Inflation - is anyone noticing it?

That was very informative and the example of using hyperinflation to pay of debt is spot on and just went through that personally last week. I have a family member with a mortgage overseas in a local currency that is experiencing hyperinflation, sent a few thousand AU$ dollars and closed it off.

Doubt it will be the case in Australia though but it's a good piece of knowledge to have, that "a healthy level of debt used to purchase stable assets can be a really good hedge against inflation" as per the video and as per many posters on here suggest.

 

I saw it start a few months into lockdown when classic/muscle cars started to sell for top dollar. Performance shops being booked out and car parts stores selling product like hot cakes. I knew from then it was going to flow through everything.

 

Actually, 23rd of December 1913.

It’s a tricky spot we find ourselves in.
Yes inflation is a hidden tax and it inflates away debt. Problem is if you hold lots of debt, then central banks decide to lift interest rates what does one do then?

 

Touche. Date the federal reserve was created.

 

True story. Ex-colleague of mine from Argentina brought a car, used it for a few years and sold it for double. Still depreciates, but not as much as as the currency...

 

How would you invest during inflationary times, keeping in mind we have the real possibility of interest rate hikes looming over our heads?

 

Well, you are either paying the inflation tax or you are receiving it.

Inflation hedges are generally assets and specifically tangible assets. Typically, these include real estate, precious metals, farmland, and potentially some resource stocks. Many would also say bitcoin, but sadly I don't know much about crypto.

That interest rates will increase isn't so much of a problem, because it is the real interest rate that matters. Rates might rise, but real interest rates might still go negative. And with so much debt, I doubt they will want to kill inflation anyway by raising rates - they need it to destroy the sovereign debt.

 

I feel this needs unpacking

Would you be able to elaborate?

I assume you mean that interest rates might still be offset by inflation (aka thus creating the "real" interest rate?)

 

Well, real interest rates are what matter, which is why real estate is booming at the moment.

Real interest rates are the nominal rate minus inflation.

So, if interest rates are 1% - inflation of 2%, real rates are -1%.

But say interest rates rise to 1.5%, but inflation rises to 3%, real rates are -1.5%.

Negative (real) interest rates are a wealth transfer to borrowers because it reduces the value of debt. Ie if real interest rates are negative, they are paying you to borrow money.

Interest rates don't need to go negative as some have speculated, if inflation is high enough. I would also add, that if people increasingly distrust the CPI as a measure of inflation (say inflation is more like 6% than 2%), the real interest rates could be much lower than are we think.

 

Why Australia is running low on timber, cars and pianos
Supply chain crunch: Why Australia is running low on timber, cars and pianos

 

Looking ahead to retirement, it struck me the other day how much more assets we need to retire now than when my parents retired 20 years ago. For most the ideal is to retire with a good income that doesnt eat your capital so you can pass it to your kids. 20 years ago if you split 2 million across term deposit, blue chip shares and property you could expect a gross yield of 6pct. So easily 100 to 120k per year without eating into capital. Now where can you go? .7pct for term deposit, 3pct for blue chip shares, and less for most cbd property after costs. So you need 5 to 6 mill plus for the same lifestyle. From that perspective maybe even the rich have got poorer? It seems our policy makers are taking from one hand and giving to the other ie low rates means higher asset value but its harder and harder to extract an income from those assets. Kind of reverse inflation?

 

So much money are being printed all around the world.
Hard to see no inflation will fall as it is the reserve bank motto to have inflation.

 

Exactly.

If you look at US data:

January +0.4%
February +0.5%
March +0.7%
April +0.8%

Anyone see a trend?

 

20 years ago i bought a house for $400k. 2m = five of them. @ 380 each rent yearly gross = 99k

If I had 5 of them, in 2021 they would be about 5m. Rent @660 ea = 171k gross.

So the numbers add up. Many costs have come down, mainly food and services have gone up.

 

Yoyr figures imply those houses have only gone up 150pct in 20 years. Dont think that reflects reality for most markets. Rental yields on average have decreased enormously.

 

Lol I love this graph. Do people just ignore "the biggest drop in 39 years" right before the "the biggest lift"?

 

When you add leverage and positive carry the income returns might look better. So perhaps next generation can borrow to their eyeballs to buy income generating long duration assets and let inflation do its job and deflate the debt away.

They need to teach this at school

 

My guess is 20 years ago 90% of population probably retired on a old age pension. $2 M in retirement....20 years ago would surely be very rare. What would it be in today’s value?

Heard the other day some financial person on TV. You need $1200 per week to retire comfortably, only 30% will achieve this??? Bla Bla bla

I can tell you that you will need much more than this if you want to travel and enjoy dining out, nice wine and not too extravagant lifestyle but not penny pinching

 

Yup. Although my general point was less about cpi and the cost of living, more about the fact you need a lot more now to generate the same income due to very low yields across all asset types.

 

Yes. Eseentially take on more and more risk to generate a half decent income. Which was partly my point. Where does this all end? Perpetual debt increases requiring lower and lower rates. I actially think the financial system is screwed.