Categories
Investing Wealth

How Do You Invest within an RESP?

I’ll have to admit that I’ve thought and re-thought about how I should invest my kids’ education money. I feel an extra sense of responsibility because I don’t consider the money ‘mine’.

While I control the account and I can get the money back now or if the kids don’t go to school, for its intended purpose – funding an education – it’s not mine anymore, and that’s how I treat it.

If I allocated $20,000 towards my childrens’ education, the last thing I want is for them to end up with less than $20,000. The second-last thing I want is the stress of trying to earn back losses. While some argue that kids can take on debt to fund their education, I’ve seen how huge college debts can be debilitating. When a fresh graduate needs to start repaying big student loans within six months of graduating, they don’t have the time to be picky. They take the first decent job they can get and become debt-slaves for the rest of their lives. Many probably won’t be debt-free again until retirement – and debt is the antithesis to freedom.

Student loans –> credit cards –> car loans –> mortgage

Everyone I know who graduated with big student loan debts has not lived a free life. All these people have dreamt about ‘doing what they love’ but none could because they could never get a break from their debt repayments. I don’t want my kids to go through that.

So, if I put in $20k I want my kids to receive at least $20k. Of course, if invested in equities the probability that I accomplish this rises with my kids’ investing time horizon. Research has shown that very few historical 5yr equity market returns are negative.

How do you invest within an RESP?

The first step is simple. Simply put money into an RESP account and get that sweet, sweet Canadian Education Savings Grant (CESG) of up to $500 per child per year. This easy first step nets an instant 20% ROI.

Next, consider when your child(ren) will need the money. If it’s in less than 5 years I would suggest being very conservative. More than 5 years? Then you can start to take a little more risk.

Personally, I add an extra layer of conservatism on top of my baseline allocation. For example, if I considered a baseline allocation for a particular person with a 7 year time horizon to be 70/30 then I might ratchet down to 60/40. Also, within this mix, despite ridiculously low rates, I consider an allocation to risk free deposits (high interest savings accounts, GICs, CDs).

I know I’ll get flack for being too conservative, but I do this because time-lines are fixed. When a child graduates from high school they immediately (usually) go to college and have to pay a fixed cost. In contrast, I can delay retirement or adjust my expenses to live off less if I mess up my retirement account.

Categories
Investing Life Wealth

Investing, Hope and Climate Catastrophe

There was a time when an HIV+ diagnosis was a death sentence.

Not anymore.

According to Elizabeth Ranes, RN, “life expectancy for a person infected with HIV now extends to 70 years of age. That’s a remarkable improvement from the early days of HIV, when many men succumbed to the disease in their 30s.”

Someone diagnosed with HIV in 1989 would have little to look forward to, and no need for retirement planning at all. Anyone with any savings would spend it all, as most had no heirs and many were isolated from their families.

However, as diagnosis and treatments quickly improved during the 1990s, a subset of HIV patients started to outlive their wealth. This subset had planned for the worst, but unexpectedly benefited from new treatments. This new hope was a mixed blessing, as many of these people were now penniless.

Today, a growing number of teenagers are increasingly hopeless about the future. Instead of a disease, a convergence of global warming, resource shortages, political extremism and wealth disparity is painting a bleak picture.

Guidance counselors and therapists have commented on a growing number of young people seeking help amid existential gloom. Like it or not, agree or disagree, Greta Thunberg is the poster child for global teenage grief, anger and hopelessness.

The thread below illustrates what’s going on:

I know people love to hate on Greta, but remember she is a child. The value she provides might not necessarily be her arguments. Rather, the fact she is expressing her worry is what we need to take away. She is a barometer for the psychology of a growing portion of tomorrow’s leaders.

As I’ve explained by looking at the AIDS epidemic, when people lose hope they adjust their behaviours. They live like they have no future.

What does that mean for teenagers today?

And what if they are wrong?

Let me tell you a secret. When I was a teenager I had little hope for my future. I’m not entirely sure why. Perhaps I received no encouragement or help. Maybe I had pessimistic tendencies. I definitely had no path in front of me.

So I behaved like I had no future. I did many stupid things. Luckily I snapped out of it and doubled-down on forging my own path. But I could have easily gone the other way and simply continued to be a burden to those around me. Or worse.

