inflation – The Stocky Fox

Inflation raises the stakes

November 29, 2021November 29, 2021 Stocky Leave a comment

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The financial story of the past six months has certainly been inflation. After many decades of unprecedentedly tame inflation, starting this April inflation shot up and is now at over 6%. Four years ago I even made a pronouncement that “Inflation was dead”. How could I have been so wrong? Or was I?

To put things in perspective, let’s go back to 1992, after the US had “recovered” from the first Iraq war under the first President Bush. From then to last year, 1992 to 2020, 28 years, a generation, a lifetime in the investing world, inflation averaged 2.4%. Over those 28 years there were just six years where inflation was higher than 3%. Frankly, I think we got a bit spoiled.

How will this affect my investments?

But really, who cares about inflation, per se? What we really care about is how it impacts our investments and our retirement plans. When it’s all said and done inflation isn’t all that bad if your investments grow faster than inflation.

This year, inflation is at about 6%, but the stock market is up about 20-25% (depending on the day you look—wow it’s been a crazy market the last few days). That means the real return (stock return minus inflation), how much more “stuff” you can actually buy, is up about 15-20%. That’s an amazingly good year that investors will always take.

Typically when inflation is high that’s bad for the economy. There’s a lot of deep water there and economists much smarter than I are debating that all the time. But the chart below shows over long periods of time it’s not that simple.

	Stock return	Inflation	Real return
1950s	18.2%	2.0%	15.8%
1960s	8.6%	2.4%	6.1%
1970s	5.7%	7.1%	-1.3%
1980s	17.4%	5.5%	11.3%
1990s	19.4%	3.0%	15.9%
2000s	-1.0%	2.6%	-3.5%
2010s	13.8%	1.8%	11.8%

The 1970s had the highest inflation, and that was a terrible time for the economy and therefore for stocks. But the 2000s were also a horrible time for stocks even though inflation was very low.

Inflation makes your portfolio riskier

As someone investing for their future, the problem with inflation is that it forces you into stocks. Stocks are a natural hedge against inflation because you don’t own pieces of paper with green ink (cash), or the promise to get pieces of paper with green ink in the future (bonds).

Rather you own “stuff”—real estate, buildings, patents, factories, etc. As the price of things go up, the very definition of inflation, the prices of those things you own also goes up.

But we know that stocks are much more volatile than bonds. That’s the rub. That’s what makes high inflation hard for investors.

It creates this precarious balance between hedging against inflation and having the proper asset allocation. It’s like you’re driving on a mountain road but now instead of the cliff just being on one side, it’s on both sides.

What to do?

The jury is still out on this, but things look precarious. I always tend to be more aggressive with asset allocation, so I’m 100% in on stocks, and that’s how I’ll keep it. But we’re in our mid 40s so we still have decades to ride out any nasty storms. If I was in my 60s it would be a much tougher decision.

Now it’s cheaper to be rich

November 3, 2021November 3, 2021 Stocky Leave a comment

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After you do all the smart things with investing and become rich, you then have to show others how you’re better than they are. Afterall, what’s the point of amassing wealth if you can’t feel good at the expense of others.

Early in my life (the 1980s and 1990s) this was easy. You could buy expensive stuff, conspicuously display it, and you were set. Life was easier back then—the more expensive something was, the better it was, and the better it made you.

However, in my adult lifetime (let’s say starting in the 2000s), it seems that centuries-old, tried-and-true concept has been thrown on its head. Those outward appearances of wealth, namely expensive things, have become less reflective of your wealth (or what you would like others to think your wealth is). Some of it is technological advances, some of it societal changes, some of it changes in taste. But it’s undeniable that it has become cheaper to be rich.

Watches

Growing up, a Rolex was wealth and success in its purest form. As far as watches go, they are beautiful but not the greatest timekeepers. A mechanical watch can’t keep time near as well as a quartz or digital watch.

Yet, when I was a kid, if you saw someone wearing a Rolex and another person wearing a Timex, it was clear which one was, or at least seemed, richer and more successful. Of course, that wasn’t necessarily the case (see, The Millionaire Next Door).

For me personally, my parents gave me a Rolex as a gift when I graduated from Pitt. They were giving me a watch but so much more. It was a sign of my accomplishment, my achievements to that point, and their confidence of my future successes. Congratulations to Rolex’s marketing department.

Today I still have that Rolex but I never wear it. Rather, I wear a smartwatch. Despite being rich, I choose to “show off” my $150 Apple watch instead of my $6,000 Rolex. Certainly for me it has a lot to do with functionality: my Rolex tells me the time and date (and those not very well), while my smartwatch tells me those plus emails, texts, my calendar, a stopwatch, the weather, and on and on.

People can always choose function over fashion, but I think even with fashion the smartwatches have eclipsed the expensive timepieces. If you got 100 millionaires in a room, do you think you’d see more smartwatches or Rolexes? I think smartwatches in a landslide.

The point is, if you’re rich, you don’t need to have a four-figure watch on your wrist. You’d more than fit in at a small fraction of that.

Clothes

Clothes have always been a fashion item, and that continues to this day. It boggles my mind that some jeans can cost $20 and what looks to my uneducated eye as the exact same thing can cost $300. Whatever.

That said, a couple decades ago it was a lot more expensive to dress like a successful person, especially at work. My professional career started with Medtronic at the very end of the 1990s. That was just when corporate America was transitioning from suits to business casual.

Of course, if you were rich, that meant you had a good job, and if you had a good job you had to dress the part. A typical work outfit would be a suit ($300—and these are moderate prices, you would certainly go much, much higher), a dress shirt ($30 plus dry cleaning), and tie ($20). Compare that to a business casual outfit of the same caliber which would be a button-up shirt ($30) and chino pants ($30).

That’s a difference of $350 compared to $60. And that doesn’t account for the little extras on a suit that could accentuate how rich you are like cuff links or a tie clip. Plus, it’s even more expensive in that back then you needed both the suit and the casual clothes. So your total cost was $410.

Today you don’t really need the suit at all and can just get by with the business casual. You’d look just as rich as before but just have to spend a lot less money.

Cars

Cars are another way to really show off how rich you are. There have always been cars to get you from A to B. But it seems there’s been a real change in how we perceive them.

As a kid, I remember that Mercedes or BMWs represented the cars that rich people drove. Sure, there were Yugos and Civics and Chevettes that did the same thing, but they clearly weren’t driven by rich people.

That price difference, back then a top of the line was $80,000 and a lower-end car was maybe $9,000, made a huge difference in perception. I am sure it happened, but I couldn’t imagine a millionaire choosing a car like the one we had (haha!!!) over a Mercedes with every bell and whistle imaginable.

A young Stocky standing in front of our Chevette.

