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.
You might want to consider a cash wedge to combat an unknown financial future as well!
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!
Hi Mark: As mentioned I’m a very conservative investor but do gamble once in a while. It’s in the genes. One I just saw2 that looks interesting is HCAL ETF. It is focused on the Canadian banks, yields 7.6% and pays $0.127 monthly. That is over $1.52 yearly and looks safe. Another I have looked at but have yet to pull the trigger is SGR.UN. It is a REIT on the TSX but operates in the states and is anchored by US grocery stores. I know these are not what you would call growth stocks but they are interesting for the cash flow so why not take a look at them.
Ya, not sold on HCAL myself. I really don’t like leverage that much but that’s my bias.
As for SGR.UN, interesting and would need to look at more!
Hi Mark: Not there yet Mark. The highest my portfolio got was $7.5 mil. but like the rest of the stocks have fallen back. All it takes is another lucky bounce to raise the portfolio that much more. My nephew asked me about the banks and I said that they were to expensive for me but that they could split their shares and make it more affordable. It is not out of the range of possibility as TD and National split their shares in the $90.00 range in ’14. At the moment a lot of capital gain locked in that my estate will have to pay one day but hopefully not to soon. HA,HA!
You took advantage of many share splits in the 1990s and thereafter I suspect given your years of investing…amazing. I also got some splits from those in 2014. I wish I had more. LOL.
Anything you have your eye on, right now?
Hi Mark: As mentioned I have a large cash wedge in Waterhouse plus cash in a checking and savings account plus cash in a savings account and checking account in the credit union. Between the two I have 4 GIC’s and in Waterhouse 1 ETF and 2 mutual funds and the rest are REIT’s and equities. that is why I get a large DTC. Needless for me to say I am well over 7 figures and if the market would only cooperate I would be at 8 figures.
8 figures, jeepers! Outstanding. Sounds like you can spend it up or great some significant generational wealth!
Hi Mark: I’m ashamed to admit it but I probably have 4-5 years of dry powder sitting there not earning any interest at all but as I’ve mentioned the stock market is still high even with the pull back. T doubt that my cash wedge will decrease as May is my smallest month but June and July are my biggest months. Ricardo you may be onto something with Shrinkflation. Personally when I go to the store I may buy the regular items and then have to go in partly through the next week and pick up more items and then I may not return for two weeks as I will have enough to make due. This means the store is losing a regular customer for that week and I’m pretty sure others will be in the same boat. Mark something off topic but something you mentioned before is that you should follow your own advice and stay out of the media following. I have done this for years. A friend of my dad’s told him that those ” nook nosers” are to close to the action. Now if you get by that saying what he meant was that the buyers and sellers on Bay Street are sitting in front of their screens watching every little thing and reacting to it every day, but the market doesn’t work that way. What is up one week is down another so you and I can sit at home and mull over buying a stock and when we feel the time is right then we can pull the trigger on the stock.
Ya, I try and avoid the market noise as much as I can so I do eat my own cooking. I find the articles related to inflation, stagflation, etc. interesting but that’s about it since nobody knows what the future holds 🙂
Hi Mark: I too care about cash flow and being an investor millionaire. I started investing in the ’70’s and then the Arab Oil Crises hit in ’73- ’74 so I bought bonds. What a mistake. Bonds that I bought for $94.50 were going for $62.62 in ’79 and Canada Savings Bonds were going for 19.5% and with bonds it is all interest. One lesson learned. By the ’80’s Reaganomics came in and things started to get better and I started to buy more stocks but by ’89 you could still get 9% on a preferred stock. During the ’80’s Jack Welch brought in his Sigma Six management program which consisted of Laying off 10% of a department and letting the rest of the workers to pick up the slack. It was great for the stock as it split in ’87, ’92, ’94, ’97 and ’01 but not for the morale of the workforce. I was finally laid off in Jan./ ’92. When Jack Welch finally left he left a mess for the new CEO to clean up which he couldn’t.
All equities here, Ronald. You?