What happens when a big segment of the population feels this way for similar reason, thus reinforcing their belief? They certainly won’t be thinking about retirement savings. More likely, they’ll be drop-outs, criminals and pot-heads. Not all. But more than under normal circumstances.

Maybe they’ll be proven right in the end. Maybe there is no future. But if they’re wrong, they’re basically cornering themselves into a pretty shitty life. In the end, it becomes a self fulfilling prophesy.

I’m not blind to the problems we face, but I think it’s important to maintain some hope. We each have our ways. Acceptance, action, religion.

We must continue saving and investing like we have a future. Perhaps the nature of those investments and the way we budget for risk change. We need to broaden our definition beyond financial instruments and invest in skills, resiliency and self sufficiency. We also need to plan for a greater number of contingencies and develop a better understanding of ‘risk’.

As we’ve learned during the AIDS crisis, simply dropping the ball to sulk on the sidelines won’t do anyone any good.

Categories
Investing Life Wealth

How Can Inflation Coexist with Deflation?

How does one explain a world in which macro trends are deflationary (DumbWealth: The Case for Deflation) yet the basic necessities of life are increasing in price?

While it sounds contradictory, the two paradigms can coexist. Look at housing prices and healthcare costs over the past 10 or 20 years. Look at commodity prices during the 2000s.

From the late 1990s to early 2010s commodity prices across the board were going through a super-cycle, driven by rising Chinese demand. Commodity prices were booming, yet – despite some cyclical bounces along the way – the secular disinflationary trend that began around 1980 continued until present day.

Medium Term Crude Oil Prices

Makes no fucking sense, right?

There are those who argue the CPI stats don’t reflect reality. The thing is, price ‘reality’ for one person isn’t ‘reality’ for another. We all have different baskets of goods and all spend different proportions of income on those goods, so our true experiences will differ.

ShadowStats has re-calculated CPI based on its own interpretation and has consistently printed double the reported inflation rate:

So, despite the long-term deflationary pressures of debt, demographics, productivity and imports, one must still respect how quickly commodity prices have risen lately. We’ve seen this battle before.

Over the near term, we’re going to see rising prices. Perhaps the scariest part of all this is how quickly global food prices are rising. Over the past year, the FAO Food Price Index has risen almost 40%!

This doesn’t necessarily mean that you’ll witness a 40% price increase in the grocery stores or a huge impact to your food budget. However, for the poorest portions of global society this could mean the difference between paying rent and feeding their kids.

In the end, the cure for high prices is high prices. This means two things.

  1. Much of the current increase in commodity prices is caused by supply chain issues created (exposed?) by the pandemic plus growing shortages of raw commodities. Higher prices are incentivizing production (and delivery) to quickly come back on line, which will eventually mitigate further price increases – potentially even lowering prices.
  2. Higher prices could break demand. At some point people simply can’t afford to pay higher prices. There’s an argument that the final straw that broke the housing market’s back prior to the 2008 Global Financial Crisis was higher gas prices. People could no longer justify longer drives, eroding demand for new suburban sprawl developments. Simply put, higher prices eventually erode demand somewhere, somehow and this can have a domino effect on the economy, ultimately replacing rising prices with a deflationary shock. This is what we saw in 2008.

Final thoughts

Although the ‘peak oil’ movement seems to have disbanded with the influx of lower quality, relatively expensive American shale oil, it is quite possible the world is riding a deflationary low-tide coupled with broad resource shortages that result in inflationary waves.

My prevailing shower theory (i.e. something I came up with in the shower) is that the secular deflationary forces will remain omnipresent, but most of the world will fixate on the boom/bust cycles driven by resource demand and shortages, exacerbated by fragility in the global just-in-time supply chain.

There will be rotation from good times to bad and back, but ultimately there is no end to this inflation-deflation battle. We can’t make more easily accessible, high quality oil, copper, etc. Yet, ‘economic progress’ requires us to use more and more. However, demographics and debt will continue to act as a counterbalancing force for our destiny.

Categories
Wealth

Chart: Urban-Rural Divide

Folks living in rural communities have become increasingly vocal about the deterioration of their way of life. Understandably so.

Flyover states are often overlooked by policies crafted to support economically dominant coastal regions. Meanwhile, they’ve watched globalization pass them by as jobs were replaced by machines or overseas workers. They blame city elites, immigrants and foreigners for their misfortunes, and gravitate to those who promise a return to the ‘good old days’.