Today, I think brands like Prius and Tesla have turned that logic upside down. A top-of-the-line Mercedes or BMW costs about $130,000 and a Ferrari or Lamborghini is in the $250,000. Compare that to a Prius at $25,000 or a Tesla at $40,000.

At least for me, if I saw a Prius lined up next to a Mercedes S-class, I wouldn’t necessarily think the Mercedes owner was richer than the Prius owner, rather I would think they were different. One was more ecologically conscious, and that could very well correlate with wealth. Back when Foxy Lady and I lived in LA (in the early 2010s) Priuses really took of and I felt at the time they were every bit as fashionable as a BMW 7-series, maybe even more so.

The point of all this is that as society has evolved over the past 20ish years, fashions for the rich have changed. They have changed in a way that makes those really expensive outward appearances of wealth less important and less closely linked to how rich you actually are.

To me that’s a great thing. I’m a millionaire but I am also EXTEMELY cheap (cut to Foxy nodding in agreement). It’s looks like I’ve finally become fashionable.

The sharing economy helps kill inflation

May 13, 2019May 13, 2019 Stocky Leave a comment

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“Share and share alike” from Robinson Crusoe

We all know that inflation is really important in planning for a comfortable retirement. We also know that I personally think that inflation fears are really overblown.

In this post I showed that technology is an amazing deflationary force. A few readers (like Andrew H) have noted that technology, and especially computers, are improving at such a rapid rate that it’s no wonder they are falling so much in price. But what about things that aren’t technology related? There are a lot of things we buy that aren’t computers or DVDs or internet browsers, probably spending a lot more on those than the technology-related products whose prices are going down so rapidly.

While I agree that a lot of non-technology products like food, clothing, and such do experience inflation, I think there are some surprising areas that are experiencing DEFLATION. I just tried out these new-fangled services that seem to be popular with the 20-somethings: Uber and Airbnb. What can I say? I never claimed to be on the cutting edge of this stuff.

Uber

Uber has been in the news a lot because it just had its initial public offering (IPO). Basically Uber is a taxi service. With a regular taxi you’re getting in a smelly yellow “police interceptor” with a driver whose accent is so think you can’t understand him and worry that he doesn’t know where he’s going (along with all the other negative stereotypes). But with Uber you have regular people who use their own personal car as a taxi.

First, the cars seem to me to be nicer. They’re newer model cars; I’ve done Uber now probably four times and haven’t been in a car that is noticeably old or worn or uncomfortable. Plus they are meticulously clean. It’s like riding in your friend’s car, if you’re friend is a clean freak. Advantage: Uber.

Second, they use technology well. You download the Uber app, and when you want to be picked up you click the button. Then you see a real-time map with your car driving towards you. If you live in a dense taxi city like New York or Chicago, this may not be a big deal where taxis are literally around every corner. But for the rest of us, it can sometimes be nerve-wracking wondering when (if) you taxi will be there. A few months back I literally missed a flight because my taxi never showed up. I didn’t know there was a problem until it was 10 minutes after he should have been there, and at that point it was too late. Advantage: Uber.

So there you have a couple nice advantages that Uber offers, but what about the big one: price? I’m not an expert, but I would estimate that Uber is about 30% less than a traditional taxi, especially on longer trips. I took an Uber to Charlotte airport (100 miles away) and it was about $150; Foxy Lady took one to Raleigh airport (60 miles away) and it was about $80. I would guess with a traditional taxi those prices would have been much higher. For more local trips it’s harder to say, but I figure Uber comes to about $1 per mile (and Uber-aficionados, I would welcome your enlightenment). Obviously a big part of the savings is they aren’t paying taxes to cities (a taxi medallion in Chicago or New York costs over $1 million!?!?!? Crazy). Also, they are just regular people using their own cars to make some extra cash. No matter how you slice it, it does end in significantly lower costs.

So here you have a better product than we ever got in the past for a fraction of what it used to cost us. To me that sounds like deflation.

Airbnb

Airbnb is another sharing economy website where people can put up their homes or vacation rentals up for rent. You go to their website and it’s like picking a hotel. You pick where you want to go and the days you want to stay there. There’s an option to pick “a bed”, “a room”, or “the whole place”. As a 38-year-old, I’m at a stage of life where the only acceptable option there would be to get the whole place, but if you’re younger and strapped for cash or want to meet new and interesting people maybe that’s something you’d want to do.

Anyway, we had a recent trip to Hawaii where we used Airbnb. We found a really nice condo right on the beach for about $900 for the week (about $140 per day). There were a couple things that struck me about this. First, the price seemed really good. My experience tells me that $140 per night will get you a nice hotel room in a mediocre location or a mediocre hotel room in a nice location. So we were probably paying what we’d pay for a nice place in a location like Des Moines, but we were in Hawaii, so that seemed like a nice win for Airbnb.

Second, our place was really nice. It was someone’s actual house. As it turns out, they travel a lot for some job in the entertainment industry, and they end up being at home about 30 weeks per year. Those other 22 weeks their place sits empty; they choose to make a little money by using Airbnb on their place, so good for them. Back to the point, it was a full-on place with a living room, kitchen, balcony, and bedroom. So compared to a 250ish square foot hotel room, we had a bonafide 800ish square foot apartment. Big advantage for Airbnb.

Third, you’re dealing directly with the owners. Our experience, plus what I have heard from a lot of others, is that the people whose homes you rent are really nice and accommodating. They are letting you have their place for a little bit and they genuinely want it to be a good experience for you. From our host, we got some nice restaurant recommendations. Not that people who work for hotels aren’t nice, but you just seem to have a deeper connection with someone when you are taking over their property. You want to be a good guest and they want to be a good host.

Finally, the place was just more comfortable. Partly because it was larger, but also because it was someone’s home and that made it easier to be our home. We were able to have a couple nice dinners at home looking out on to the ocean. I finished up the last Game of Thrones book sitting on the balcony, and I didn’t feel all crammed up in a hotel. It was just really nice.

So again, just like with Uber, Airbnb offers what is definitely a much, much better product, and they are able to do it at probably what you’re paying to a medium-caliber hotel. Put those two ingredients together and you get . . . DEFLATION.

The point of all this isn’t Uber or Airbnb, per se. It isn’t even diving into the sharing economy. Rather the bigger picture is looking at how inflation is supposed to be raising the price of everything, and if you look at things closely it kind of is. Cab fares go up every couple years, and hotel rates are constantly increasing.

But we live in the most innovative and dynamic of times. People are finding ways to bring us better products at lower prices. If you broaden that view to “a place to stay while I’m in Hawaii” you don’t have to get that hotel whose prices go up about 5% per year. If you broaden that view to “safe and clean transportation to Charlotte” you don’t have to go in a cab whose rates the states allow to increase every few years.

