Please do make any financial decisions based on the contents of this blog. My blogs are designed to be thought-provoking and introspective, not financial advice. Please do not act on any document unless it is titled “Statement of Advice.”
Governments and central banks are claiming an early victory “the war on inflation” but why do we still feel poorer than ever?
Reason One: Your inflation rate could be 5%, or it could be 40% – it depends on your life situation
Let’s imagine the following characters:
- Greg, a self-funded retiree with his house paid off. About 30% of Australians live like this. Greg’s 5 year average inflation rate is about 8%.
- Adrian & Izzy, middle income earning couple with 2 kids in public school. About 25% of Australians live like this. Adrian & Izzy’s 5 year average inflation rate is about 25%
- Sterling & Georgina, high income earners with 2 kids in private school and 1 daughter in her third year of university still living with them. About 10% of Australians live like this. Sterling and Georgina’s 5 year average inflation rate is about 40%.
- Sammy, a uni student living with her parents rent-free. About 10% of Australians live like this. Sammy’s 5 year average inflation rate is about 5%.
- Luca, an unemployed drug addict on Newstart allowance. About 8% of Australians live like this. Luca’s 5 year average inflation rate is about 5%.
Greg
“Inflation, what inflation?” is what you’ll hear from Greg and his mates as they tee-off on their local golf course for the third time this week. Greg has already paid off his home and does not have a mortgage, and he has a great deal of money in fixed interest investments. He’s loving the high interest environment because it is paying him handsomely, virtually risk-free. Sure, he’s paying more at the pump, for groceries, and electricity, but he has not felt the pinch of higher mortgage repayments or rent.
Greg’s cost of living over the last 5 years has increased around 8% per annum, but the interest on his investments has increased by more than this figure, so Greg’s financial situation has never been better.
Adrian & Izzy
Adrian & Izzy are struggling, big time. Their mortgage repayments have tripled from $2,000 a month 5 years ago, to $6,000 a month today. To make matters worse, their weekly supermarket shop, electricity bills, and insurances have more than doubled since 5 years ago. Their wages have increased, but a rate much lower than their cost of living. When interest rates were slashed in the response to the coronavirus pandemic, they were able to put away about $50k in savings and extra mortgage repayments, but all of this money has since been used to cover the dramatic increase to living costs. They haven’t been on an overseas holiday in over 3 years, which was an annual tradition until just 5 years ago. They don’t have much in the way of savings anymore and are seriously considering paying for their next holiday on a credit card. They do not have the money, nor a plan, to pay off this credit card.
Adrian & Izzy’s cost of living has increased by an average of 25% per annum over the last 5 years, and they are sick of being told that the official inflation rate is 4%. They feel like they’re doing something wrong, and regularly fight about money.
Sterling & Georgina
Sterling & Georgina are highflyers with a large business and investment portfolio. 5 years ago, their investment property portfolio was positively geared by around $100k p.a. but today, it is costing them over $300k p.a. to maintain. Sterling & Georgina have noticed a significant uptick in the cost of living, but they are still doing okay. Where they are really feeling the pinch, is in their business expenses. Business income has steadily increased by around 5% annually over the past 5 years, but their expenses, mainly consisting of office leasing, equipment, motor vehicles, mortgages, insurances, and fuel are up at least threefold. Their profit margins have never been lower, so they have no choice but to pause their plans to expand their business and hire more staff. They are selling their worst performing investment properties to ease their cash flow burden.
Sterling & Georgina estimate their average uplift to cost of living is around 40% per annum over the last 5 years.
Sammy
Sammy is 23 years old in her third year of uni. She works part-time making around $300 a week. Sammy lives at home rent free, and her parents pay for her food and university expenses. The only thing Sammy needs to worry about, financially, is putting fuel in her car, buying lunch occasionally, saving up for an annual beach holiday with friends, and which nightclubs have the best deals on drinks.
Don’t get me wrong, I am not criticising Sammy! Sammy should be living it up right now. These low-stress, low-responsibility times should be enjoyed. Her annual rise in the cost of living over the past 5 years is around 5%. Her parents, who pay the mortgage and the utilities, have worn the brunt of inflation for her. Sammy should be eternally grateful, yet she has the audacity to complain, but that’s another story…
Luca
Luca is 31 years old, and hasn’t worked in about 6 years. Luca and two of his mates rent a small unit in an old 3 storey brick walk-up. None of them work, they all collect the dole, and they have enough money to pay rent, which hasn’t really gone up much because their apartment block is in one of those rundown lower socio-economic parts of town that just never seems to appreciate in value. During the 18 hours per day they spend watching TV and scrolling through social media, they are being told that it is okay to get stoned as a lifestyle choice, and that anything bad that happens, is the fault of an evil capitalistic system of oppression. Resultantly, Luca and his mates have got no desire to return to work, applying for the mandatory minimum number of jobs to keep the dole payments coming, and in the rare event they show up to the job interview, they are so poorly presented that the jobs are given to other applicants. Their fortnightly food shop has gotten more expensive, but they prefer to buy the cheaper, ultra processed foods, whatever’s on special. As the size of the local drug market has grown, so too has the supply and competitiveness of street dealers, resulting in price stability for weed and meth – in fact, the latter is cheaper than it was 5 years ago.
Overall, Luca’s average rise to his cost of living over the past 5 years is around 5% per annum.
