Tag: Inflation

Slow and steady wins the race

Posted on by Karac Avalron

So another finance piece today. Remember these are my opinions based on my experience of 30 years in the finance industry. Prior to making any financial decisions, you should seek out as much information and advice as you can to make sure you make the best decision for you.

So we are in an extended period of inflation and international worry, which affects financial markets. Inflation has leveled off, but we have two very unique situations that have occurred in the last few years making this inflationary period extend longer than most anticipated. First the pandemic. Without getting into that whole debate, economically, when you prevent people from working and companies from manufacturing and print money to sustain them inflation happens. Basically, there are less goods in the economy, making those goods more valuable. The second thing is we have had the great resignation.

Yes it’s rooted in the pandemic shut downs but the underlying economic realities of gig work also contributed. Coupled with the Baby Boomers (by population our largest generation) aging out of the work place and you have the conditions by which companies have to pay people more to produce goods and services, so they charge more for said goods and services. That is the inflation bit, the international worry? The Ukraine war.

Whenever a super power goes to war, (I define super power as any nation with nukes) everyone else gets on the edge of their seat. Russia has struggled in Ukraine, they are going to be there awhile and I do not seeing that war resolving soon. Therefore, this means you have a volatile period of ups and downs in markets. It’s hard to predict when things will stabilize my best guess is probably after the 2024 U.S. election, but that’s a guess.

Those who beat the drums of war, rarely fight in them.

So what do you do as an investor? You continue to be disciplined and invest slowly and steadily. You don’t sell in a volatile period unless you need liquidity fast. You ride the ups and downs, your buy opportunities now will likely evolve into gains later and sell opportunities are usually few and far between. It’s not a horrible idea to put some assets in fixed securities either, CD’s and treasuries are always nice to have but I would never go more than 10% of my portfolio. Still some CD’s are at 5%, which isn’t horrible when compared to historic inflation numbers.

Markets always go up and down, we will continue to see 300+ point swings some days for some time now as the U.S. Fed reserve keeps manipulating the interest rates (they were held artificially low for over a decade). The fed rate now is 4.75%. Anything over 5%, I think is a pretty big stretch but who knows at this point. Keep investing consistently and if you have a 5-10 year window you should be fine and actually come out ahead. Make sure you keep an eye on auto loans, it is the next “big bubble” and I think that one is coming to us later this year but we will see.

Overall, the best strategy to wealth is to retain as much of your income as possible and not send it to other people so you can live. Then taking that income and investing it with a long-term goal of growth. It takes time and perseverance particularly when things are rocky like they are now.

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Why I don’t invest in Crypto

Posted on by Karac Avalron

So another finance piece today. There is a massive story that broke recently pertaining to FTX exchange collapse. Let me get this out of the way now, I am not a crypto expert. You should take any advice/opinion you see online with a grain of salt and always do your own research. The FTX collapse is tied directly to Crypto currency values. Many people have lost a lot of money and for them I offer my deepest condolences. I know what it’s like to lose money on investments, it sucks.

So for me I never invested in crypto. Why? Because I am not educated in that market. It really is that simple folks and YOU should apply this simple philosophy to anything you chose to invest in. You have to be educated on the investment type. Now a caveat here, you can invest in things you are unfamiliar with if (big if) you are not risking a major portion of your portfolio (5% or less).

I simply don’t know crypto currencies. Further they, for the most part, are not regulated in any manner so the risk is much higher. So is the reward of course. Like most things in life the higher the risk the greater the reward. For me I use a long term conservative approach to investing. I invest in things I know, like Microsoft, Toyota, McDonalds. You see companies like that, whether you like them or not have long term established business models.

Money gives you the opportunity for a comfortable life.

I always felt more comfortable investing in companies who produced a tangible product that I actually used. See for me, the best advice I ever got for investing was “Take note of the products you buy and use and invest in those companies”. It made sense to me, if I am buying the product its likely other people are as well. That establishes a revenue stream that equates to value.