Politicians have long used this to their advantage by misdirecting fear and anger to scapegoats, as opposed to the true source. Cheap labor didn’t steal American jobs – corporate executives drove the decision to dismantle labour power, automate and offshore. All in pursuit of higher profits, funneled to executives and shareholders. Old fashioned corporate greed, one might say.

Really though, this isn’t new. The urban-rural divide has long existed in many forms. Put aside blame and ethics, and you’re left with a rural population passed over for generations.

The following chart illustrates this.

In the early 1900s, the standard of living in America was rapidly improving as new technology was introduced. However, the experience wasn’t evenly distributed. Infrastructure – water pipes, electrical wires, gas lines – is easiest and cheapest to build in dense areas. Consequently, dense urban cities were the first to benefit from essential modern conveniences like flushing toilets.

Of course, rural populations understandably took this inequality as representative of America’s priorities. The characterization of urban favouritism has since passed down for generations and continues to this day.

Data Source: “The Rise and Fall of American Growth”, Robert J. Gordon.

Categories
Wealth

How Canadians’ Incomes and Wealth Changed During the Pandemic

Statistics Canada recently released some data measuring changes to household incomes, expenditures, savings rates, assets and liabilities during the pandemic.

I decided to create a few graphs to illustrate their findings.

Before we get to the graphs, here are some of Stats Canada’s key findings:

  • Disposable income declined for most households in the fourth quarter of 2020, with the largest losses for the lowest-income earners (-10.2%).
  • Despite declines in disposable income in the fourth quarter, all households recorded higher income in 2020 compared with 2019.
  • In 2020, the lowest-income earners saw their net worth grow more than that of other households. These gains were driven by larger increases in real estate assets that outpaced increases in mortgage debt.
  • Lower-income households reduced their non-mortgage debt by more than other households, also contributing to their higher gains in net worth in 2020.

Household incomes rose for all income brackets during the pandemic:

As you might expect, spending declined:

This allowed many Canadians to save more. Note, however, those in lower income quintiles still have negative savings rates:

Higher incomes, less spending and greater savings helped propel net worth. Of course, Canadians’ net worth also got a big boost from rising real estate and financial asset values:

Finally, Canadians are exiting this pandemic in a better financial position than when they entered:

Categories
Investing Wealth

The Case for Deflation

Inflation is a hot topic right now. Understandably so, as prices for a range of commodities (lumber, copper, etc.) have risen substantially over the past several months.

Chart: Google Search Trends for ‘Inflation’ in the United States

Raw materials price pressures are now showing up in consumer prices with CPI rising 4.2% year over year ending April 2021. This level of CPI has not been seen since the early days of the 2008 global financial crisis.

However, it is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.

There are several reasons.

1) Milton Friedman once said that “inflation is always and everywhere a monetary phenomenon”. I’d argue that he is only half right. Central banks can increase the money supply all they want, but to have an inflationary effect the velocity of money must remain stable or rise. Real world experience clearly shows that money velocity is not constant and tends to have an inverse relationship with the level of a country’s indebtedness. And as you all know, we are drowning in debt right now.

It is becoming increasingly clear that this inflationary burst is temporary. The conditions simply don’t exist to support long term inflation, like that seen during the 1970s.

The relationship between indebtedness and money velocity is clear in the following chart. As the level of indebtedness of the US economy started to significantly rise in 2008, money velocity declined. Ultimately, money velocity plummeted to new lows during the Covid-19 crisis and has yet to recover, despite an improving economy.

Effectively, what this means is that new money entering the system (generally to fund new debt) is simply tucked away, mitigating any inflationary effects of monetary expansion.

This phenomenon is also illustrated by the declining marginal economic benefit created by new debt. The economic impact of additional debt today is much lower than it was in decades past. Therefore much more money needs to enter the economic system to have the same impacts it did in the past. Of course, more new money means more debt. By now you’ve probably noticed this is a vicious cycle.

2) The current inflationary pulse was triggered by the partial paralysis of the global supply chain. Exports out of low-cost producing countries grinded to a halt, forcing Western countries to purchase from more expensive domestic suppliers or compete over dwindling supply.

As vaccines are delivered the mechanisms for global trade – offshore manufacturing + shipping – can resume. Imports into the US are already back to pre-pandemic peaks and it’s only a matter of time until renewed competition from cheaper sources pushes prices down.