And remember that at the beginning of this blog we said that most people agree that technology areas are likely to have prices fall, but more traditional areas will still experience inflation. That’s true to some degree, but aren’t hotels and taxi pretty opposite of high tech? And we just showed that their prices are coming down. This is just another corner of the economy that is giving you more for less—deflation. Another reason why I think inflation concerns are way over inflated (ha, ha. Did you see what I did right there?).

The Fox family’s 2018 investment performance

January 30, 2019January 30, 2019 Stocky Leave a comment

2018 was an “interesting” year for stocks. Everyone wants to think “this one was different” but 2018 did seem to be pretty crazy.

We had some wild swings pretty much the whole year: from January to December. Going into December, I was marveling at what a genius I was with my prediction from the beginning of 2018 that the market would be up about 5% for the year. Going into December it looked like I was going to be spot on . . . and then the bottom fell out of the market and you have where we are now.

Our stock performance

Just like most everyone else, we had a down year. Of course, since we only invest in index mutual funds, by definition whatever the market did is the return we got.

Investment	Ticker	% of total portfolio	2018 return
US stocks	VTSAX	50%	-8%
Int stocks	VTIAX	45%	-18%
REITs	VGSLX	5%	-12%
TOTAL			-12%

We were down 12%, and obviously that sucks, but . . . There’s really no “but” so let’s not try to sugarcoat it, but maybe there is a silver lining. Since the Great Recession in 2008, stock were up about 150% (about 11% annually) and had a 10 year winning streak.

Dark blue was US stocks (down 8%) and light blue was International stocks (down 18%)

This year we had a down year, so it’s a bit hard to complain. Historically, stocks are down for the year about 30% of the time. We were probably due, so we shouldn’t get too greedy. Still, it isn’t fun to go through a down market, but that’s life.

Notice any changes?

We also made a few simplifying changes to our portfolio starting in late 2017 and continuing into 2018. At the end of 2017 we sold all our commodities as I discussed here. In 2018, we also exited our Lending Club investment which was also a disappointment (although not nearly as bad as the commodities).

That took us from five investments (US stock index fund, Int stock index fund, REIT fund, commodities ETF, and Lending Club) down to three. If you remember the post on Three Investing Ingredients, I was getting closer to following my own advice. The only thing still there was REITs. In late 2018 we finally sold those off, so as of now, we are totally following the Three Investing Ingredients. It’s nice to get back to basics.

At the beginning of 2020 when you read about how we did in 2019, there should only be two investments.

Inflation

The other thing I always look at at the end of the year is inflation. US inflation came in at 2.4%. It’s been inching up steadily over the past few years, and now it’s the highest it’s been since before the Great Recession. Even so, 2.4% is still incredibly low.

We spend a ton of time talking about the impact inflation will have on your portfolio. A few years back I even wrote almost a love note to the investing gods for 2015 being a no-inflation year. The fact that inflation remains very tame compared to historical standards—I use 3% as a target for inflation—means we’re ahead of the game.

Wrapping it all up

Let’s chalk up 2019 to a crazy year and a “bad” year. But we know sometimes we have bad years. In the grand scheme of things it definitely could have been worse.

MY 2019 PREDICTION—I think our new normal for the next several years will be a lot of volatility, like we saw in 2018 and so far in 2019. I never like trying to predict the stock market, but it just “feels” like we’re in for another down year. I predict down 7%. Of course I’ll use this as an opportunity to keep socking money away and buy stocks at prices that in 10 years will look bargains.

Federal reserve makes markets dive

June 14, 2018June 14, 2018 Stocky 1 Comment

Nothing gets stock markets so excited as the Federal Reserve. Here is a chart of the S&P 500 yesterday. Quick, when do you think the Fed announced that it was going to raise interest rates? Everything was going fine—it was a pretty smooth day and then at about 3pm the Fed made its decision and the bottom fell out of the stock market. Why is the Fed so important? What is it doing that can make a calm market move to much so quickly?

Basically (and this is very basic, as there is a boatload of nuisance in this) the Federal Reserve, and for that matter the central banks of any country, control the core interest rate. That single, yet enormously powerful tool, allows the fed to influence the economy in a major way.

The guiding mission of the Fed is first and foremost to maintain a healthy level of inflation. In the US that is around 2-3%. Being too low has some problems that reasonable people can debate, but pretty much everyone believes that when inflation gets too high, that’s when really bad things happen. So more than anything, the Fed is tasked with keeping inflation low. Then a secondary goal is to promote a healthy and growing economy that keeps unemployment low. So basically the Fed has two jobs, keep inflation low and keep the economy strong.

How does the Fed impact the economy?

Let’s imagine a really simple economy. There are ten companies named A and B and C all the way down to J. Just like in real-life, not all companies are created equal, with some being much more profitable than others. Here A is the most profitable (maybe like Apple) while J is the least profitable (maybe like JC Penney).

Interest rates will play a big part in the profitability of these firms. As interest rates go up, the amount they spend on interest for all their debt goes up as well. Because A is so profitable, it would only start to lose money if interest rates went really high, up over 10%; however J is much more vulnerable and will become unprofitable if interest rates go over 1%. All the other companies have a similar situation as shown in the graph.

So this is where the Fed comes in. Let’s say the Fed sets the interest rate at 6%. Firms A, B, C, D, and E are all profitable even when the interest rates are that high; but firms F, G, H, I, and J are not. Because of that things won’t look good for firms F-J. Maybe it’ll be so bad that they’ll go bankrupt or maybe they’ll lay off people or put a hiring freeze on.

At 6% interest, you have five firms that are doing well (A-E)—growing, hiring more people, expanding, etc.—and five that aren’t (F-J). And at 6% the economy is performing at a certain level. But what would happen if the Fed lowered the interest rate from 6% down to 5%? One more firm (F) would be profitable, and in general it would benefit all the firms. The profitable ones would be doing even better, and the unprofitable ones wouldn’t be quite so bad off. And that would lead to a strong economy: more “stuff” would be produced and more people would be employed.

So there is very clear relationship that lower interest rates led to a stronger economy. Having a strong economy is one of the Fed’s goals, so that begs the question, “Why doesn’t the Fed push rates all the way down to 0%?”

This is where it starts to get interesting. It’s my favorite topic: Inflation. Remember that the Fed’s first job is to control inflation. Let’s look at the Fed’s decision to move interest rates from 6% to 5%, but now look at it with an eye towards inflation.

In our pretend world, let’s assume at 6% interest rates the economy is doing well. Things are growing and unemployment is fairly low. When interest rates go to 5%, firm F will become profitable so they’ll want to hire some people—makes sense. But remember that unemployment is low, so F is going to need to tempt people who are already working for A or B or C or who ever to come work at F. How does F do that? They pay them more.