So those simple principals enable me to avoid the current decline in crypto currency. It also means I missed any and all gains by crypto as well. It’s a double edged sword. Meantime I keep the long term boring process of investing in companies that produce goods and services with a long term track record. Coca Cola, Intel, Google, Apple we can go on and on. The point here is I know these products, I use them and by slowly and steadily investing into stocks and mutual funds that hold these stocks I’ve created a nice portfolio.

Maybe you know crypto, maybe you know oil or real estate? There isn’t a perfect formula here, but investing in what you know is often the best you can do. Sure you might miss a trend and not get in on those huge returns, I get it that sucks. By long term steady investing into companies and products you are educated on is a great way to ensure liquidity and viability of your investment portfolio.

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Finance: Interest Rates

Posted on by Karac Avalron

So from time to time on this blog I do finance pieces. I have been in the finance industry now over 30 years (yikes I am old). This is not financial advice only my financial opinion. You should consider multiple sources when making any financial decision and become as educated as you can. So the subject today is interest rates and how in the U.S. the federal reserve manipulates them to create false narratives in the economy.

Let me be clear here there are several factors in the U.S. economy that contribute to its overall health and well-being. The availability of credit though is a major factor and manipulating interest rates has a dramatic impact on financial outcomes. IMHO one of the biggest travesties in the U.S. economic model is the propensity to promote debt as a means to obtain assets. Of course there are times when you need credit for large purchases you don’t have the capital on hand to cover. Houses, vehicles, machinery that’s traditionally what credit was meant for. Now? You buy your lunch on credit.

The issue then becomes “how much is this purchase costing me?” you see it’s not the 8.99 for the sandwich and soda it’s the interest charge you incur on the purchase when (or if) you don’t pay off your credit card every month. Which, most Americans don’t do. The federal reserve’s rampant meddling with the federal reserve rate (the rate in which banks lend to other banks) has created horrible economic outcomes in the past.

The Fed’s need to relax on rate hikes for at least a quarter.

There is a good article here https://www.forbes.com/advisor/investing/fed-funds-rate-history/ from Forbes that discusses the changes. Essentially what happens is the higher the interest rate the more valuable currency becomes. This is actually a viable method to combat inflation. Inflation often occurs when too much money is in the system or to little supply of products. Post pandemic we have both of these issues which is why the Fed is raising interest rates so much so fast.

Prior to the interest rate hikes over the last 2 years the fed rate was too low. You see the issue really is the U.S. federal government manipulates the value of their currency as a buttress against its monumental debt spending. Now all governments do this to a degree but the U.S. is on a whole other level. We had the prime rate in the U.S. at .5% for years and under 1.0% for a long time. Everyone knew that was way to low but the economy was humming along we had good times so no one complained much.

The problem with that approach is you put off the pain and here we are. Had the fed maintained a more pragmatic approach to interest rates, bringing them back to historic norms incrementally over the last 20 years we would have less inflation now. In the year 2000 the prime rate was 5.75% high by today’s standards but a reasonable rate in my estimation. Why? Because what it does is requires those who use credit to make purchases to think carefully as the interest expense on the debt is high. It’s a big commitment financially to borrow anything at 5% IMHO.

So how do we get out of this manipulation? You can do rate caps but that’s another artificial means to an end. You do what’s called settling the rate market. You get to a point say 4% and you do not raise or lower the rates for 2 full quarters to see how the economy adjusts. The problem now is you have the government changing rates every month. They are doing this to manipulate the economy due to severe inflation. I get why they are doing it but had they not kept interest rates artificially low for nearly a decade the huge increases now wouldn’t be necessary.

I know all of this is fairly dry and not something most of you will probably want to read through. Here is the net bottom line. Leave interest rates alone for 6 months, let things play out see how the economy does. You then adjust .25 -.50 % from there and then wait again. Market adjustments take more than a quarter to take hold and because interest rates were so artificially low for so long it’s going to take well into 23, if not 2024 to flush out the current inflationary situation we have.

Hang in there and remember, your personal economy is paramount. Have a 6-month emergency fund, secure your income sources by diligence at work, and keep an eye on your spending.