3) Labour productivity tends to rise coming out of recessions. Higher productivity offsets higher wages, thus putting a cap on unit labour costs that can flow into prices. I believe this phenomenon will be even stronger as we exit the pandemic.

The nearly immediate and widespread adoption of new software and methods of working have compressed a decade’s worth of productivity gains into the present. Not only that, but companies that maintain a remote workforce can benefit from labour cost arbitrage across geographic regions. Over the long run, both of these advances will keep a lid on unit labour costs. This is disinflationary.

4) Population growth in the US continues to be very weak and will be for the foreseeable future. 20-something year olds simply can’t afford to have kids. Or they are choosing not to bring new people into the world for ethical reasons.

The point is that forward demand driven by new consumers entering their prime spending years continues to decline. When demand declines prices fall.

While nobody can predict the future, one can use data and hard evidence to create a guide. Evidence suggests that those calling for a shift in the economic regime – from disinflationary to inflationary – could be wrong. I believe, as a diversified investor, it is important to prepare for the possibility that the pundits are wrong.

While I won’t know if I’m right or wrong until some point in the future, it appears that the bond market might agree with my thesis, as the yield on the 10yr has flatlined since March 2021.

Categories
Life Wealth

Should You Get Your MBA?

Are you considering dropping $100k on an MBA? You better think long and hard before applying. That boat load of money might not get you what you’re looking for (assuming you even know what you’re looking for).

An MBA isn’t a solution for career malaise and those who do it are often disappointed. Particularly given the cost.

Here are some real comments from a recent Reddit post by Canadians who have done their MBA in the recent past:


I completed my MBA from <school in Toronto> last year. I was also a mature student. Frankly I don’t think it is worth the investment. The program is poor and the resume build and placement assistance is mediocre at best. If you are planning a career in a sports related industry, you may be able to connect with alumni and help you in your career, but in other areas / industry – the hiring / placement is comparable to any other degree. You could recover part of the cost by working as a graduate assistant. Not recommended for gaining any new skill set or career growth. If you are interested in entrepreneurship and planning your own start-up, they have some resources and good profs. Other courses, it’s just a sham – you participate and submit any junk, you will get an ‘A’.

I think it really depends on the type of job you’re aiming for. For example, if you ask the accounting majors wheter you should get a MBA, it’s almost always going to a no because regular accounting work holds the CPA designation more valuable than an MBA. However, if you want to get into consulting, some firms may require a MBA, and going back to school definitely has its perks on career resources and events that you can attend. I would say make sure you actually have a plan in mind to use that MBA towards something, whether it be a job in new direction or something. Otherwise, if you’re doing it for the sake of doing it, it may just become a really expensive paper.

Yrs ago I was torn whether to do a CPA or an MBA. Decided CPA was better value and return. Yrs later, I have no regrets. I’m likely making much more money than if I had a MBA. To me, an MBA is really a networking opportunity. The actual content is no more than you’d get in any bachelor degree. So if you don’t plan to really take advantage of the networking it’s of almost no value. And an online MBA is (In my opinion) almost useless, and a total waste of a lot of money.

I may be wrong, but my opinion after 15 year career is that many MBA grads do it because their career has stalled and they need a credential to get another 10%. They tend to not be super talented or high performers but are good at school. Source: I work in marketing and make a comfortable living with only a BSc and relatively high IQ.

Well MBA grad from one of the top Canadian schools here. Unless you’re in management consulting or investment banking then it’s not worth it. Save your money and invest in something else instead.

My husband graduated with an MBA from uoft 5 years ago and hasn’t used it to its supposed advantage. He didn’t take advantage of the networking aspect of it and is still in the exact same industry, associate level position and income bracket. I admit he lacks the drive to really do anything with it which is why I had initially advised him against doing the degree. unless he had a clear plan for his career…which he did not. With that said, he enjoyed the program although it was very intense. Many of his classmates are now very successful in their careers. If you want to do your MBA just make sure you know why you want to do it, what you will do with it and if it will add value to your life and career.

I asked my former boss who did it and he doesn’t think it’s worth it. And as someone who never had an MBA, I don’t think its worth it as well. Education has lost its luster and its more of a “foot in the door” for consideration rather than having value. Even for candidates whom I’m interviewing for, I don’t really put much value behind it. Relevant experience is more important. This is coming from the perspective of CPG business/ecommerce.

