Inflation and The Great Resignation

In this episode, we chat about the fact that inflation continues to persist in our economy and that we are seeing significant disruption in the labor market. These two trends are becoming THE economic issue resulting from the pandemic. 

For retirement savers, inflation has the ability to erode purchasing power. Many investors are exhibiting some behaviors that may be counterproductive during this challenging climate. Likewise, many employees are deciding to leave their jobs. What impact will this have on our economy in the short-run...and how will they adjust their long-term financial plans?

Unedited Transcript

Michael Baker  00:46

Welcome back to the money huddle. My name is Michael Baker and I'm here with Ross marinelle Ross How you doing today but

Ross Marynell  00:53

Michael doing wonderful. This is this is our week in our family. This is this is it. We have so much stuff going on right now.

Michael Baker  01:04

You got it you got to expound for me.

Ross Marynell  01:07

We've got the youngest child's birthday on October 12. We've got the oldest child's birthday on October 15 today and it's a lot of fun happening in our household these days so excited to be here though. Got a little break before the madness before this weekend. But man I'm excited to chat we've got a lot of fun stuff to cover today

Michael Baker  01:31

I know man and can we can we start out with Can we start out with the simple fact that it costs me $71 to fill up my SUV yesterday?

Ross Marynell  01:40

Yes we can.

Michael Baker  01:42

I don't know like it where I have been if I've just not been paying attention but last night like I need a gas and I told my wife I said hey before I go to I got to get gas before I tried taking kids to school in the morning so you know be wiped out so not my normal routine where I'm getting gas like in the middle of the day getting gas at night. You know not nothing else not not me thinking what my next couple moves are I'm gonna you know, get gas go home, go to bed. And I look at the look at the meter and I'm like, What is happening? $71 I don't drive I mean, I feel bad for these people driving these huge SUVs, huge trucks that have gigantic fuel tanks. What does it cost to fill up a Ford F 150?

Ross Marynell  02:32

So think about this. I've got a couple of friends that run businesses where they have work trucks out. So I've got you know, we have a mutual friend who runs in hpac business.

Michael Baker  02:43

Oh, like Mike, Mike Geddings at Panther Heating and Cooling. Shout out to Mike.

Ross Marynell  02:47

Yeah, shout out to my Panther heating and cooling and yes 15 work trucks out there criss crossing you know, a couple counties and what how that increases you know the cost of your bottom line when you've got multiple you're experienced times 15 or 20 plus they're probably driving five times more than we are a day maybe more it adds up it's that's it's it's this slow creep of inflation and we're starting to see some you know, obviously this has become a it's been a story for for a few months now. But it's starting to get real right where we're starting to see gas price prices at the pump. I saw an article from ABC this came from ABC News it said that the headline was winter heating bills set to jump as inflation hits home listen to this Michael. They say with prices surging worldwide for heating oil, natural gas and other fuels. The US government said Wednesday and expects it expects households to see their heating bills jump as much as 54% compared to last winter

Michael Baker  03:54

Wow, that that doesn't sound like a good thing.

Ross Marynell  03:59

No, this is it could be worse in other countries. And so this is going to this is painful because if you are retired and on a fixed income, or just find yourself in a lower income situation now and you've got to pay 54% more for just heat just to keep your house warm. And like you said you're paying a pretty penny more to just drive yourself to and from you know the places you got to go get to work. This is where it starts to get people angry.

Michael Baker  04:33

Yeah, meanwhile, we won't even talk about the fact that at the very beginning, I'll leave that alone. I was getting ready to talk about the pipeline that we cancelled and all the you know, regulations we put back on energy but I will keep it moving. So inflation we just had the the most recent numbers come out inflation continues to persist. Core CPI in September was 5.39% I think it was, the expectation was 5.3%. So not not terribly off the expectation but still higher than expected. And, you know, I think we're starting, I mean, just about everybody is starting to see it in some way, shape or form. And, you know, we had talked about this amongst ourselves but Jerome Powell still thinks this is transitory, but likely going into next year 2023. What do you think? I mean, are we going to be able to get this thing under control? We're going to be you know, with the supply chain stuff that we're starting to see, they're telling us now Hey, by Christmas presents in October, which of course, if you tell everyone Hey, there's going to be a shortage, buy it now. And then people panic buy, which only exacerbates the problem? What do you think, man? What do you what are you seeing?