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Working from home has one huge pitfall you need to be aware of

Posted on by Karac Avalron

So here we are the end of 2022. Time flies when you are having fun eh? The pandemic is mostly over but the new normal is well, normal. Part of that is working from home. Now full disclosure here I have been 100% remote for nearly 3 years. I don’t need to go to the office to do my job and I get paid well for doing it. I know there are a lot of people like me out there and while this is a great work outcome for me (and many others), it comes with one huge pitfall.

What is that? If you can do your job remotely, its highly likely someone else can do the job cheaper. Remote work has opened up the possibility of outsourcing more than ever. A few decades ago it was manufacturing that was outsourced to international workers who performed the labor cheaper. That’s why you’re getting T shirts at Walmart for 7 bucks. Then it became call centers, next? Your corporate job.

Let me use my situation as an example. In the role I am currently in I am a “senior financial analyst”. To be blunt I am over qualified for this role as I have management experience. I took it because I didn’t want to manage people any more. I make less then I could if I was still in management but I make very good money. I am processing data and summarizing its impact on a portfolio of business owned by the larger business I work for.

There is someone else out there who can do what you do.

It is by no means “light” work, its nuanced and requires experience and knowledge to execute the data in a way that can be consumed by decision makers. However, anyone can LEARN how I do it and learn how to deliver the product to the consumers (my bosses) nearly identical to how I do it. YES, I have established relationships with the people I work with and for but it’s the corporate world, we aren’t friends we are coworkers there is a major difference.

I could be replaced by someone in another part of the world who could be paid less. Not only in wages but in benefits. Now initially it would be problematic for the customers I serve. There is so much nuance to the work I do the only way to master it is to do it for a few business cycles. It can be learned though, like a lot of other remote work. Unless you are creating unique material you are essentially performing tasks others don’t want to do, or don’t have time for.

Hence the pitfall of working from home. There is likely someone else out there who can do the same work, and achieve 90% of what I (and likely you) achieve for less expense. This is why you always have to have a backup plan. What if that happens? For me I will get another job in finance somewhere. Even processing Accounts Payable I can at least make some money. You have to have contingency plans as well if you are a remote worker. The new normal is here and companies are looking to maximize profits (they always are). The new reality of people working from home provides opportunities for many, including company looking to cut staff expense.

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Anxiety, The Stock Market, and Inflation

Posted on by Karac Avalron

As you know from time to time I do finance pieces on my blog. I have been a finance professional for 30 years. Of course I am another person on the web talking about money, so always trust your instincts and do your own research.

The markets are dropping again, Inflation is still high, Ukraine, and politics is ramping up for the midterm elections. It’s an anxiety filled season, oh and are you in Florida? Hurricane Ian created a lot of hardship and stress. So for the finance piece I’m not going to go on a long drawn out post about it. I’m going to give you some bullet points to navigate this, hopefully it helps.

Stock Market: It goes up and it goes down, it is a rollercoaster. The key is, you don’t get off a rollercoaster when its moving, you will get seriously injured or die. Same with the stock market. We are in an unstable period right now, the rollercoaster is moving. If you are in the market you stay, don’t sell. Stocks are fluid, this will level off be patient.

Inflation: Everything is more expensive and is going to remain expensive through AT LEAST the 1st quarter of 2023. So this winter is going to be rough. Energy costs are going to be very high, highest in recent memory is my best guess. You see the Ukraine war, Russia will use energy as leverage. They know Europe needs their gas and oil to heat their homes this winter. Less oil and gas = higher cost for everyone.

Stock pile cash, you’re going to need it.

So how do you deal with this two negative outcomes? YOU STOCKPILE CASH. One less night out this month, make your coffee at home, tighter budget for Halloween… Whatever it is, you need to find money in your personal economy that you can shift. Remember this doesn’t have to be a permanent change, we are weathering a storm, or waiting for the ride to end so to speak. This bad economic time will pass. Believe it or not, I was alive the last time this happened in the 70’s and early 80’s.

Back then, we had so little gas in the U.S. depending on your license plate number you could only get gas on certain days. Now part of me wants to see that again, just to see how the younger generations deal, but I’m going off on a tangent…. Be more frugal NOW in October and pinch as much as you can off your budget and bank it. It’s going to be a long winter, in some places harsh but it will pass. The ride will end and whatever the new normal is we will deal with it.