MBA is only worth it if you can’t breakout of your current income level. If you’re already at +$100k, then it’s basically useless and your opportunity cost is insanely high for the potential return. To move into the mid 6 figure salaries, you’d be better off with a solid executive coaching program and networking with VP+

I was seriously considering this about 8/9 years ago and was planning to go to <school in Toronto>. I was getting into the tech industry and wanted something that would “help advance my career”. This is around the same time when “design thinking” was the new buzzword that every business was using and, bingo, I was a young product designer at the time. I decided not to do it and I’m glad I didn’t because it wouldn’t have been for me. I hated university the first time around and felt like I could flourish much more actually working and learning from those with experience. I’m really happy with how my career shaped out and I’m earning considerably more than I ever thought I could with room for growth. I know this is an entirely different perspective that you originally asked for but I think you just need to think about if it’s something that is going to be right for you. Do you enjoy what you do? Do you feel like your position has room for growth (seniority, managerial, exec.)? Do you feel like your industry has room for growth (tech, etc)?

Far too often, degrees are seen as a way to get a better job as opposed to a way to do a job better. I think employers can see through this by now.

Successful MBA graduates aren’t successful because they got an MBA. They’re successful because they work their asses off to leverage any opportunity (education/network/namebrand/alumni) to move the needle further. Having the expectation that the MBA will open doors will set you up for a lot of regret.

Categories
Wealth

The Origins of Money and Inflation

Since the early days of humanity we have strived to obtain the goods and services we desire by trading our surpluses to fulfill our deficits. Throughout history a society that could produce an excess of sable furs (for example) would trade with neighbouring societies that were especially efficient at producing wagons. 

Early trade simply entailed an exchange of goods, known as the barter system. This method of trade is very cumbersome because it requires both participants have coincident needs, appropriate divisibility of tradable assets and agreed-upon measures of value. These three conditions often prove elusive leaving many potential barter trades incomplete and many others unfair. As an alternative to the barter system, universally-accepted measures of value developed in different cultures around the world in many different ways.

The first universally-accepted measures of value were items with widespread appeal, easy division and widely-accepted values. In many societies, commodities were often used as a medium of exchange because they tended to have widely-known and stable value for most people in society. In many societies, commodities were the first form of money and gold was often the commodity of choice. 

In Britain goldsmiths helped to develop the modern banknote. During the English Civil War of the 17th century, citizens deposited valuables (gold, jewellery) into the safes at various goldsmiths for safekeeping. In return, the citizen would get a receipt that provided proof of ownership when the person wished to later withdraw. 

Gold withdrawals were made to make a payment for goods and services. Some merchants, however, were willing to accept gold receipts as payment since they knew the receipts were ‘as good as gold’. Goods providers accepted gold receipts as payment since they knew the receipt could be converted into actual gold at any time. The exchange of gold receipts for goods eventually became common-place and, in effect, these receipts became early gold-backed currency.

Once they discovered gold was rarely withdrawn from their safes but gold receipts were being readily traded, some enterprising early goldsmith ‘bankers’ decided to start issuing and lending more receipts than the available gold to back up the receipts. They did this knowing that most customers never actually ever withdrew their gold, so the chance of having to back up all the receipts at the same time was miniscule. This was an early incarnation of fractional reserve banking with a portion of the monetary base tied to a physical commodity, such as gold.

The ability to convert to gold is the basis on which paper money was derived. Paper money wasn’t created out of thin air…it was a contractual ownership stake of a certain amount of gold that was held in a goldsmith’s safe. As long as the public was confident that an appropriate amount of gold was readily available for convertibility, they maintained confidence in the paper receipts that represented those claims.

Of course, some goldsmiths got greedy and lent out far too many receipts. These goldsmiths created the risk that gold would not be available if many receipt-holders redeemed at the same time. Some merchants would question the ability to easily convert the receipts into gold. If it appeared that not enough gold was kept at the goldsmith to back up the receipts, merchants would no-longer accept the receipts at face value. Instead, merchants demanded more receipts for the same amount of goods. In effect, the value of the receipts went down (therefore the prices of goods went up). This illustrates the basic monetary force that creates inflation.

Like the gold receipts of 17th century Britain, the US dollar was at times convertible into gold. The history of US dollar convertibility into gold is mixed – the US dollar has been taken on and off the gold standard a few times. The last time the US dollar (and most other world currencies) was tied to gold was after World War 2 under the Bretton Woods system. 

