NWP Monthly Digest | July 2021
If you believe you can, you probably can. If you believe you won't, you most assuredly won't. Belief is the ignition switch that gets you off the launching pad." -- Denis Waitley
Whatever we plant in our subconscious mind and nourish with repetition and emotion will one day become a reality." -- Earl Nightingale
One of the more delightful (or scary) things about the human mind is our ability to each create our own reality. Almost literally, the human mind has a singularly powerful control over our behavior, our relationships, and our performance in daily endeavors. The Power of Positivity! I think, therefore I am!
My father is a huge believer in visualization, something he learned as an exceptional high school athlete that had the opportunity to continue playing football collegiately at Colorado State - this, despite being massively undersized at 5’9” and 150lbs. Believing in yourself can go an awfully long way towards overcoming other, minor inconveniences that life throws our way.
Study after study continues to prove that our brain is our master — sometimes in ways that confound and sometimes in ways that create extraordinary pain. The placebo effect is the one most everyone is at least slightly aware of. In clinical trials of different drugs, there will often be a “placebo”, or a sugar pill, that doesn’t actually have any medicinal compounds in it. Prozac, a common prescription drug used to treat depression, anxiety, and other mental health issues, has had several tests of it’s efficacy versus a placebo and come out on the losing end.
Other studies of medical students have shown their ability to develop actual, physical symptoms of the diseases and ailments that they’re studying while being 100% healthy.
Admittedly, this is a slightly weird way to start a newsletter/blog post about inflation, but here we are. Everyone wants to talk about inflation, and this time, they’re serious. Because, as we all know, all everyone wanted to talk about after the financial crisis from 2009 and forward was that inflation was coming and there was nothing you could do about it. And then inflation never came.
The first thing you need to know about inflation is that nobody can agree on the best way to measure it, nobody can really understand how it works, and nobody can properly forecast what it will be. If you want someone who understands the uncertain nature of inflation and the power of the U.S. banking system inside and out, my go-to guy is Cullen Roche and his Pragmatic Capitalism blog. If you want to get a good understanding of the way things truly work, start here with Cullen.
So let’s talk about inflation. **Disclaimer - I’m keeping this very simple on purpose**
At it’s very basic core, inflation is an increase in the prices of goods services. Very typically, this happens when an increasing supply of money is chasing a shrinking (or not growing) supply of those goods and services.
The fundamental force behind economics and pricing power is supply and demand. When supply goes down and demand remains the same, prices go up. When demand goes up and supply stays the same, prices also go up. Over time, our economic system is designed on a credit system and an ever increasing supply of money, which means there will always be some sort of inflation. And if you think inflation is a bad word, don’t even get me started on deflation, which is much worse.
If you know your history, then you most likely have read the tales of Germany and the Weimar Republic’s hyperinflation following WWI and citizens walking around the streets with wheel barrows filled with worthless, paper money. Or perhaps you’ve heard about Zimbabwe and the collapse of it’s sovereign currency due to hyperinflation. On the wall in my office, I have a “One Hundred Trillion Dollar” bill from the Reserve Bank of Zimbabwe which was allegedly worth less than $2 (American) at the time of it’s collapse. That’s not good.
Closer to home, however, would be the inflation the United States dealt with in the 1970s and early 1980s - gas shortages and lines miles long to fill up your tank, 18% interest rates...If you lived through that, it’s tough to forget.
So, Jeff, inflation is bad, right? Not necessarily.
Inflation is good when it is mild. There are two situations where this occurs. The first is when inflation makes consumers expect prices to continue rising. When prices are going up, people want to buy now rather than pay more later. This increases demand in the short term. As a result, stores sell more and factories produce more now. They are more likely to hire new workers to meet demand. It creates a virtuous cycle, boosting economic growth. -- Kimberly Amadeo, The Balance
The reason, in my humble opinion, that people are so scared of inflation right now is very simple. We fear that our income will stay the same and prices will go up and we will be able to afford less stuff. That’s scary, as is the notion of the ever increasing cost of housing AND the potential of mortgage rates heading north to 4%, or 5%, or 6%…who knows?
When inflation increases, interest rates are likely to increase as the Federal Reserve begins a more contractionary stance with the money supply. This double-headed monster of inflation could both decrease our purchasing power AND increase interest rates. It takes away a lot of control that people have over their future, and the quickest path to an unhappy citizenry is to take away any sense of control they have over the lives. The past 30+ years have seen almost no upward movement in wages for the average worker in the United States, so the notion of higher prices is scary.