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Finance Tip: “The Cash Flow Buffer”

Posted on by Karac Avalron

This particular tip is used in business often. It is exactly as it sounds a buffer. Keep in mind that opinions I express in my blog may or may not be good advice for you personally. You should investigate all financial advice thoroughly before pursuing any course of action. So a cash flow buffer is a concept that many people might confuse with an emergency fund in the context of personal finance.

With the job market shifting to a more hustle economy, you might not be earning a steady paycheck any more. You might be doing contract or consulting work and who knows you might kill it for 8 months, then the next 2 months your down 60% on your earnings. This isn’t as farfetched as you might think. This happens a lot now. What I am seeing in the news articles I read are people busting their tails for 6 months, doing uber eats, working a full time gig, then maybe one more side hustle and banking a large chunk of change. Only to then slow WAY down to recover for 3-4 months, rinse and repeat.

The job market in the U.S. has changed a lot in the 35 years since I started at burger king in the mid 80’s. So one of the approaches I take with family members I advise financially is treat the working part of your life as a business. We set up a balance sheet, expenses etc. We build an emergency fund of 6 months of expenses (if there isn’t a whole lot of debt) and then work on the Cash Flow Buffer. There it is again, lets define it. A Cash Flow Buffer is the number of days you could continue to pay your bills out of your regular bill paying account if income were to stop.

Inflation is falling, but its still very high

Again this isn’t an emergency fund! So you have 5K in your checking account, you lose all your jobs you have no money coming in. You spend 3500 a month for expenses this would mean you have a cash flow buffer of 45 days. So many would assume you would then begin to tap your emergency fund, and that would be correct. AT THE END OF THE 45 DAYS. You see the buffer is meant to create space for you so you can replace income.

That 5K will keep you afloat for 45 days that’s your real window until you have a real emergency on your hands. The buffer assumes you are not replacing your income. Businesses use this tool a lot, particularly seasonal businesses who do a large % of their sales at a specific point of the year. For you in the new gig economy this might be useful for you to gauge as you navigate the new normal for working.

So how you do it is, look at your monthly spend. Take out all the non-essentials and come up with a number. (rent, electricity, food, water). If you lost all your income today how long could you pay for things without tapping your emergency fund? You see the concepts here are more for discipline purposes. The last thing we want to do is hit the emergency fund because if we tap into that, we know that things are really bad, it’s for emergencies.

Think about your personal cash flow buffer. I keep about an extra month of bills in my checking account so my buffer is 30 days which is light. I am confident that I would be able to replace my income (or a good chunk of it) before 30 days. Ideally you have a 30-60-day buffer here that you would use BEFORE the emergency fund.

I know it’s confusing, but if you start treating your financial situation as your own personal business and economy you might find that these things make sense.

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stressed-out-woman

Quick Finance Piece: Is this a recession?

Posted on by Karac Avalron

Yes, it is.

So before I go too far let me do the normal disclaimer. I am a finance professional and any advice you see on my blog is my own opinion only and is not meant as investment advice. So that out of the way, yes we are in a recession. “But the media says we aren’t in a REAL recession”. I don’t trust the media, if you do I can’t really help you….

An economic recession has been defined for decades as two quarters of economic decline as measured by GDP. Now that’s not the technical definition but that is what has been used as the gauge for many years. The United States is in a recession. Now there are DEGREE’S of recession and that is where the nuance comes in.

This is not a hard recession by any means. We have great job numbers (which is an interesting situation in of itself), but we have horrible inflation, a slowing housing market etc. You see what you aren’t hearing much about is the horrific impact that Covid shut downs had on industries and supply and demand economics. You shut down global production for 6 months, you just don’t flip a switch and it comes back to normal.

The ride shouldn’t be to bumpy this time around

Throw in a war, a decrease in domestic Oil refining, divisive politics, on and on. The situation is dynamic and fluid there is no one catch all correction to fix this. You had decades of artificially low interest rates now creeping up again. A hard recession would see the market decreasing, layoff’s and a higher unemployment rate.

