June 2023
Chris and Kevin agree that many products and services have gotten much more expensive over the years. For example, food and real estate have generally increased in price over time- and the best way to combat inflation is to invest with a long-term mindset. Because interest rates have increased, many people have been investing in treasuries which can be a great short-term investment; however, treasuries typically do not appreciate enough to keep up with inflation.
Chris and Kevin recommend listeners to investigate owning commodities like gold and investing in real estate and stocks, as history shows these assets do increase in value over time and can help increase one’s purchasing power.
Click here to subscribe to our YouTube Channel.
Watch previous episodes here:
Ep. 35 Implications of the Debt Ceiling Showdown for Investors
Ep. 36 Modern Finance Advice for Earners - Introducing Modearn
Hello, everybody, and thank you for joining us for another episode of THE FINANCIAL COMMUTE. I'm your host, Chris Galeski, joined by Wealth Advisor and Partner, Kevin Rex. Kevin, thank you for joining us.
Appreciate you having me.
So Meghan was on the podcast a couple of weeks ago and we were talking about the debt ceiling. But in that conversation, the whole concept around inflation came up partly because the US government's now $30 trillion in debt. But it's not just the US government. There are governments around the globe that have printed lots of money had to create stimulus to try to get some economic expansion, mainly because of COVID.
That shutdown. But when you actually look at it, we were having a conversation like what is a trillion dollars? And, you know, this got into this whole, inflation, purchasing power. And if you think back 20 years ago, think of a billion dollars, that was a lot of money or even 10 billion. I mean, if you got $10 billion 20 years ago, you're pretty good.
If I said $10 billion today, how do you feel?
Still a lot of money, but definitely not the same right you used to say someone was a millionaire and that was amazing. Now it feels like everybody's like, if you're not a millionaire, you're struggling in certain areas. So yeah, it's things have changed.
And so on that topic like that, it's really hard to fathom or truly understand what a trillion is. And then you expand beyond a trillion and it's like, okay, we're raising the debt limit to $1.5 trillion per year, and then the US government is $30 trillion in debt. But the impact of that, these are some things that are out of our control when all of a sudden we go from, you know, $20 trillion in the system to 30 trillion because of COVID and the shutdown.
And that money gets released into a system where you can borrow at 0% interest rates. You have a lot of money chasing very few goods and services, and then all of a sudden, boom, without you even realizing it, inflation and the purchasing power of your dollar just gets withered away. And it happened so fast. So on that, what are some other examples that you can think of where you just kind of wake up one day and you go, Wow, my purchasing power has just disappeared?
That's funny. You bring that up. Two days ago, my daughter turned nine. My parents did a snatch breakfast so they came over, stole her in her pajamas, took her to breakfast. They came home an hour and a half later and I was like, how was it? My daughter was, you know, cheering, laugh and loved it. My dad's just shaking his head.
I’m like did something happen? He goes, She wanted pancakes, $10. She wanted an orange juice, $8.50. Then she wanted bacon because the pancakes didn't come with anything. Three pieces of bacon, $8.50. He's like tax and tip, your nine year old daughter's breakfast was $35, and I could just see him at the age he is, I think orange juice was probably $0.50 back when he was a kid.
And so to see him now be spending that amount of money, he still believes that things should be cheaper. But that's not the world we live in because of the money printing and the debt that we have. And so it really brings up the question, how do you start, you know, really considering the purchasing power that you have and the things that we need to be doing.
Yeah. I mean, it's mind boggling, you know, to say the least. Although, you know, I'm not trying to get into a whole debate here. If you've got trillions of dollars worth of debt and interest rates are zero, like that's okay. It's only really a problem when interest rates are at 5%, 6%. So there's we're not here to talk about the debt today.
We're here to talk about the purchasing power. It even happens with real estate. I mean you we have some clients that, you know, purchased a place a number of years ago for a million dollars. Let's say it's worth 3 million today. And they said, you know, I found my forever home, Chris. And it's not you know, I think I could sell my place for 3 million, but my forever home, it's going to cost five.
Well, they're going to sell their home, pay some capital gain tax, you know, go buy this new home. But now all of a sudden, because borrowing rates are higher and property taxes are higher, they're going to go from, you know, $3000 to $4000 a month in costs for housing costs to $15,000 to $20,000.
For a $2 million difference, right?
Yeah, for the difference between a $3 million and a $5 million. So what's that client or that person going to do? They're staying in their home. They're not moving. And so, you know, purchasing power can sneak up on us really quickly. Technology in some areas have caused purchasing power to increase, think about TVs. I go to Costco, a thousand bucks buys you the biggest TV. I mean, it's amazing how big they are. Yeah. When you got your first TV, how small was it?
I mean, it was actually pretty big. The screen was small. Right. But if you think about it, it was like that deep that wide. And it was a 13 inch TV. Then I got upgraded to have a VCR underneath it. But so we tease my brother in law because he bought this TV and he spent $4,000 on like this plasma.
It was 60 inches. And literally a year and a half later, you could buy that same TV but thinner for 800 bucks. So you're absolutely right. Real estate is a great example of, you know, things having gone up so much that it becomes cost prohibitive in a lot of ways. But there are examples. You know, we talked about cars being one of them, too, where, you know, they've stayed relatively flat and your purchasing power is still okay there.