During World War 2, many central banks around the world shipped their gold to the United States for safe-keeping and payment for armaments. By the time the war ended, the US had by-far the largest gold reserves on the planet. In an effort to stabilize the global economy and create confidence in war-torn European economies as they rebuilt, the Bretton Woods exchange rate system was created. Essentially, the Bretton Woods system tied global currencies at a fixed rate to the US dollar. The US dollar, in turn, was tied to gold at a specified convertibility. Therefore, (whether or not they actually had gold in domestic vaults) all currencies were indirectly convertible into gold in US vaults.  

During the late 1960s/early 1970s, the US was running a fiscal deficit to pay for the Vietnam war, and for the first time in the 20th century was running a trade deficit with the rest of the world. Interest rates started to rise and it is widely believed that the US Federal Reserve began printing money to buy US Treasuries, thereby increasing money in circulation as a percent of available gold reserves. As the market grew more suspicious of the lack of gold reserves backing US dollars in circulation, confidence in the US dollar began to wane, and Germany and Switzerland left the Bretton Woods system in 1971. 

Foreign holders of US dollars started demanding gold in exchange for their US dollars. Growing conversions put pressure on gold reserves and, as the proportion of gold available for conversion declined, it was only a matter of time that all US gold was used up in the conversion process, leaving the remaining US dollars worthless. To prevent this, US President Richard Nixon abandoned convertibility in August 1971. 

The act of banning convertibility effectively freed US monetary supply from the anchor of the gold standard, allowing the US Federal Reserve to print money within less restrictive limits. Monetary policy’s only anchor became the ‘full faith and credit’ of the US Treasury and the US Federal Reserve. Of course, central bank and treasury credibility becomes far more subjective with the elimination of a gold standard. 

During the 1970s, growing money supply, combined with a decline in productivity, a slowdown in post-war disinflationary forces (due to the tightening of post-war economic capacity in Europe and Asia) and the oil supply shocks were the ingredients that led to high inflation and stagnant economic growth – stagflation.

After a decade of haphazard economic initiatives (e.g. price controls) and ambivalent US monetary policy, Paul Volker – who became chairman of the US Federal Reserve in 1979 – significantly raised short-term US interest rates, starting one of the greatest post-war recessions. It was this dramatic change in interest rates that crushed inflation helping the US Federal Reserve regain credibility. 

Why did the US Federal Reserve wait so long to combat inflation? With the memory of the Great Depression still fresh in the minds of many policy-makers, US economic policy was targeted at maximizing employment, and inflation was not seen as a primary economic threat. It was widely felt that aggressively combating inflation would tip a teetering US economy into another depression. Meanwhile, countries like Germany that were familiar with the pain of hyperinflation were quicker to combat inflationary pressures. (This highlights how the collective memories of a society shape political willpower and can lead governments to create erroneous economic policies.)

For the United States, combating inflation early in the 1970s by slowing economic activity would have been political suicide. It took a decade of inflationary pain before policy-makers and the public were willing to accept that inflation was as much a threat to the economy as deflation and unemployment.

The 2008 collapse of the global financial system has parallels to the inflationary experience of the 1970s. Throughout the late 1990s and early 2000s, many policy-makers were aware of the growing threat that concentrated financial intermediaries, leverage, derivatives exposure and skyrocketing real estate values posed to the financial system. It was no secret that these elements posed massive systemic risks. However, the political will-power did not exist to do anything. As these elements of the economy had yet to cause severe economic pain, it was very difficult to get politicians, businesses and consumers to accept the preventative measures that needed to take place. Preventative measures would have slowed economic growth and prosperity – all to safeguard the economy from threat that, at the time, was theoretical and intangible. 
Similar circumstances exist with homeland security, cancer prevention, driving behavior, etc. It is extremely difficult to mobilize a population to willingly experience current pain (financial, lifestyle, effort, etc.) in exchange for reducing a potentially larger theoretical future pain.

Today, the US dollar remains a free-floating currency not backed by gold or any other commodity. Instead of being backed by gold US banknotes are backed by the full faith and credit of the US government. Currency value is predicated on the faith that governments won’t print more than what is necessary to keep up with real economic growth. However, with the largest fiscal and monetary expansion in US history currently occurring, combined with the collective global memory of an extremely painful recession/depression, the risk of inflation over the medium/long-term is very high. 

