Investment Financial Advice – State Of The Inflation

Summary

• Inflation is frequently talked about these days.
• In 2008, the stimulus packages were mostly injected into the banking system. However, banks did not lend to the economy.
• However, the stimulus packages of the late are different.

Investment Financial Advice – State of the Inflation

Inflation is frequently talked about these days. It is mainly because of the federal government debt created to finance stimulus packages since last year. Cash injections to the economy were fast and massive. Even World War 2 did not call for this level of debt creation, or money printing. As you can see in the chart below, before 2020 the all-time highest debt level happened during World War 2. Now, in 2020, we have a new high.

The case for inflation goes like this. Money is flooding into the economy, but unlike the last round of money printing during the 2008 financial crisis, this time it is different. In 2008, the stimulus packages were mostly injected into the banking system. However, banks did not lend to the economy. They held on to it and even loaned large portions back to the Federal Reserve to earn an attractive interest rate. That is right. As bizarre as it may sound, that is what happened. The bailout was almost mainly to save the big banks whose financial statements were severely damaged due to the sub-prime mortgage implosion. The politicians believed that saving big banks would lead to saving the US from a total collapse of the economy. Whether you buy that idea or not, the fact is that the money from the stimulus package never reached consumers directly in a meaningful way.

Inflation typically happens when consumers are too eager to buy items or services and consequently, the price of them goes higher in response. One can say that the stimulus package and policies from 2008 fueled stock market growth in subsequent years. True. But, it still did not lead consumers to start spending again as they were waiting to see their stock portfolios grow back up to their previous glory. So, no inflation followed.

However, the stimulus packages of the late are different. The money is going into consumers’ pockets, local governments’ spending programs, and other businesses where it will be spent. Hence, the clear distinction is made that the money will indeed hit the grocers, online stores, and stock market this year. Hence, this is different than the previous stimulus packages that did not result in inflation. Please see the graph to see how the latest stimulus was dispersed. It is mostly going to spenders, not banks who could hoard.

Likewise, during World War 2, the cash printed by the US government was injected directly to the economy in the form of vigorous industrial productions that focused on war equipment. It directly benefitted material suppliers, workers, and entrepreneurs. This resulted in 18% and 9% inflation in 1946 and 1947, respectively. And the stock market went sideways during that period. However, a few asset classes outside of the stock market shined.

What does that mean to us as investors? Next time we will share some information as to how we are slightly adjusting investment portfolios to manage risk during a potentially material inflationary environment. We do not claim to time or predict the future performance of the stock market. Our focus is to manage a likely and material risk of a potential inflationary pressure prudently. If it does not happen, you would not lose much, but if it does happen, you could stand to gain. We would like to prepare so that portfolio growth potential could look asymmetric (limited downside while leaving upside open).

Please tune in for the next article in two weeks.

Ujae & Sarah Kang

Founders of UAK Diversified Wealth Management.

Sarah's latest piano

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