But in general, if things are going to cost more, you need to have two ways to combat it. And it's either increase your earnings or increase your assets through investing. And some of us, it's easier to increase your earnings than others, retirees obviously can’t increase that. So when we talk about increasing the assets, for us, it comes down to having the right mindset.
We know this exists. We know that prices are going to go up. And so how do we stay the course? And when you think about, you know, financial planning being a key component of it, understanding what you have and where you're going, and then using buckets to understand it, you need to have short term goals, middle term goals and long term goals.
And you hear me talk about this all the time with my clients, where we create a plan when everything's calm and easy and it's going to work. But what happens is greed and fear take over when the markets get all volatile or markets are shooting straight up for 10 years and everyone they don't want to miss out. They have the FOMO effect.
That's when plans get derailed. And so that mindset of staying the course and understanding that the plan will work is so important.
Yeah, I mean, sometimes it's not even when the market's volatile. I mean, leading up to this debt ceiling, you know, last time in 2011, the market was down like 25% in a couple of month period leading up to, you know, that whole debt ceiling debacle. This one, it was amazing. They haven’t quite come out with a deal yet.
But it's May 31st and I think they're going to sign one here pretty quick. But the market's somewhat nonchalant about this whole debt coming up to this debt ceiling deadline this time. But a lot of clients are saying, hey, this ensuing crash, if they don't make a deal, you know, should we sell? Should we get out? So how we respond and react to things could be a big impact of what we actually receive.
It's incredibly important. And, you know, you think back to our parents and grandparents, if they had panicked across whatever was going on at the time, pulled their money out and put it under their mattress, it makes you feel good. But talking about purchasing power, you're going to wake up in ten years and you can't afford that orange juice because you have the same amount of money.
But costs and services are going up, so you have to invest. There's very few people that are wealthy enough to where purchasing power is just irrelevant. For most of us, you have to invest and it can't just be short term goals. It has to be into the future. So what are some of the strategies that you're talking about with your clients as far as helping keep up with inflation, outpace inflation and increase purchasing power?
You know, Kevin, it's so nice now to actually be earning something decent with short term or cash.
Investors needed that.
Yeah, you know I mean people were incentivized to save because with interest rates at zero it was bad and so it's easy to have that knee jerk reaction saying hey I want safety and I'm going to by owning something safe, whether it's Treasuries or money markets or CDs, I call CDs “certificates of depreciation” because you can't have access to them, but it's decent yield.
You know, you can earn 5% and that's attractive. But really it's not because we have to worry about reinvestment risk and then we're not getting asset appreciation, we're just getting that income. And that income might not be keeping up with the inflation that we're exposed to. I mean, there's certain areas of our life where inflation is much higher than 4% or 5%.
And so we really need to back up here and take a look at, you know, what are our needs, how should we be investing? And we've got to take that bucket approach. We've got to make sure that we're diversified owning things like commodities or gold that can keep up with inflation over time, things like stocks or real estate.
One of the reasons why I like real estate as an investment is because once we deploy that money into real estate, we're going to be earning some income from it and then we're going to hopefully see price appreciation along the way. So we just have to be patient over, you know, a five, ten, 15 year period to see that work out because it's going to take a few years to get that income.
It's going to take a few more to see the appreciation, and then it's going to take a longer term to really see the impact of having that asset. And that can be a great way to have diversification, have income, keep up with inflation or allow the purchasing power of your dollars to maintain over time. Yeah, but we can't do that with a short term mindset.
No, you can't. It's you have to understand that again, the buckets, Treasuries are great for your liquidity and for your short term. That's nice that you're getting paid. You have to have assets that are going to keep up with inflation, outpacing the future. I’m not a huge fan of stocks as far as valuations go, but we still use them.
We like them because they are a necessary tool to increase purchasing power over time, over the short term, one month, three months, six months, it's anybody's guess. But we've seen historically over time, stocks will be worth more in the future. So that is that bucket that you just need to stay the course, allow it to do what they're going to do over time.
And you have your other buckets short term for liquidity and cash needs.
Yeah. And essentially we need exposure to stocks because a lot of those companies are the ones that are affecting our purchasing power. They're raising prices over time due to inflation and then passing those increase in prices down to the consumer. And so if we're not invested in those very same goods and services that we’re purchasing, we are even more behind the game.
So having...
Paying more, but not participating.
So by avoiding stocks and just going, you know, oh, I'm just going to buy Treasuries, we are really getting behind the eight ball because we're not even participating in the benefit of being able to increase prices over time like these companies do.
Yeah. So I think just kind of in my mind, prices are going up, have a plan, stay the course and understand that we need to have growth assets to keep up with purchasing power into the future.
Yeah, thanks a lot, Kevin. Really enjoyed the conversation around purchasing power inflation. Any time I'm having this conversation, I always think back to when I was a kid, my grandma used to say, Oh, when I was a kid, a coke only cost a nickel. Now it's like, what, $5?
Disneyland is ten bucks, right? It's gone up.
Thanks a lot, Kevin.
Appreciate you having me.
Disclosure:
Information presented herein is for discussion and illustrative purposes only. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. These views are not intended as a recommendation to buy or sell any securities, and should not be relied on as financial, tax or legal advice. You should consult with your financial, legal, and tax professionals before implementing any transactions and/or strategies concerning your finances.