Categories
Income Investing Wealth

Dividend Growth vs Median Wage Growth

In case you haven’t been paying attention, most people are broke as fuck. The days of middle class growth and prosperity ended a generation ago.

Need proof? Look at real (real = adjusted for inflation) median household income in the United States. For years it was declining. Median real household incomes were flat from 1999 to 2016.

This seemingly simple measure is a driving force behind many of the recent societal shifts across America and much of the developed world. This is because while the economy has grown, the average Joe has been left behind. The wealth created by the overall economy didn’t simply evaporate – instead it went to a select few.

The 1%.

The owners of capital.

Labor has been shortchanged for a generation and people are looking for answers. This is precisely why far-left and far-right views are growing in popularity. Both wings of competing political parties offer radical solutions (and scapegoats) to their constituents who – driven by desperation – eat it up. The same situation has occured many times throughout history, often with tragic results.

Luckily, real median household incomes have started to improve. Still, the experience over the past 20 years has been horrible.

On average, despite a couple good recent years, real household incomes in America have grown by 0.53% each year this millennium! Compare that to average real GDP growth over the past 20 years of roughly 2% (which is already on the low side, historically).

Now compare real median household incomes and real GDP to real dividends paid by the S&P 500. The chart below shows real dividends per share for the S&P 500.

On its own this line doesn’t provide much information to evaluate against real household incomes or real GDP. The chart below, however, shows year-by-year growth in S&P 500 real dividends.

The average annual growth in real dividends this millennium: 5.14%.

5.14% vs 0.53% growth in real income growth (dividends vs. wages) is a massive difference. Especially if you compound this over 20 years as you can see below.

At 5.14% annual growth, $100 of annual dividend income grows to $272.

At 0.53% annual growth, $100 of annual wage income grows to $111.

That’s 145% more income for the person who derives their income from dividends. This clearly shows that the owners of capital (shareholders) have far outperformed the providers of labour (workers) over the past 20 years. And this doesn’t even count the capital gains on shares during the same period.

So who would you rather be?

This is the reason why many people have chosen to transition from providers of labour to owner of capital by saving and investing heavily. The aim is to accumulate enough capital to replace labour income with dividend income + capital growth. It’s the path many use escape the rat race.

Categories
Wealth

Shortages and Inflation

The Covid lockdowns shut down businesses as people remained quarantined at home. Consequently, businesses drew down inventories as they worried about a depression-like economic environment.

What few foresaw was that many consumers would exit this pandemic richer than when they entered it. Portfolios and home prices have performed very well, while savings rates have skyrocketed. There is a lot of pent-up demand, and as lockdowns across America subside sales comps at US retailers are rising.

Rising demand coupled with depleted inventories is causing a shock-like rush to restock. Amit Mehrotra, head transportation analyst at Deutsche Bank explains:

“We look at sell-through rates of major retailers and compare them to how inventory per store is tracking. If you look at Dollar Tree for the most recent quarter, same-store comp growth was 4.9% but inventory per store was down 5.1%. That’s a 1,000-basis-point spread between sales and inventory. The spread for Walmart was over 700. At Target, it was almost 400. At Tractor Supply, it was a whopping 2,000 basis points. These are big numbers. It’s a critical sign.”

He adds:

“Inventories are flying off the shelves faster than companies can replenish them. That is why the inventory restocking cycle is still in the early innings.”

This resurgence of inventory restocking costs money and is pushing up all kinds of prices involved with manufacturing and shipping goods.

Baltic Dry Index up 428% over 1 year:

Copper up over 90% during past year:

Lumber up over 350% during past year:

What do this restocking scramble mean for you? Higher prices.

Inflation expectations have risen significantly over the past year, as indicated by 5 year breakeven rate. (The breakeven inflation rate represents a measure of expected inflation derived from 5-Year Treasury Constant Maturity Securities and 5-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 5 years, on average.)

OK but what does this really mean for you? By some estimates the cost to build a house has risen by over $30,000. This increase is reflected in both new builds and resales. Expect to see price increases in day-to-day goods too. Proctor & Gamble has stated they will raise prices in September to fight higher commodity costs. Kimberly-Clark and Coca-Cola have also recently announced price increases. This is just the tip of the iceberg.