In researching some investment opportunities, we realized we needed to take a look at three key data points: Fed Funds rates, 30 Year Mortgage rates, and CPI. We wanted to take a long historical look and the St. Louis Fed data points we choose go back to 1971 when the oldest boomers started to hit age 26 (family forming age) and inflation began to pick up significantly.
Here’s the chart:
We wanted to know at which point the CPI declined or corrected significantly based on the data the Fed aggregates. We only found two instances of large declines in CPI and those occurred from July 2008 to December 2008 and that decline was a 3.5 percent drop in CPI. The other time was in February 2020 to May 2020 and that resulted only in a 1.1 percent drop in CPI.
The cause for concern is two-fold. In the early 70’s as boomers started hitting family forming age they helped drive inflation up as demand for homes and subsequent household goods drove inflation. The boomer group was one of the largest population group of 72 million people. We now have a combination of Millenials (Gen Y and Z) coming into family formation age in large numbers, this will again drive demand for housing and household goods. Most of the Millenial group however has not been able to buy houses because of low interest rate speculation however that scenario won’t last long as housing will correct into 2023. Once housing corrects, there will be another wave of housing purchases as Millenials finally get a chance at owning a home at a somewhat reasonable price.
The second part of the problem is where boomers retire and live off social security, medicare and retirement funds. The boomer group will also add to the consumption matrix but won’t be adding to productivity.
Reviewing the chart above, it is likely that any type of upcoming “demand destruction” will be marginal for a short period of time as that’s what has happened every time over the past 50 years. Keep in mind that in 2008, a global housing fraud almost brought down the entire global economy and inflation only dropped 3.5% and in 2020, a global pandemic only dropped inflation down 1.1%!
So how are we dealing with high inflation?
- Keep our job(s) and ask for inflation adjustments during semi-annual reviews
- Relocate to lower cost environment.
- Have multiple income streams
- Side gig
- Think outside the box!
We are still waiting for a stock market and housing correction and will hold off on large investment moves until we see some significant correction in both markets but where we do find exceptional value, we do invest. In the meantime, stay tuned and stay solvent…