And that leads us to the second thing you need to know about inflation — it doesn’t affect everything the same way at the same time. Here is a chart of 20-years of price increases from 1998 to 2018, which was a time period of extremely subdued inflation:
Housing, Food, & Beverage (the category you are most likely to notice an increase immediately) had price increases below that of wage growth. As did the technology we enjoy, clothing we wear, even new cars. But, healthcare and college costs went through the roof.
Inflation, as a whole, has been very low for a while, and it’s been low in places that impact our daily lives for the most part. In May, we saw the year-over-year change in inflation hit 4.99%…much higher then the ~2% or less we’re used to. Standard reasons for this surge in prices is generally considered to be the huge amount of stimulus cash added to our economy, increased demand for employees who seem to be more inclined to continue to take unemployment benefits, and shocks to our supply chains as an economy goes from “pandemic pause” to “we’re open for business”.
And now the debate begins. Is this surge in prices something that we can expect to be a constant in our economic lives for a longer period of time? Or is this temporary, or “transient” inflation, as Fed Chair Jerome Powell likes to refer to it?
Which brings me back to the beginning of this newsletter/blog post. Inflation is impacted by a lot of numbers and math, but at the end of the day, our economy is actually a whole lot of individuals making decisions about how to use their money every day - some of those decisions are rational and some irrational. One of the craziest things about inflation is that simply believing that inflation is here will continue to cause inflation to go up.
If individuals think that prices are going to go up in the future, we start to buy things at a faster rate. If companies think that inflation will go up in the future, they start to prepare themselves for that inevitability by increasing prices. That cycle is certainly not virtuous, but it is inevitable. The collective mind of the economy is just as powerful as your own mind when it comes to making it’s own reality. Could it be that if everyone believes in inflation enough, it will become reality? Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon…”, I would argue that it’s also an expectations phenomenon, too. Something to chew on…
For what it’s worth, the bond market continues to discount the notion that inflation is truly here to stay, which is a great sign. But that won’t change the fact that inflation concerns will continue to be the leading factor in expectations for the stock market in the short-term.
Noble Wealth Pro Tip of the Month
It’s July 1st and the first half of the year is behind us. As we prepare for the second half, it’s a great time to do some general housekeeping with your personal finances. It other words, it’s time to do a personal audit.
Are you sticking to your budget? Look at the last 6-months and see where you spend your money.
Are you paying for unnecessary subscriptions you don’t use?
Review your 401k plan allocations and do a deep-dive into the expense ratios that you pay for the funds you’re invested in. Can you change to a lower cost fund that gives you similar exposure to the market?
Review your insurance coverages. Are you covered properly and getting the best rates?
It’s time to get out those metaphorical brooms, dustpans, and mops and start cleaning up your financial house!
Things We’re Reading and Enjoying
The Psychology of Money | by Morgan Housel (Book)
Have I mentioned that Morgan Housel is my FAVORITE writer in the world? Well, yes. Yes I have. If you want to learn the most important lessons about personal finance, or you have children that are starting to get interested in personal finance, START HERE.
Doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people.
Money―investing, personal finance, and business decisions―is typically taught as a math-based field, where data and formulas tell us exactly what to do. But in the real world people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your own unique view of the world, ego, pride, marketing, and odd incentives are scrambled together.
The Midnight Library | by Matt Haig (book)
Winner of the Goodreads Choice Award for Fiction | A Good Morning America Book Club Pick | Independent (London) Ten Best Books of the Year
A rare piece of fiction to find it’s way onto my list, this is a great story about life and how we choose to live it.
In The Midnight Library, Matt Haig's enchanting blockbuster novel, Nora Seed finds herself faced with this decision. Faced with the possibility of changing her life for a new one, following a different career, undoing old breakups, realizing her dreams of becoming a glaciologist; she must search within herself as she travels through the Midnight Library to decide what is truly fulfilling in life, and what makes it worth living in the first place.
Tom Schmidt Explains What You Need to Know about DeFi | by The Oddlots Podcast with Joe Wiesenthal (Podcast)
Caution: if you’re interested in decentralized finance, crypto, and the blockchain, this is helpful. You may have to listen twice, however.
A rare piece of fiction to find it’s way onto my list, this is a great story about life and how we choose to live it.
By now you've no doubt heard about DeFi: the hot vision of crypto that aims to disrupt traditional lending and fundraising. But the space remains really difficult to grasp. There's all kinds of jargon — Automated Market Makers, Impermanent Loss, etc. — and the markets don't quite operate like traditional markets do. So how does it all really work? Where's it going? And what will it all be used for beyond speculation? On this episode, we speak with Tom Schmidt of Dragonfly Capital to break it all down.
TO ALL OUR CLIENTS, FAMILY, & FRIENDS…HAPPY INDEPENDENCE DAY!
-Your team at Noble Wealth Partners
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” Ernest Hemingway