Hi Mark: Not to take a shot at you but my dad always said that a country couldn’t survive on services alone. A country needed people to make things. Now I’m a fine one to talk as I have one nephew who works for the City of Ottawa and a niece who works for MNR in Ottawa. Both these are service jobs but the point being that we need companies like MDA, EIF, RUS, Stelco, etc. to make things so we can export or help the country out. When it comes to the tax system people paid into the RRSP because they thought they were getting a tremendous deal at the time. Now they turn 72 and the government with draws .0528 of their savings from their RRIF. I don’t think that the government is going to change its mind anytime soon. As for post retirement I find following the stock market enlightening and interesting and keeps the brain sharp. Part of that is getting the good news and the other part is knowing what news to discard.
Not a shot at me, I’ll all for building things 🙂
All levels of government need to be more effective and efficient…
“I don’t think that the government is going to change its mind anytime soon.”
Nope. Sadly! Ha.
Hey Mark congratulations on being mortgage free this year! We recently enjoyed that same milestone. I like Warren Buffett’s advice, “best way to protect yourself against inflation is to be exceptionally good at something.” Having marketable skill(s) will always be the best asset. My strategy for the next while is to continue working part-time so that I do not have to use any retirement savings just yet. Keeping body and mind healthy will be top priority in order to do so.
In terms of keeping a cash wedge, what percentage do you keep in cash? Will you be increasing this amount?
Thanks, Karen! Not quite there yet but getting close! We hope to work part-time in the coming years, throughout our 50s to keep our body and minds active for sure….always been our plan starting some 15+ years ago…
I/we hope to keep about $50k in cash which is about 1-years’ worth of key expenses (condo fees, property taxes, groceries, etc.) in cash. No plans to have that amount higher than that at this time, maybe as we get older in our 60s? Not sure yet 🙂
BTW Mark – on your “simplify the tax system” message (which you’ve been pushing for a long time), I came across this article. I’m not holding my breath – but let’s see where this goes. Personally, I’m fine with doing my own taxes but there are many out there that aren’t comfortable with it – and it gives them tons of stress. Let’s try to make things easier for people – not harder! https://www.cbc.ca/news/business/tax-filing-deadline-1.6825841
Ya, not holding my breath at all but a simplified tax system would be a HUGE win for taxpayers. Our government does not seem to be in the business of keeping things simple. Unfortunately for us all…
Thanks for the link!
Stagflation? Maybe although I doubt the unemployment rate will increase. My thinking is that the Baby Boomer (me) generation is withdrawing from full time work so job openings will remain unfilled. Mind you a lot of these are on the service side. Never the less many technical positions are going unanswered as there is no one available to do the job. My two sons work in the trades and are at no lack for employment. Cost of qualified service work is increasing because the shops are having to pay more to keep their employees. Don’t know where it will end but the paycheck will be squeezed more and more. Sounds somewhat like inflation, only in sheep’s clothing
Luckily I can fix some things myself.
What I see mostly is “shrink”flation in the market.
Cash Wedge: I do keep some dinar on hand but the main part is invested and paying me approx $200mth ($2400yr) – which at present gets reinvested. So my cash wedge is paying me some cash. If for some reason a large amount of cash were needed then there is also the TFSA paying me approx $1,200mth (reinvested). My actual cash wedge will decrease a bit this year because of upcoming festivities however it has been sitting there for over a year in a high interest savings account paying me a little each month. So at present I do not fell strapped for “cash”
Interesting about the “Women Can Money” site. Women fought long and hard to gain their rights to equality. Funny how it seems “OK” to almost exclude the male from their agenda. Which leads me to the old saying “Do two wrongs make a right”
Can’t blame them to a certain extent as we see their rights still being trampled upon in some places south of here – never-the-less
I am only happy to support this event.
When it comes to cash, I prefer to keep a bit. This way, I can invest at most choosing. We hope to keep ~ 1-years’ worth in cash to start semi-retirement with in the coming year or so.
It will be interesting to see what happens to inflation and/or stagflation over time. My crystal ball is always very cloudy!