Are You Being Lied To?

By now you know I’ve got a fixation with the inflation problem happening in the US. Many in the Transitory camp have just about thrown in the towel, and my calls for “higher for longer” that at one point seemed far-fetched now appear to be our new reality.

For as long as we can remember, our government agencies have told us that inflation is “around 2% annually” but it’s becoming more clear that this claim is likely BS. The more articles I read and the more brilliant macro investors I follow, the questions around true inflation are picking up steam.

As a practice, I’m having a hard time finding which costs in our everyday lives are actually increasing by ~2% a year. Below are just a few examples of why it’s becoming evident this fable of low inflation might need to be fact-checked:

1: Health Insurance

In 2009, the average monthly premium for a family was $350. In 2024 that premium is $1977. This is an annual growth rate of 12.2%

2: New Cars

In 2009 the average price for a new car was $23,276. In 2024 the average price is $47,244. This is an annual growth rate of 4.8%

3: Home Prices

In 2009 the median price for owner-occupied homes was $185,200. In 2024 the median is $384,000. This is an annual growth rate of 5%

4: Fast Food

In 2009, a family of 5 spent $24.99 at McDonald’s. Today that same order costs $49.10. This is an annual growth rate of 4.6%

I think you get the point. Many of our daily costs are skyrocketing and it’s been a painful ride up for nearly 2 decades. Sadly, given the only options to our country’s fiscal mess is more printing, it’s possible the beatings will continue until morale improves.

What to do? Sadly, your personal balance sheet is at war with the inflationary pressures brought on by policy moves that go back decades. The government isn’t worried if you are inflated into poverty or not. For us and the families we work for, there are a handful of ways we look to combat these problems:

• Watch your cash: Do you like having a lot of cash in the bank to look at because it makes you feel good? There’s certainly nothing wrong with that as long as you are comfortable with the tradeoff being your purchasing power is declining by at least 5% a year on that money. We like to put that cash to work to at least keep pace with high inflation by allocating across a spectrum of short-term government bonds, inflation bonds, floating rate bonds and high yield credit.

• Watch your “assets”: While stocks attempt to rise with, or outpace inflation there are periods when that doesn’t happen. One of those is during stagflation, where inflation continues to rise but the economy slows. As such, I believe in having allocations to real assets, commodities, certain types of real estate, collectibles (store of value), equipment and natural resources.

You may be wondering why would we be told inflation is X when we’re seeing inflation be something like 2X? The government has perverse incentives to keep everyone in agreement that inflation is 2%. Some examples are Cost of Living Adjustments to things like Social Security payouts and salary increases to government workers. The lower they say inflation is, the lower their expenses are. Additionally, as I mentioned in a previous writing, what would happen if our Fed came out and said “sorry guys but inflation is really 7% and probably will be for awhile”. Do you think individuals & corporations would keep piles of cash sitting around? Or would they invest that money in bonds, gold/bitcoin and other real assets? This reallocation would suck an enormous amount of liquidity out of the system.

I won’t claim to know where inflation will be in 10 years but what I do know is that without a significant recession it will be hard to bring the rate down to the desired 2-3%. Furthermore, I also know that whatever we’re being told it is, I’m not necessarily buying it.

Finally, here is what’s on my radar:

commercial real estate

A lot of folks, including me, thought 2023 was going to be Armageddon for the office real estate sector. Except it didn’t play out, but why?

Well, partially due to banks engaging in massive amounts of “extend & pretend” whereby they extend a maturing loan out a little longer with the hopes that rates come down and refinancing becomes easier. However as we’re now facing the possibility of persistently higher rates, many of these loans are ACTUALLY coming due in 2024. In fact, nearly $400,000,000,000 in loans maturing in 2023 were extended into 2024. Couple that with the already-scheduled $600B set to mature this year and we now have about $1 Trillion in loans coming due in this calendar year.

The potent cocktail of declining vacancy, high rates and tenants unable to pay rent could lead us to an explosive outcome.

politics

Why are populist candidates like Trump (USA), Milei (Argentina) and Bukele (El Salvador) so popular? When the everyday voter becomes disenfranchised with the system, they tend to vote for a non-politician. We’re seeing this play out in America as more and more working families struggle under insane cost of living increases that prior generations did not contend with:

Furthermore, Professor Scott Galloway shared a sobering statistic that for the first time in our nation’s history, a 30 yr old today is earning less than their parents did at 30 (inflation adjusted). If you listen to his presentation (and I encourage you to do so) you can see the frustration and disappointment in his voice. As this trend carries on, expect populism to become an even more viable political alternative.

Macro specialist Lyn Alden nailed it with this:

bitcoin

One may think that the ownership rate in the US for bitcoin is perhaps the highest in the world (as China and Russia continue to curtail its adoption) but this chart shows that several inflation-ravaged nations are seeing the fastest adoption right now. I found this really compelling considering the lack of strong internet infrastructure & disposable savings in these countries.

It should be noted that a reported 10% of Americans own Gold….therefore the growth in the rate of adoption of bitcoin when compared to the yellow precious metal is quite astonishing.

miscellaneous

Another cost that’s surging? Property insurance.

For luxury autos it’s a 2-pronged problem. Replacement parts and labor are expensive but also a significant increase in thefts is wreaking havoc on would-be buyers. To combat this, Range Rover is offering a rebate to new buyers to help soften the blow to what are likely insanely high car insurance premiums.

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, and is based in Charleston, SC.

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