F starts to pay people more, but A doesn’t take this lying down, so A starts paying more. This wage increase trickles through the economy. But A and B and even F need to make money, so the increase in compensation they’re paying to their employees gets passed along to consumers in the form of higher prices. When prices start rising, that’s INFLATION. And controlling inflation is the Fed’s #1 goal. So that creates the difficult balance for the Fed—they want the economy to do well but not so well that it triggers inflation.

So there you go. You just completed a course in “Introductory Macroeconomics”.

What’s going on today?

Now that you have that little lesson under your belt, how does that relate to what’s going on with the Fed right now? For the past couple years, the Fed has interest rates at historic lows, at about 0%. Then about two years ago they started slowly raising interest rates to more normal levels, although even now the interest rates are still low by historical standards. Obviously that’s super low, so shouldn’t the Fed be worried about inflation?

Remember the circumstances of how interest rates got that low. At the beginning of 2008 the economy was going strong and the Fed interest rate was at over 5%. But then the financial crisis hit, blowing up the banking industry, and sending the world economy into a very sharp recession. A ton of people lost their jobs (unemployment went up) so prices stayed flat or even started to fall a little bit.

With all this going on, the Fed threw a life raft to the economy in the form of near 0% interest rates. In the intervening years, the economy has rebounded and unemployment has fallen, but inflation has remained pleasantly low. This is kind of the best of both worlds for the Fed—the economy is strong and there’s no inflation. The two things they have to balance are both in happyland, so they have kept interest rates low.

What does it really mean when the Fed changes interest rates?

With all of this, are we just a bunch of idiots? Should we really be so happy if the Fed is keeping rates low, and should we be so bummed if the Fed raises rates?

As the parent of two boys who one day may start sponging off Foxy Lady and me, I think the parent-child relationship is a good analogy.

Imagine you have parents (the Fed) who have a grown child (the US economy). Times are tough for the child (the economy is doing poorly) so the parents help out (the Fed lowers interest rates). The good scenario is that the child starts doing better to the point where he doesn’t need his parents’ help (the economy strengthens so it can withstand higher interest rates). The bad scenario is the child becomes dependent on his parents’ help and is never able to make it on his own.

In this analogy the parents reducing the amount of help they give (the Fed raising rates) is a good thing, isn’t it? It means that the kid is getting things on track and is standing on his two feet. For this reason, I actually think it’s a good thing if the Fed raises interest rates because it means that the economy is strong enough that it doesn’t need insanely low interest rates any more. Yet the markets react in the exact opposite direction.

I get it. Just as the kid would be bummed if the parents said, “hey pal, since you’re starting to make some money now, we won’t be sending those monthly checks”, the companies are bummed that they can’t borrow money so cheaply. But that isn’t sustainable.

I chalk this up to yet another of a million examples of how the stock market acts in a goofy manner in the short term. And another reason why I NEVER try to time the market. I just keep my head down and invest for the long term, regardless of what is going on with interest rates. But watching everyone hang on Janet Yellen’s every last word does make for perverse entertainment.

As the current debate unfolds, what do you think? Is the economy strong enough for the Fed to continue to take away the credit card?

BOOM—Top 5 impressions of Dow’s 1150 free fall

February 6, 2018February 6, 2018 Stocky 1 Comment

Yowza. Yesterday was a crazy day. There’s an ancient Chinese saying: “you are lucky to live in interesting times.” Definitely the past couple days the stock market has been interesting.

Yesterday I got cocky and wrote a post on the 666 point fall on Friday. I was a bit aloof, and the investing gods love nothing more than to humble people like that. So in a weird way, I take some of the responsibility for the 1175 point drop yesterday.

Seriously though, let’s take a look at what’s going on. Here are my Top 5 impressions of what happened, and what it all means.

Biggest point drop in a day

Yesterday’s 1175 point drop for the Dow was the largest of all time. Living in interesting times, right? But at a 4.1% decrease (I’m going to be using S&P 500 for percentages just because it’s a broader market and the data is easier to get), yesterday was about the 30^th biggest drop since 1950.

A top 30 (or bottom 30 depending on how you want to look at it) is notable given there have been over 17,000 trading days since 1950. However, top 30 means that on average, something like this happens about every other year or so. Maybe not so special.

Remember the last time we had a drop this big? Of course you don’t. In August of 2011 there was a -4.5%. Actually, August 2011 was a crazy month—there were FOUR days with percentage drops greater than the one we had yesterday. Think about that for a second. The month of August 2011 was a major rollercoaster with a lot of ups and downs. Stocks were down 5.7% for the month. But we don’t remember that at all because it was just a blip. Just. A. Blip.

That’s how I think we’ll remember this one. There are never guarantees, but this stuff happens all the time in investing during your 60+ year investing career. Get used to it.

See the horrors of automated trading

Look closely at the daily chart right around 3pm. It took a super-steep nosedive, at that point falling to about 1500 points. But then, nearly as quickly it recovered about 500 points. That a huge swing in about 10 minutes.

What caused that: Automated trading. Computers saw all the selling around them and were programmed to sell too. However, what should be very comforting is that humans (and other computers with different programming) saw that and realized that the selling was overdone. They stepped in and started buying.

Computer algorithms are a newer phenomenon in the market. I did a post of how they lead to much more volatility (written the last time the market went really crazy). However, while volatility may rise, it really doesn’t have any long-term impact on returns.

But the lesson here is realizing that a lot of what goes on is driven by thoughtless, emotionless computers that don’t really realize if there is an “overreaction”. As a human who has perspective, that means you can keep your cool when that stupid machine thinks it’s all going to hell.

How bad are things really?

This is important. What has fundamentally changed since a week ago when stocks were at an all-time high?

Really not much. There was a jobs report that showed wages had crept up a bit. On top of that Janet Yellen has stepped down as Chairwoman of the Federal Reserve, and is being replaced by Jerome Powell. Yellen was seen as fairly dovish on inflation, tending to keep rates lower for longer to spur higher employment. Powell is a bit more hawkish and is seen as more likely to raise rates more quickly to fight inflation. That goes to the whole thing we were talking about with the Fed yesterday.

Beyond that, which I think is a bit of a Red Herring, there aren’t any fundamental economic problems that are causing this. In 2008 the mortgage crises exposed the rotten foundation of the banking industry; in 2001 the internet bubble popped and exposed massive accounting frauds; in the 1970s OPEC exercised considerable cartel power (something that I wrote about here as unlikely to occur again).

That’s a quick rundown of all the major stock market disasters of the past 60 years. I don’t think there are any fundamental issues like that which we are uncovering to cause that to happen now. Rather, while we remember those three listed above, just like August 2011 there are a dozen mini-disasters that turned out to be much bigger bark than bite. I think that’s what we’ll have here.

What I think is going to happen

Making predictions on the stock market is a sure way to look stupid, but I’ll do it anyway.

