ALBANY – It has to do with cycles. Economic cycles. Interest rate cycles. The economy was in a disinflationary cycle from 1981 until just prior to the pandemic. Now, inflation rates are rising. We think there is an inevitability to that cycle, but the pandemic was the point when it became apparent. If the pattern holds, this inflation could last fifteen, even twenty years, with the interest rate cycle mirroring that. But there is something different with this period of inflation.
The labor cycle. This country’s labor force is comprised of everyone over age 16 who is not institutionalized. Within that labor force, not all can work or want to work. The labor force peaked in 1998, with 73% of people working or looking for work. Today that number is less than 63%. This was not caused by the pandemic. Part of the cause is artificial intelligence. Go to McDonald’s and you will see two or three kiosks where you can place your order. It is just a matter of time before it is all kiosks. Our aging population also plays a part. We have a lot more people consuming these days, but significantly fewer people in the labor force contributing toward those goods and services.
Regardless of what you hear about this period of inflation, do not overreact. It is human tendency to get caught up in the suddenness of what is “in” and what is “out.” You do not want to buy something simply because it is going up quickly. It may not be sustainable. A successful investor is going to be able to execute their strategy with discipline regardless of what is going on. Remember, whether it is a pandemic or inflation, there will always be something going on.
Do not use any economic situation as an excuse to attempt to time the market. As Warren Buffet said, “The stock market is designed to transfer money from the active to the patient.” Chasing returns is a form of market timing. Switching from stocks to bonds can be another. Our company does not engage in market timing in any way. We study companies and buy for the long run. We do not simply sell to buy something that looks better.
We tell our clients not to expect inflation to be cured in the short run. Each time it comes down, it is likely to eventually go up higher, resulting in a pattern of higher highs and higher lows. When people spend a higher percentage of their income on necessities (or entertainment), two things get shortchanged, healthcare and retirement — two things everyone is going to need. If a couple is alive at 65, one will likely live into their nineties. That is a long time to go without a raise or a bonus. Ultimately, we must spend less. We must save more, and we must invest in something that earns more than the inflation rate. If you are not getting more than the inflation rate, you are really losing money.