Ross Marynell  05:57

Well, so a couple thoughts come to mind. One, so I'll throw two more articles at you that talk about it. There was a BBC article it said Kraft, Heinz, Kraft, Heinz says people must get used to higher food prices. And part of it is stemming from just the raw materials, right? The cost of ingredients, such as cereals and oils has pushed global food prices to a 10 year high. And so there's they're they're prepping us good use the higher food prices it's coming. The supply chain issues are are real, they're starting to hit home. There was a there was another article I found that was linked back to South Carolina said South Carolina schools face food supply chain disruptions. So schools across the Midlands are struggling to feed their students due to supply chain disruptions and food service vacancies heightened this issue. So we have multiple problems, right? We're having job shortages on at the shipping ports to get all these boats unloaded. We're having a major truck driving shortage where we need truckers to move this product once it gets unloaded. And that's not a quick fix. These are not quick fix problems. I just don't see the idea that it's transitory. It sounds great when you're presenting to you know, your CNBC article or news audience. The reality is, this is a labor issue. We've got people that we need to fill these spots to be able to move this product. And it can't You can't train somebody overnight to become a long haul trucker. Like this is a problem that's probably been in the works for a while. And now because we've had this for stoppage last year, it's just we've exploded it.

Michael Baker  07:43

You bring up many interesting points. And what I keep thinking to myself is, this is a polarizing topic, but it it needs to be discussed. And I think, I think one of our problems here. And you know, not just in the political realm, but just across many different things is like we're getting to a point where we don't want to have discourse and conversations that are uncomfortable anymore. And that's really not how problems get solved. But I'm thinking to myself, like I understand, I've heard all of the discussions, I believe on both sides of the debate for the vaccine, should you do it, should you not do it. And, you know, the administration is getting ready to to put pen to paper and make their vaccine mandate, like come to life through the partment of labor, through OSHA, through their regulatory agencies, on businesses, and I'm thinking to myself, you know, another data point they're just came out was, in August 4.3 million people in August 4.3 million people left their job, that people quitting their jobs. We have supply chain issues in a big way. You mean, the port issue is significant for a host of reasons. At what point do we stop and take a breath and say you know what, maybe now's not the best time to be like putting our boot on the necks of businesses. Let's fix these problems. However we need to fix them and then we can go back to like you know, implementing an agenda. I mean, what are your What are your thoughts? I mean, they're gonna just make it worse.

Ross Marynell  09:30

The I came across a great phrase for this 4.3 million Americans quitting their jobs in August, one month. They called it the great resignation. And I think that's a very telling title, right? Because now this is the the labor component saying, I'm going to upgrade my job one way or another, and so maybe they're leaving for higher pay, maybe they're leaving to join another company that's offering a bonus. Because we know companies are increasing hourly wages, they're putting signing bonuses into packages for, you know, entry level positions. There are people who are being told to go back to in person work, and they're saying no, I'm not going back, I like working from home, I'm going to keep keep working from home, and I'm going to quit and go find another job, and they're finding them. And so employers are already pushed into a situation that they may not have ever been in before, where they're not only struggling to find talent, they're having to increase their compensation, and still struggling to find talent, because people are, there are an abundance of opportunities, we know there are an abundance of job openings. And so the tide has turned a little bit on the employer employee relationship. And it seems to me right now, the employees have the the ability to upgrade their work life, their income. And so part of it is you want people to be well compensated for the effort to their, you know, with the skills that they're bringing. But I think putting even more pressure on employers to try and find people right now is a really dangerous spot. We are short labor.