I think we’re definitely in for a wild month. I bet today (Tuesday 6-Feb-2018) the market will be up 200 points, then down 300 and another 500 the next two days. We’ll have a ton of volatility for the rest of the month, and we’ll end February down 4.8%. For the year, I will stick with my prediction from December 2017, and I think we’ll be up 5%.

What am I basing that on? A lot of gut, and that’s never a good thing. The market has had an unprecedented run. These things can’t last forever, and the market does take “breathers” (sometimes called corrections). I think that’s what we’re going through right now.

However, the fundamentals are strong. The tax break is a big boon. Even more important, the tax break and a lot of other things are spurring innovation. Money is being deployed in R&D instead of sitting in banks in Ireland and Switzerland.

Being as involved as I am in the medical device space, I know tremendous innovation is happening. Diabetes is on the brink of being cured by Medtronic; bear in mind in the US we spend about $250 billion (read that again, a quarter TRILLION) to treat that. Think of all the benefits that will follow. Also we’re on the brink of having driverless cars which that alone will create well over a trillion dollars in sales and societal benefit. Those are just two of probably a dozen you could rattle off. Bottom line, I think things are really good right now.

How this should impact your portfolio

It shouldn’t. Definitely this shouldn’t scare you off into selling your portfolio. There’s a famous saying in the stock market that says “You should be scared when others are greedy, and you should be greedy when others are scared.”

A week ago stocks were flying high and everyone was greedy. As it turns out we should have been scared, but hindsight is 20/20. Now that everyone is scared, we should be greedy.

That said, I wouldn’t try to time the market either. A friend, Mr Snow Leopard, has a bit of cash sitting on the sideline and we were chatting about this and what to do. I said if it was me, I would invest in equal installments over the next three or so months. I know that goes against my analysis on how to invest a windfall, but I think things are so crazy right now, I wouldn’t feel comfortable putting all the chips in on one hand. I’m going with my heart over my head, but oh well.

I think we’ll definitely be in for a rocky ride and I think there are going to be a few of these really good buying opportunities interspersed with glimpses of optimism. Either way, DEFINITELY DON’T PANIC AND SELL OUT.

Fed rate hike spooks Wall Street

February 5, 2018February 5, 2018 Stocky 1 Comment

Last Friday there was blood flowing down Wall Street. The Dow suffered its 6^th largest point drop in a single day, falling 666 points (que Iron Maiden). Being a top 10 worst day seems like it’s important, but that really overstates things. The Dow is so high now, at 26,000, that a 700-odd point drop really isn’t that big.

If you look at the list of the Top 20 biggest point drops, this one ranks at #6. But in percentage terms it’s lowest on that list. In fact, since 1950 there have been about 200 or so drops in percentage terms this bad. That comes to about 2-3 per year. So let’s not get too freaked out.

Also, let’s keep in mind that the stocks are up 3% so far for the year. That’s really good, and no one would normally complain about that after just a month. But it’s human nature to complain, so that’s what we do.

OK, I’m a little calmer. But it’s still worth trying to figure out why the drop happened. Most economists look to the Federal Reserve as the culprit. Or more precisely the idea that inflation is steadily rising and that will prompt the Fed to start raising interest rates. You know my feelings on inflation in general, and specifically I predicted a few weeks back that over the long term we would have really low interest rates. Either way, new ideas on inflation weren’t what spooked the market, but the idea that the Fed would start raising interest rates.

That begs the question, how do interest rates impact the market? And that’s really French for Why is the Fed so important.

How does the Fed impact the economy?

In our pretend world, let’s assume at 6% interest rates the economy is doing well. Things are growing and unemployment is fairly low. When interest rates go to 5%, firm F will become profitable so they’ll want to hire some people—makes sense. But remember that unemployment is low, so F is going to need to tempt people who are already working for A or B or C or whoever to come work at F. How does F do that? They pay them more.

So there you go. You just completed a course in “Introductory Macroeconomics”.

What’s going on today?

Now that you have that little lesson under your belt, how does that relate to what’s going on with the Fed right now? Currently, the Fed has interest rates at about 1.5%. That’s really low, but actually over the past couple years the Fed has been raising interest rates from when it was at 0%. Obviously that’s super low, so shouldn’t the Fed be worried about inflation?

Remember the circumstances of how interest rates got that low. At the beginning of 2008 the economy was going strong and the interest rate was at over 5%. But then the financial crisis hit, blowing up the banking industry, and sending the world economy into a very sharp recession. A ton of people lost their jobs (unemployment went up) so prices stayed flat or even started to fall a little bit.

But what keeps them in the news is “the specter of inflation on the horizon.” If you follow this stuff (like I do) in the past few months, every time inflation numbers come out, everyone looks at those and tries to predict what the Fed will do.

Every time this happens the market swings like a pendulum. If rates are going to go up, the stock market gets crushed because firms will be less profitable (as we saw on Friday and in the little illustration above). If that changes and we think rates are going to stay low, the market shoots up like a rocket.

What does it really mean when the Fed changes interest rates?

With all of this, are we just a bunch of idiots? Should we really be so happy if the Fed is keeping rates low, and should we be so bummed if the Fed raises rates?

As the parent of two boys who one day may start sponging off Foxy Lady and me, I think the parent-child relationship is a good analogy.

I get it. Just as the kid would be bummed if the parents said, “Hey pal, since you’re starting to make some money now, we won’t be sending those monthly checks”, the companies are bummed that they can’t borrow money so cheaply. But that isn’t sustainable.

I chalk this up to yet another of a million examples of how the stock market acts in a goofy manner in the short term. And another reason why I NEVER try to time the market. I just keep my head down and invest for the long term, regardless of what is going on with interest rates. But watching everyone hang on the Fed’s every last word does make for perverse entertainment.

Inflation Killers—Credit Card Rebates

January 16, 2018January 16, 2018 Stocky 1 Comment

NOTE: If after reading this, you would like to apply for one of the credit cards that the Fox family uses to max out credit card rebates, we can send you a link and that lines our pockets with a bit of money at no additional cost to you. Let me know if you’d like to do that.

We’ve talked about how your cell phones are a great killer of inflation, along with other things store brand groceries and Craig’s List and the sharing economy. But there’s another product that is totally killing inflation that makes those seem like small potatoes—your credit card and the rebates you can now get.

Back in the day credit cards allowed a convenient way to purchase products without having to carry around a lot of cash. Eventually competition among credit card companies began to heat up, and by the late 1990s they started offering rebates to card holders on their purchases.

Let’s take a quick look at how credit card companies make money:

They charge interest and fees to those who carry a balance. This is where there is a ton of money to be made. For the purposes of this post, we’ll ignore this other than saying the Fox family never carries a credit card balance.
They take a cut of all purchases. When you buy something for $10 at the store with your credit card, you end up paying $10.00 for it, but the store only gets about $9.41. That’s because the credit card processing company charges 2.9% of the purchase plus $0.30 on each transaction. Most people don’t think about this revenue stream, but it definitely adds up.

