Weekend Reading – Is Stagflation on the way?
Welcome to a new Weekend Reading edition on stagflation.
A few thoughts on stagflation soon…
Before that, some recent reads just in case you missed them:
I posted this March 2023 dividend income update and I look forward to sharing my update for April next week!
I’ve been an advocate of ending any mandatory RRIF minimum withdrawal rates for many years now and I would love to see those changes to simplify our tax system and offer more financial flexibility at the same time to all retirees. I doubt I’ll ever get my wish!?
A thanks and shoutout to Rob Carrick for mentioning my post in his recent newsletter related to owning international stocks – yes – I think we should all own some in our DIY portfolios. How much international stocks can and should vary.
You can read one of Rob’s recent editions here that includes how a children’s account was paid just $0.01 in interest despite having over $1,400 saved/invested. While our penny is no longer in circulation, interest paid by some financial institutions certainly remains, though paltry, at best. (subscription and edition here.)
Weekend Reading – Is Stagflation on the way?
I have some thoughts on that…and this caught my eye:
1Q23 GDP +1.1% (q/q ann.) vs. +1.9% est. & +2.6% in prior quarter … slowest growth since 2Q2022 (which was a negative quarter) pic.twitter.com/HjLOF8zERX
— Liz Ann Sonders (@LizAnnSonders) April 27, 2023
What is stagflation anyhow?
Well, it’s not inflation that’s for sure but stagflation could be even more concerning…
At the most basic level, inflation means a rise in the general level of prices of goods and/or services over a period of time. When inflation occurs, each unit of currency buys fewer goods and services. Inflation results in a loss in the value of money and purchasing power. While not good, it can be tamed…
Stagflation is essentially a combination of stagnant economic growth, high unemployment, and high inflation. When you think about it….this combination probably shouldn’t exist – prices shouldn’t go up when people have less or no money to spend. But it could be a place where things are trending…
- There seems to be massive financial/wealth reset required triggered from COVID-related lockdowns over the last three years offset by massive financial stimulus inflows around the world – to where we are now.
- We seem to have massive supply/demand imbalances – that triggered inflation to run wild.
- We’ve had a massive, long-standing imbalance between cheap money for far too long and now a knee-jerk reaction that money should not have been so cheap, for so long in the first place.
So, with some consumers (and governments now drowning in debt), magnified by a recent surge in interest rates, record-low unemployment rates may slowly rise snowballing lower growth across manufacturing and service sectors delivering an overall stagnant economy – that could be where things are trending…
How might you invest during stagflation?
Well, as far as I know, there is no cure for stagflation.
And, it might not happen.
If it does occur, at some point, to dig out the economy will simply have to increase productivity over time whereby higher, incremental growth can occur with jumping back into inflation.
Given that, I could foresee some growth stocks suffering during times of stagflation but other assets/sectors like real estate and commodities (see oil and gas) could thrive – so a consideration to strategically tilt your portfolio for those, potentially.
How are we going to save and invest, if stagflation even hits?
Gosh. I really can’t see myself doing anything differently, really…focus on:
1. Owning real estate. We will own our home within the year, i.e., no mortgage. So, that is one equity asset we’ll expect to have and maintain. You gotta live somewhere!
2. Staying diversified with stocks. We own and will continue to own many stocks in Canada and just a few from the U.S. stock market (and have done so for the last 15 years). Beyond those stocks we own a few low-cost ETFs for global growth diversification just in case! I have no idea where equities will go near-term but longer-term they should be the place to be. It’s worked out well for us so far… Here are just some of the returns for just some of the assets we have owned for the last five years at minimum:
Notes: Portfolio 1 is low-cost global but ex-Canada ETF XAW; Portfolio 2 is low-cost ETF QQQ; Portfolio 3 is see above, all for illustrative purposes only.
Sources: Portfolio Visualizer
3. Keeping some cash. I feel some cash on hand is always handy. It’s liquid, versatile and I certainly don’t have to sell any stocks or ETFs to spend it as I please if and when needed. Worse case, I buy more assets (stocks and ETFs) whenever I want with it. We’re slowly raising our cash wedge position for any future semi-retirement plans in the coming years right now in fact, mostly cash sitting in my corporation.
What’s your take on inflation or upcoming stagflation? How are you going to disaster-proof some of your portfolio to weather more economic and market calamity?
More Weekend Reading…
Interesting article here about Amercians cashing out of their employer retirement plans (when they change jobs) and any benefits from doing that if this practice was employed more in Canada; could that approach benefit Canadian workers? I see pros and cons here. Here at home, I think it’s generally a good idea that many Canadian RRSPs (from a workplace) have a locked-in feature: you cannot raid money from your future self by design. I believe that forces some planning on your part which is good.
The Dividend Guy highlights a few reasons why he is not a millionaire – pouring investments including his time and energy into his business instead. He doesn’t really care about net worth. Like many investors, he cares more about cashflow, rising cashflow over time. That’s a growth mentality IMO.
I care about cashflow too. I also like being an investor millionaire. LOL.
As part of my usual weekly reading material, Dale Roberts helps us try to make sense of the market this past week.
Retire By 40 appreciates the power behind “Barista FIRE”, i.e., you supplement some of your financial independence with some part-time work for extra income and/or to help close the gap on some expenses.
So, while your portfolio can cover most of your expenses, you work a bit for the rest; as you need to cover off needs or wants as expenses.
“Here we have Barry, the IT guy.
- Figure out Barry’s annual expenses. Barry spends $60,000 per year.
- Save up. Barry worked in IT for many years and built a $1,000,000 portfolio. He can withdraw 4% every year. That’s $40,000.
- Quit IT and work enough to cover the gap. In this case, Barry needs to make at least $20,000 per year after taxes. He can quit his unfulfilling IT job and reinvent himself as Barry, the barista.”
I like #FIWOOT myself but I’m biased!
“Investors need to understand not only the magic of compounding long-term returns, but the tyranny of compounding costs; costs that ultimately overwhelm that magic.”
― The late, great John C. Bogle
Have a great weekend!