again to be impossible.