Companies are reporting good earnings that means DEMAND is still there and that bodes well for a quick recovery. They call that a V shaped recovery. I suspect we will see another decline in the 3rd qtr. and possibly into the 4th but the basis for good economic outcomes are there. First, the job market is healthy, you can work and make money. Second, demand for goods and services is still robust, so companies are still making profit (which fuels point 1).

I think 2023 will be a better year economically, unless again something extraordinary happens (a pandemic, another war. Be prudent here and tighten things up as best you can and save a bit more than usual but I don’t suspect things to get horrible soon, but things will still remain in the current state for the near term.

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Yet Another finance secret finance professional won’t tell you (but I will)

Posted on by Karac Avalron

So another finance piece, as I write this the U.S. is in an official recession. This piece isn’t about recessions, inflation or politics so you can exhale. We are going to reveal another secret though that finance professionals don’t like to admit. So a quick disclaimer, I am a finance professional. I have been working in the finance and accounting field for over 30 years. This blog is not a finance advice blog; this is my own opinion based on my experiences. Any advice you receive regarding finance should be researched thoroughly by you as an investor and verified through multiple sources.

Now that out of the way here is the opening salvo “When things are good, everyone is a genius.” The last decade up until the pandemic really the stock market overall was pretty good. You had good annualized returns and many people made a lot of money. So being a finance professional and advising people to go into the market wasn’t a genius play. Of course if you aren’t fluent in finance you might have perceived it as such. Interest rates were low for a long time so there really wasn’t anywhere else to go with investing except real estate.

But the secret? Everyone is a genius when things are good, what about when things are bad? What about when you are in a bear market (when indices drop 20% in a calendar year)? The secret is, the real finance geniuses were diversified PRIOR to the bear market. Any finance professional could have told you to put your money in an index fund prior to covid and you would have made fantastic gains. The real economic geniuses advised you to diversify with money spread to commodities, bonds/treasuries, real-estate and precious metals (this is a commodity, but not a traditional commodity).

As an example, what if in 2016 your finance professional advised you to have 15% of your portfolio in “Gas & Oil”? That would look pretty good now wouldn’t it? Same with bonds, treasuries, wheat, gold… you get the picture. The secret here Is diversity of investment result in a wider spread of assets which can absorb declines in any particular sector.

Like it or not, the world still runs on Oil based products.

Now that does mean you would have had less in technologies for the same period and not enjoyed that growth. I concede that, but the savvy investor doesn’t play the short term they play the long term and sustained diversified portfolios over the long haul 10-30 years normally perform as well as a strict stock portfolio. Don’t get me wrong here, I personally believe the majority assets you are investing in should be either growth stock mutual funds or blue chip mutual funds.

100% of a portfolio though?  No, you diversify specifically for bear markets and sharp down turns because they always happen. It’s not a matter of if, it’s a matter of when and how long will it last. For calendar year 22 as of 6.30.22 the markets are down 20.3% now this has come up in July, there is no denying that but you’re still down overall. On top of that we have large inflation numbers devaluing the purchase power of your dollar. So what 1.00 would buy last year now buys .92 that’s an 8% decrease (rough estimate). That isn’t equated well in your portfolios return.

Meaning you made 10% on the stock sale but the money you received purchases 8% less than it did meaning the value of that 10% return to you in real time is a net positive of 2%. Again, the secret here is diversity. Always have part of your portfolio assigned to cash, bonds/treasuries, commodities and that will provide you a decent buffer for the next bear market because this will happen again.

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One area where you underestimate your spending.

Posted on by Karac Avalron

Inflation is running rampant. Gas prices are off the charts, rent has gone up, interest rates are rising. The key here is your income is likely not matching the pace. Maybe you got a 5% raise last time (if you are lucky). Inflation at 8%+ you’re losing money in nearly every area. Look this post doesn’t have to be long today, I’m not going to fill it up with elaboration on inflation.

