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  • Eric Watchorn

General Commentary

Updated: Apr 24, 2022

Spring – finally Spring!

Hope everyone had a wonderful Easter long weekend. This seemingly long winter that was also elongated by Covid measures for us all has finally come to an end. Spring is in the air, and with that, despite the Ukraine war, also a good measure of hope.

This thing called hope is what propels spending and the economy itself. Yet even prior to the Russian invasion of Ukraine, the year has begun with economic weaknesses and major inflationary concerns.

So how does one perceive these events, and thereby how does one act accordingly?

The answer is certain to be subjective and personal, yet perhaps its useful to work on the understanding of what inflation means and what certainties there can be for the financial health of individuals, families, and businesses.

We like to start always with the basics.

Given the fact that the inflation is pressing everyone with much concern (speaking of everyone outside the Ukraine), let’s examine what inflation is.

Most people tend to measure their wealth in nominal terms. In behavioral economics this is called the ‘money illusion’. They do not take into account inflation or other economic facts that may affect their real purchasing power; and therefore, this approach can make one feel richer than one actually is.

Referring to the chart below by the Bureau of Labor Statistics, USA, that without inflation, it seems that hourly earning s have not changed from 1973. Things in Canada are not much different, if at all.

We know that the dollar, ours, or theirs, has really lost approx. 85% of its value over time. We also know that a million dollars will buy you just a shack on the outskirts of San Francisco or a townhome in Vancouver, BC. Therefore, to be an ‘inflation-adjusted millionaire’ today, you would have to have at least $6.5 million. The newfound real estate wealth, it can be argued, is somewhat negated when you sell as you will have to spend the proportionate amount when re-entering the market. However, real advantages are at hand with multiple properties and/or market diversification and re-direction into less expensive markets.

This is a natural consequence, and we see it locally. Areas that used to be less popular due to distance etc, are now showing amazing rise and value due to the fact that some would like to capture in absolute terms what inflation rewards.

Another element of inflation, let’s say its 3%, is that the corporate world gets away without actually raising real wages. Many scholars argue that modest inflation is passed on to consumers through the increases of the price of products & services, which then are reflected in wage increases of 3%. Many wonder if there is an additional spread that some companies use to profit from even more in inflationary environments. I personally believe that there is, and its this extra notion that is adding to existing inflationary pressures. Is it a zero-sum game – perhaps in an academic sense, yet in real life and simply put the currency and buying powers suffer more erosion that the inflationary benefit of higher profits and wages likely supply.

Yes, and for most, its better than a deflationary environment, but progress for the average citizen and the working class is capped. According to the Washington post, in 2021, the working class’s expenses exceeded all wage gains. Yet the opposite was true for households with higher incomes.

Keep in mind that’s a conservative estimate that assumes the CPI represents true inflation. The real picture is likely far worse.

The good news is that governments are realizing that the printing of money cannot go one forever. So, what are the best ways to address these issues?

Warren Buffets’, largely known as the worlds best investor, or easily in the top 3, has been around for decades and has seen inflation affect the economy several times. He has a number of investing rules which we believe can be adopted by everyone to create healthy financial lives. In brief:

His #1 Rule is: Never loose money!

If participating in equities, use guarantees, tax advantaged vehicles and liquid options, or illiquid options with rates of return that easily surpass inflation. Diversify from traditional asset classes to asset classes with historically solid returns based on actuarial data.

His #2 Rule is: Never forget Rule #1!

As above

His #3 Rule is: Always have a margin of safety!

Always have some of your assets that provide guarantees on monthly /annual income regardless of market activity – for your entire lifetime, regardless of market performance = peace of mind. And, have asset classes that can deliver liquidity / cash when needed for emergencies.
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