So obviously to maximize revenue from #2, credit card companies want as many people buying as much stuff as possible on their credit cards. That leads to competition from the likes of Chase and Capital One and a ton of others, and that competition has taken the form of credit card rebates that over the last 20 years have gotten more and more generous. Credit card companies are enticing you into using their products by giving you a cut of #2.

My first credit card was a Visa associated with Exxon. It offered a rebate that could be redeemed for free gas. It was something like 0.5% of my purchases, but it was better than nothing. I was already buying gas so once a month I would get something like $12 off a fill-up. Over the course of a year that added up to maybe $150, not a ton of money but free money nonetheless. Given that I wasn’t getting that before, that was definitely “deflation” on my gas purchases—SCORE. Compared to what is offered today, that was just a pittance.

Credit card arms race

Fast forward to 2018 and things have definitely become higher stakes. We are bombarded with commercials where Discover gives you a rebate and then matches it at the end of the year, Capital One gives you a 1.5% rebate on all your purchases, and Chase gives 2 airline miles for every dollar you spend.

Credit cards are even offering one-time bonuses of hundreds of dollars if you sign up and spend a few thousand dollars in the first few months.

It’s easy to get overwhelmed by all the marketing and confused by all the intricacies of the rebate programs. But there’s gold in them hills.

If you take a few minutes (and that’s really all it is) to understand the different programs and figure out which one is the best for you, it can be thousands of dollars each year in your pocket. THOUSANDS OF DOLLARS.

The impact is huge

I’ve mentioned this a few times, but the Fox family plays the credit card roulette game and last year it amounted to about $4,000 in our pockets. Given we spend about $120,000 a year on expenses, that’s almost 4% of our expenses each year.

You’re probably not surprised that I look at the impact with a spreadsheet, and when you do the numbers it has an enormous impact. Let’s genericize it and look at my cousin Savvy Fox. He’s a 22-year-old who graduated from college making $50,000 per year and spending about $40,000 per year of which 80% is stuff on his credit card. His only major expense that he doesn’t put on his credit card is his rent (and eventually his mortgage); but for everything else he uses his credit card. Of course, he pays his credit card off each month to avoid usurious interest expenses.

Over the course of his life his income and expenses will grow 3% each year until he’s spending $120,000 per year (like us) when it flattens out.

At age 22 Savvy spends a total of $40,000 of which $32,000 (80% of the total) he uses credit cards for. Because he’s savvy with his credit cards, he gets about a 4% rebate on those purchases which is $1,280 for the year. This is found money so Savvy invests it in and index fund and gets about 8% each year. If he follows this plan for his entire working life (until age 65), when he retires this little exercise will give him a nice little treasure chest of about $660,000.

$660k for doing nothing more than maximizing his credit card rebates!!! Go ahead and read that again. In a world where the average net worth of a person is $80k, this little gambit by itself gives you 8x that. BOOM!!!

To further illustrate the point, $660k is when Savvy is really savvy with credit cards and gets the 4% rebate. If he wasn’t savvy and just got a 1% rebate, at age 65 he’d have $165k. That’s really, really good; twice the net worth of the average American, but still HALF A MILLION less than what he could have.

That should show you the stakes. Now let’s talk about how you get there.

Specifically what the Fox family does

It’s important to find a credit card with the highest rebate. Right now the ranges from about 1.5% to 2.0%. But the key is the sign-up bonus. You can fairly easily get a credit card with a sign-up bonus of $200 and higher, and you get that if you spend something like $1,500 in the first few months.

Our family typically plays this game 2-3 times per year, for both Foxy and me. So we sign up for a new credit card every few months. Our normal spending easily gets us to that threshold for the bonus. So take 3 new credit cards per year times 2 people, and you get a total of 6 new credit cards per year, each of which has a $200 rebate. Just the rebate gets us at least $1,200. Add to that 1.5% rebate on all our purchases that we can use a credit card for, let’s say $6,000 per month, and you have another $1,080. That’s over $2,000 right there of found money. That gets us to about 3.2%, but we do better.

As generous as personal credit card rebate programs are, business credit card rebate programs are better. Since Foxy Lady and I hung up our own consulting shingles, we had to set up a business. Because we have a business we can get business credit cards!!!

At Capital One a typical personal credit card has a rebate of $150 and a 1.5% cash back. Not bad. Their business credit card has a rebate of $500 and a 2% cash back. Much better. At Chase, they have a business credit card with a $700 rebate (after you account for the annual fee). Now we’re talking.

You can easily imagine that if Foxy Lady gets two Capital One credit cards per year and two Chase cards, and I do the same, the rebate dollars add up. I’ll do the math for you—it’s $4,800. Add to that the cash back which is around 2%, and that’s another $1,440. We’re getting about $6,200 EVERY YEAR for doing nothing more than using credit cards. That’s a ton of money that is just sitting out there for the taking.

Bringing this full circle, there is a ton of money out there for people who put maybe two hours per year into getting it by playing the credit card game. That money hasn’t always been there, so that by definition is DEFLATION. Credit cards can be a huge inflation killer.

If you are interested in signing up for one of the cards we use, if we send you a link we get a bit of a bonus from Chase or Capital One. If you want to do that, just shoot me an email.

RIP Inflation

December 27, 2017May 6, 2019 Stocky 2 Comments

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Inflation is dead!!! That’s quite a proclamation. Is the stress of the holidays getting to me, making my mind soft? Or is there something really to it?

If you are a regular reader of this column, you know that inflation can have an enormous impact on your financial plan. You also know that I think that the government’s official measure of inflation (CPI) is way overstated. No matter what you think, it’s undeniable that inflation is important and generally the lower the better.

If you don’t want to read the whole column, I’ll give you the answer: robots and engineering. If you’re interested in my reasoning, read on.

Quick Crash Course

Inflation basically comes from one of two places:

The government going insane and turning the presses on to print more money. This is hyperinflation and Zimbabwe and Venezuela lately and the Weimar Republic in the 1920s are good examples of this.
The general rise in prices as people demand more for their labor and raw materials get more scarce, leading to increased prices.

Say what you will about the insanity of Washington, but #1 really isn’t a concern. So inflation for the rich countries of the world really comes from #2.

Oil

The latest bout of really bad inflation in the US was in the 1970s and carried over to the early 1980s until Ronald Reagan and Paul Volker punched inflation in the face. That was started by the oil shocks that OPEC imposed on the world.

Oil production was curtailed which drove prices higher. Oil is a bit of a unique commodity in that we used it (and continue to do so although to a lesser degree) in nearly every aspect of life. More on that in a minute. Our world was based on oil so we really couldn’t do with less, so we had to pay more. We really didn’t have a choice. Prices rose (inflation).