There is likely one area in your life where you are underestimating how much you spend. That area is food. Yes, those $4-dollar coffee’s you buy twice a day, that organic ketchup on and on. Food prices rarely go down and the creep on food prices happens gradually. Here’s the rub, that food that you purchase, unless you buy a lot locally, has to be processed, shipped and stocked. All of that goes into the price point. So gas is going up? All of the food you’re buying at the super market was trucked in, someone had to pay for gas to get those products there.

Here is a link to a world food price index Now this is something finance professionals use to gauge real inflation numbers. I’m not suggesting you delve deeply into this. What this site does is aggregates average prices around the world for common food categories (meat, milk, sugar) and comes up with a “global average”. In 2004 the FPI (food price index) was 65.6 today it is 158.5.

I don’t care how much they charge for coffee.

A remarkable increase right? The key here is this never goes back below the prior year’s index. Unlike gas, housing and interest rates food prices keep going up. This is why your food cost is one of the most important budget numbers you have to know because the “price creep” is real. You are always going to be paying more for food, and now with inflation you are paying more for everything so chances are you are starting to lose wealth AKA purchasing ability.

Tighten up your food purchases, make your coffee at home, pack a lunch instead of eating out. Food continues to go up because we all need it; you die without out. Are you over spending here? Are you aware of exactly how much you spend a month on food? I look at how much I spent and I was blown away. I started a victory garden and that helped. Sure I don’t buy tomatoes anymore but coffee? Meh…

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Historic Inflation – The most important # you need to know is 3.22%

Posted on by Karac Avalron

So another finance piece today. I am not going to go through my normal disclaimer hopefully by now you understand you should be diligent about your finances and obtain information from multiple sources. I’m thankful you consider me one, today we are going to talk about inflation. Yes, its real, and it isn’t exclusive to one region we have global inflation. The numbers I will use in this post will be U.S. numbers but in my research it tracks, mostly, globally.

You are probably wondering what the 3.22% is, that is the historic average inflation rate over the last 108 years. That’s ON AVERAGE, which is important. We have years in there where we have 13.5% inflation (1980) so it’s really important to have good perspective here. Historic inflation isn’t as important as “life time” inflation. That metric is the inflation rate in YOUR life time. For me? Its 3.95%. None of the numbers I am throwing at you include 2022 which right now is approx. 8.5% (give or take). As it isn’t a full year of data we can’t use it for these purposes.

Here is a link to the historic chart I am using. So a few important things to remember.

  1. The distinction between historic and life time inflation rates.
  2. The likelihood of sustained inflation.
  3. Globalization

I distinguished the 1st item already, but items 2-3 are intertwined. We had a sustained period of high inflation in the U.S. from 1973 – 1983 (roughly) that’s a long time. That was in my life time, it might be yours too. What normally happens, and is happening now is wages increase as inflation increases but rarely at the same rate. As an example, it’s likely that in 2022 we will come in between 6-10% inflation for the year, it’s unlikely that your income increased by that same amount. The thing that is a killer about sustained inflation is multiple years where your income doesn’t match or exceed inflation = less wealth overall.

Inflation decreases your purchasing power.

You may make more but it doesn’t buy as much, basically. Globalization is a fairly new phenomenon in the inflation equation. In the 70-80’s it was far less then it is now. So what happens in one major country affects the global consumption and production metrics. If China can’t produce as much of X as it normally does, the price of X goes up, or inflates. Add in a pandemic here and there and well you get the picture.

There is only one sure fire way to combat inflation for you personally and that is increase your income by more than the current inflation rate. The problem is most can’t do that. So the second best way to combat inflation is to ensure your income and investments are increasing more than the average inflation rate in your life time. So for me, that means I need to increase my income and investments every year by 3.95%. Now that is just to remain as is, if I want to improve my financial situation (my ability to consume more) I need to increase my return by MORE THAN 3.95%.

Take a look at the link above and see what your life time inflation rate is. This is the minimum target you should be striving for in all of your investments and your income. Trying to figure it out monthly or on an annual is probably not going to work, but hey if you can make 8.5% in these markets I tip my hat to you. For now, shoot for 4% minimum, 6-8% would be ideal and reasonably attainable if you have investments.

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