In summary, telling any of these people about a national inflation rate is completely pointless, especially Luca.
Reason Two: Inflation, being a year-on-year measure, ignores what happened more than a year ago
Even if it were true that the cost of living only rose by 4% over the past 12 months, my response would be:
“Great… what are you going to do about the prior hyperinflation?”
During the great money print of 2019 to 2023, due to the devaluation of money, we had massive price rises for everything (perhaps except for street drugs). Not only did real estate double in value, but rents and mortgage repayments tripled. Food prices, utilities, transportation and financial services prices also skyrocketed during this time.
Even if we were able to flatten inflation entirely by reducing it to NIL, we’d still be paying for the price rises up until 12 months ago.
The only real way to win the war on inflation is to DEFLATE the money supply, so much that prices don’t just rise by a smaller amount or flatline, but FALL back to a level that is in line with a sustainable long-term inflation figure. Long-term inflation is around 3 to 5% per annum. Therefore, we should be aiming to get prices down to around 2019 prices, plus say 5% per annum inflation.
Imagine how nice that would be. Can you imagine how economically prosperous lower prices would be? Unfortunately, it’s never going to happen. Governments and central banks will not allow it. And there’s a simple reason why. Inflation is good for the government and bad for the people. Deflation is good for the people and bad for the government.
All money in circulation is debt printed by central banks, and that those who are in the most amount of debt (governments) would prefer to use LESS VALUABLE (inflated) money to pay for old debts, rather than MORE VALUABLE (deflated) money. Once you understand this you will see that the only possible way that a government could survive deflation would be to cut spending dramatically and pay down their debts. But no, governments would prefer to keep spending more than what they have, buying votes from the poor and middle class, and inflating their debts away via money printing.
A solvent government would be way too unpopular. Just ask John Howard. His government was the last Australian government to trade solvently, and Howard’s popularity was on thin ice during his whole tenure.
I saw John Howard speak at a TSS Breakfast recently, and his words will forever resonate:
“…govern based on principle, not popularity.”
Alas, until we have a government with the balls to seriously consider DEFLATION, they will continue to do nothing about historical hyperinflation.
Reason Three: Our governments manipulate inflation data to buy votes and sell their narrative
Get your tinfoil hats out and be sure to read my recent blog post here: https://thevirtuouscollective.com/uncategorized/its-official-we-are-in-recession/
All I’ll repeat from this blog post is that the federal government DECREASED the weighting that housing had on inflation, during the time that we had the biggest increases to rent and mortgage repayments in history. That is just the tip of the iceberg. The more you read into it, the dodgier it gets.
Why is inflation data so important?
The “official” inflation rate (as determined by federal government) is what drives the most important policy decisions of central banks, and the decisions that they will be making over the next few months will have the most extreme consequences on our quality of life in history.
Premature rate cuts combined with ongoing government insolvency and money printing will be extraordinarily inflationary. The “official” inflation figure will continue to be understated and meaningless, but there will be a deep recession, and low to middle income earning households will suffer immensely.
On the ground knowledge
If we can’t trust the figures from the government, what can we do to properly assess the health of our economy?
Ask people! Conduct your own little survey. Try to speak to as many people as possible from a wide range of locations and demographics.
I consider myself to a “foot soldier” – an adviser to mostly middle-to-upper-income earning Australians, and I have around 20 meetings per week. What people are telling me is incongruent to what the government is declaring. Even those who are earning good money are struggling to make ends meet. I’m seeing people sell their homes because they cannot afford the mortgages. Investment properties have gone from positively geared 2 years ago to bleeding cash today. Around 1-2 of my clients per week are going through separation, with financial stress playing a major role.
Almost no-one is saving money, savings are going backwards, and many are living week to week. Some people who were highflying 5 years ago are now using credit cards and resorting to predatory lending such as Afterpay and payday advances.
It’s not easy to open up about financial struggles, so if this is what I’m hearing, I can only imagine it is the tip of the iceberg.
A more believable data point is the following chart on household savings. I’m guessing that there is no point trying to manipulate this figure because it does not influence any major decisions… although it should!
There you have it. The poorest 99% of our population are almost out of money.
My advice
My advice to people right now is to increase income through hard work, enterprise and upskilling, and to seriously trim budgets in anticipation of higher prices.
It will be an investors’ playground for those who can weather the upcoming recession, although I think it will be highly unlikely the government will admit we’re in a recession.
Either way, right now not the time to follow the herd. It is the time to be defensive, solvent, nimble and liquid.
Warren Buffet of Berkshire Hathaway is one of the best performing investors in the world, having consistently beaten the S&P500 since the 1980s.
Though not completely immune to them, Warren Buffet has an amazing ability to predict stock market crashes and recessions.
This year, Berkshire have been methodically dumping enormous amounts of stock and are holding the largest volume of cash and bonds ever owned by a fund manager.
Why would they do this?
The answer is simple. Warren Buffet is getting ready to buy stock at heavily discounted prices, and so are we.
Like Warren, you have an opportunity to outperform your peers. Do not waste it.
The VCo portfolios are positioned accordingly.
Please do make any financial decisions based on the contents of this blog. My blogs are designed to be thought-provoking and introspective, not financial advice. Please do not act on any document unless it is titled “Statement of Advice.”