Thirty years later in the mid-2000s oil prices dramatically rose again to $150 per barrel as demand from India and China shook the markets. Again we had to use oil so we paid the higher prices, but then that story ended differently. Technology had advanced so we could use less oil—natural gas powerplants, hybrid cars, solar panels, etc.—which took a bite out of the 2007 oil shock.

Also, and more importantly, technology also allowed fracking and oil sands to produce amazing amounts of oil in the US and Canada. All the teeth were taken out of the OPEC threat. Prices cratered over the next few years and have remained at very low levels. If oil ever goes up again, more fracking and shale sands will be mined to bring prices back down. We’re probably set with oil prices being moderately controlled for the next 100 years.

BOLD PREDICTION—Oil prices will never rise faster than 2% for the rest of my lifetime.

Other raw materials

Oil is a very unique raw material in that it is used everywhere. Others aren’t nearly so ubiquitous. That said, raw materials can increase in price. However, when that happens our dynamic economy has shown an amazing ability to engineer products to substitute the more expensive raw materials for cheaper ones.

The price of copper has doubled over the last 30 years (from about $1.50 per pound to $3.00 per pound). That should cause inflation yet think about engineering. Thirty years ago how much copper was used in telephone line—a ton (literally)? Now that’s all fiber-optic cable (mostly plastic—which is cheap) that carries a 1000x information at marginally higher prices. Copper pipes used to be used exclusively in homes. Now it’s PVC which is cheaper and more durable. You get my point.

You can also have commodities like foodstuffs (cows and bushels of corn). In the past those have increased in price significantly. However, as an economist would predict, as the price goes up farmers plant more corn and ranchers husband more cattle. That keeps everything at relatively steady prices.

When ever anything gets more expensive, businesses, with their profit motive, will find alternatives to do the job better at a lower price. That is going to keep a major cap on inflation.

BOLD PREDICTION—There won’t be raw material whose price goes up significantly while also whose use increases significantly.

Robots

The largest component of inflation is human labor. In the past, there has always been a general pull towards higher wages. When the economy is weak (unemployment is high) that tends to slow or even stop. When the economy is strong (unemployment is low) companies have to compete for workers and they do so by raising wages. That leads to higher prices.

Of course, higher prices don’t always translate to inflation. If a person is paid more but is much more productive (thanks to computers or other tools) that doesn’t lead to inflation, and if the productivity improvements are large enough will often lead to deflation.

However, and here’s the political hot potato, those productivity advances tend to be focused on the highest-skill workers. Engineers now have computers to make them more productive; airline pilots have more advanced aircraft; construction workers have better tractors. When most of those people got pay increases it was because they were more productive, no their impact on inflation was minimal.

The low-skill workers really haven’t gotten productivity enhancements, so any pay increases they got typically led to inflation. But look at what has happened to all those low-skill jobs. They have disappeared or are disappearing. You don’t have gas-station attendants and grocery-store baggers anymore. Cashiers are quickly disappearing. Soon waitresses are going to disappear.

Most of the time the extinction of these jobs is because technology (robots) can replace them at a fraction of the cost. Politically and socially this is deep water and we could debate this for hours whether this is good or bad. But from an inflation perspective this is definitely keeping a cap on inflation. If the wage for a low-skill job rises to fast, a robot or computer replaces it at a cost of pennies on the dollar.

Go to your grocery store and see all the self-checkout lines. Each of those used to be manned by a low-skill worker. Now one worker is overseeing 8 lines. Many restaurants have self-order tablets which eliminate the need for waitresses (now you only need servers). Of course countless low-skill factory jobs have been eliminated by robots. You could go on and on.

This puts a huge cap on inflation, leading to much of what we see:

Stagnant wages for low-skill workers
Exponential growth of people-replacing machines
Persistently low inflation.

BOLD PREDICTION—Wages for skilled workers will continue to increase while unskilled workers will decrease. Only a minimum wage will keep wages at the low end up, but that will lead to fewer low-skill jobs available.

The Federal Reserve has said it is baffled by the persistent low inflation in the face of fast economic growth, historically low interest rates, a low unemployment. In the past those three ingredients always led to inflation, something that the Fed is chartered to control. To me it seems like an easy situation to figure out, but I am smarter than a Nobel Prize winner ?.

It’s pretty simple—we aren’t going to have inflation because there are so many amazingly smart (and very well paid) engineers that can find any product (including people) whose prices are rising and replace them with cheaper substitutes.

Like I said before, there are social implications for this which make these issues very gray. However, keeping to the black and white areas, I believe this means inflation will probably remain low for years to come. As an investor that’s GREAT NEWS.

Inflation–the big scary monster hiding under your bed

December 5, 2017December 5, 2017 Stocky Leave a comment

“Ocean waves will grind the greatest boulder into sand if given enough time”

Inflation, the general rise in prices over time, is a powerful and unrelenting force which is eroding the value of your money every year, every month, every day. How powerful is inflation? Look at this simple example with my neighbors, Mr and Mrs Grizzly.

If they want to spend $50,000 per year (in today’s dollars) in retirement they’ll need about $1.2 million on the day they retire (40 year retirement, 6% return, 3% inflation). Every year in retirement they’ll spend a little more than $50,000 to buy what $50,000 buys today because of inflation. However, if you crank the inflation knob up a notch from 3% to 4%, they’ll need $1.5 million. Up to 5%, they’ll need $1.8 million. What makes inflation so scary is that the impact is huge—a 2% increase requires your nest egg to be $600,000 larger—and it’s also completely out of your control.

In the US, inflation is tracked by the Bureau of Labor Statistics, a division of the Department of Labor, with a tool called the Consumer Price Index (CPI). Basically (I know it’s much more complex, but for brevity’s sake) it looks at a general basket of goods that people buy and tracks how those prices change over time. It’s meant to track EVERYTHING that consumers buy: food, housing, cars, airline tickets, medical expenses, entertainment, and on and on and on. The US boasts an amazing record of tame inflation over the decades, but even then it’s been quite a roller coaster: in the early 1980s, according to the CPI, inflation was averaging about 12%, and it has averaged about 1.6% since 2009.

That just ruined Mr Grizzly’s day. So he needs $1.2 million today to retire, but depending on inflation it could range from $1 million to $8 million if it got as high as it did in the early 1980s?!?!?! No bueno. How the heck is he supposed to plan for a range like that?

What to do with inflation. It’s like that big, scary monster living under your bed. It can be a powerful force that can completely turn your financial world upside down. Or, it can be something that is built up in our imagination that in reality isn’t that bad at all. Let’s figure this out.

Inflation is going to do what it will do, and there isn’t a lot you can do about it as an investor. The US government sets an inflation target at 2%, but reasonable people can debate how good Washington is at managing stuff like this. When I do my planning for the Fox family, I personally use 3%. But there is some good news—I actually think the CPI waaaaaaay over estimates inflation and that it is going to be on the lower side of historic averages, which is a good thing for those of us saving for retirement (as always, this is just my opinion and may turn out to be quite wrong, also with my projections I am not predicting the future).

The CPI is supposed to compare apples to apples, so basically what did you buy last year and how much would that cost if you bought the exact same stuff this year. I think over the short-term the CPI works pretty well; I’d believe that prices in 2017 were about 2% higher than in 2016 (in line with the CPI’s figures). But over longer periods of time, the CPI really fails because I think it does a really lousy job of dealing with major technological advances. So when you look at 10 or 20 or 50 years, which happens to be the time horizon we’re looking at for retirement, I think the CPI really overestimates inflation.

If you go back to 1965 (I picked 50 years ago, because I figure I have 50 years to live, so that’s my time horizon), the CPI says prices have risen about 7.5 times. So something that cost $100 in 1965 would cost about $750 today. If you do the math, that equates to about 4.1% per year. We saw the impact that the level of inflation has in the above examples (pretty major impact), yet let me tell you why I think the government is getting it wrong and there is some real relief. This is going to be a long post (but I hope a valuable post), so get comfortable.

Cars

In 1965 you could get a new 4-door sedan like the Chevy Impala for about $3000. Today you could get a new 4-door sedan like the Honda Civic for about $20,000. If you do the math, that calculates to about 3.9% inflation per year, right around what the CPI says (I know, you’re saying: “Stocky, so far I’m not impressed.”) But remember, the CPI is supposed to compare apples to apples; when you compare a 1965 Impala to a 2015 Civic, the Civic has a ton of advantages.

The Civic gets 35 miles to the gallon, while the Impala got about 12. The Civic has incredible safety features like airbags, antilock brakes, backup camera, and on and on; the Impala has seat belts across your lap (they didn’t even have the shoulder ones). The Civic has Bluetooth to connect to your MP3 player, while AM/FM was an option on the Impala. A new Civic will probably last you 200,000 miles or more, but your Impala would be lucky to get to 100,000 (like “go-out-and-buy-a-lottery-ticket” lucky).

Put all that together and how much of that 3.9% annual price increase is due to inflation, and how much is due to the Civic just being a better car? It’s not an easy question to answer, but I would think an awful lot of the price increase is because you’re getting a safer, more fuel-efficient, and more durable car . . . just a better car.

To look at it from a different angle, we know $3000 in 1965 would buy you a new Chevy Impala. What would $3000 buy you in 2015? A quick look at Autotrader.com shows that for $3000 you could get a 1998 Honda Civic with 150,000 miles. Between those two choices, each of which is $3000, don’t you have to pick the Civic as the better car? It’s safer, much more fuel efficient, has more convenient features (cruise control, automatic windows), and it will probably last longer. All that says that inflation was actually a lot less than the 4.1% the CPI said or the 3.9% we calculated.

Rent

Housing is the biggest expense that people have, so how does that come into play? In 1965 the average rent was about $90 per month while in 2011 it was around $870 which calculates to about 5.1%. That’s higher than the CPI, but before we freak out about runaway inflation in the housing market, let’s do the apples-to-apples comparison. In 1965 you were getting a place where you might have shared a bathroom with your neighbor and a phone too. You had an icebox instead of a fridge (literally a cabinet that you kept cool with blocks of ice), and radiator heating.

Today you have granite countertops and stainless steel appliances, central air conditioning, and a fitness center downstairs if you’re lucky. How much of that 5.1% increase is due to prices rising, and how much is due to you just getting a much, much nicer place with much better amenities? Today, I’m sure if you tried hard enough you could get a total armpit of an apartment that was completely vintage 1965, and I bet you probably wouldn’t pay more than a few hundred bucks for it, showing that prices for apples-to-apples apartments haven’t risen near that 5.1% level.

Healthcare

Ahhhh. This is where you’re saying: “But what about healthcare? Medical prices are spiraling out of control. That’s where they get you.” The Medical CPI shows that prices have increased an astounding 17 times since 1965—about 5.9% annually. Mr Grizzly just had a minor aneurysm, which he knows is really going to cost him. But before you despair, do the apples-to-apples comparison and realize that the quality of healthcare has gone up exponentially while costs it can be argued have come down.

Let’s say Grandpa Fox had a heart attack in 1965. First, his chances of survival weren’t very good, but let’s assume he survives and gets coronary bypass surgery. After two months of recovery he’s back at home living his normal life, but now with a sweet scar running all the way down his chest from the open-heart surgery. That surgery back then would cost around $6000 (it’s hard to find exact numbers on this so I estimated; any reader who has better data please let me know) which is a drop in the bucket compared to the $100,000 price tag bypass surgery costs today.

Unfortunately, Grandpa Fox passed his lousy heart genes on to me. However, instead of a heart attack hitting me out of the blue, my doctor discovers early on that I have high cholesterol and prescribes me Lipitor which costs about $300 per year, and that is even lower if you go generic. My heart problems get taken care of for much less money, plus I didn’t have to go through a high-risk surgery and brutal recovery.

But maybe Lipitor doesn’t work, so after a while they find my coronary arteries are severely blocked and I get a stent (of course, I only use a Medtronic brand stent). I have a non-invasive surgery where they insert the stent through a tiny incision in my hip, I go home that evening, and it all costs me about $20,000. Like before I probably would have a much better outcome than Grandpa Fox, at about three times the cost which equates to about 2.4% inflation over the 50 years.

So while medical expenses have skyrocketed (and I totally agree they are out of control), if you look at the idea of taking someone with a heart problem and getting them back to health, prices have actually gone way down since 1965. So much for aggressive inflation here; you could actually argue that there has been deflation.

Food

So let’s compare apples to apples, literally. Apples in 1965 cost about 16¢ per pound while today they are about $1 per pound—that equates to inflation of about 3.6% inflation. But there is actually a difference between 1965 apples and 2017 apples. Back then there was this weird concept of fresh fruits and vegetables being “in season.” You could only buy apples certain times of the year which was around late summer and fall (I had no idea so I actually had to look this up, which kind of proves my point). Today fresh fruits and vegetables are in season when your grocery store is open and you have money. So again, you’re paying more but you’re also getting a better product as well—year round fresh fruits and vegetables.

And there are many product categories whose prices have fallen drastically (air travel, anything with electronics), and others that we used to be charged for but are now free (telecommunications, news articles, books). The whole point of all this is that depending on how you look at it, inflation isn’t going to be nearly as high as the CPI says which is a huge help to savers. That means your dollar will stretch further in retirement than you might otherwise think, and that you’ll need less to retire on. Consider this my gift to you.