Michael Baker  11:14

No, I agree with that. 100%. I mean, I think if anything, you know, one of the things that I've always that I personally have felt, you know, people may disagree, but this is my opinion, I feel like that Americans in general will, one thing we do well, despite all our disputes and differences, like, you give us a challenge, like We'll rise to the challenge, you know, I mean, if if people just, you know, put their differences aside, but and sometimes it seems like it has to be, we're getting to a point where it has to be more and more and more severe. Before people wait to that, but I'm just thinking to myself, like, you know, I feel like if we were to come out and say, Look, Alright, here's where here's where we're at, we need, you know, we need to figure out how to how to do this. I mean, I remember back in, you know, the early stages of the pandemic, where, you know, you had some of these cities like New York City where it was a hot spot. I mean, they were, they were offering, you know, significant pay bumps, to bring in help from other states. And I'm just thinking to myself, you know, I mean, I've heard different things, and I'm, I'm not the most educated on all of this. So in my mind, I'm simply saying, you know, there's got to be a way to figure this out that if people would put their differences aside, we could get to that. But that doesn't change the fact that inflation is still here. 4.3 million people left their jobs, I personally think that that's probably going to be a lot of that people, like you said, Ross upgrading, you know, upgrading and people starting their own businesses, you know, a lot of people are just like, Look, I can go, I can do what I'm doing. And I don't, I can basically make the same money, but work for myself, and not have to deal with all these mandates and restrictions and the commute going back to the office. So I think that's going to happen. But right now, Tim, like you were saying 10.4 4 million jobs are available, according to the latest report. So 10.44 minutes, so we have jobs available, how it's going to shake out in the hiring, if you're an employer, that's going to be an interesting thing to watch.

Ross Marynell  13:30

So just just to put a cap on that, just think one industry, we need 60,000 truck drivers. And I just looked at what the hourly wage those folks can make right now. It's not this is not entry level pay, this is legitimate. You know, you're in that 35 to $60 an hour range. That's a good income for a lot of people. So we you got to think that labor will find its way there, because people are gonna look around and go, Hey, if I can do that job, and if I'm making $20 an hour now and I can go make 35 or 40. You know, you would think that those spots get filled eventually. But how long does it take how much the prices have to increase before we can reconcile that? It's anyone's guess right now. But, you know, we start seeing stories about schools, school systems struggling to provide food to kids that that's got my attention. And so we'll see how that shapes up. And you know, we're about ready to start. Will third quarter earnings season has started and so we will see how the retail businesses fare and how many of those were able to supply the product that their customers wanted. So we'll see what kind of commentary comes out from the CEOs of our retail businesses over the next few weeks.

Michael Baker  14:52

I think and I don't know if I'm super excited about this, but I see there being a huge shift to more online people going online for goods and services. I mean, if you can, I mean, if you think about it, if you can wait two days, you can get just about anything now, you know, provided that, you know, shipping, you know, and right that your house, you know, so that's, so that's an issue to resolve. But as far as like going to the store, it's gonna be really interesting to see, you know, how these trends, you know, unfold? That's 100%. All right, well, so yeah, let's move on. One. One thing, I guess, if you want to say there is a positive, it's more of a of a, an effect, a side effect, if you will, but it could be looked at as a positive for a lot of our people that are in retirement, on Social Security, or claiming Social Security, there's going to be a large cost of living adjustment this year 5.9% cola was just announced to take effect for January 22, or, excuse me, January of 2022. So a lot of people that are, you know, living on a fixed income, or where social security is really a substantial part of your retirement income, you're going to see, you know, a nice little bump in that benefit. And I think that's gonna, you know, hopefully help some people out.

Ross Marynell  16:19

That is a big jump. And what's historically been rolling out over the last couple of years has been under 2%. So I think the year before it was 1.9%, if I'm not mistaken, so it's a big jump for fixed income, Social Security recipients. The one, the one thing again, we would want to warn people is just take a look at your part B premiums, and see what you're paying, because the 2021, Part B premium is slotted to be $148.50. So if you are paying less than that, now, Social Security can take a portion of that cost of living adjustment and pay it toward your Part B premium.

Michael Baker  17:00

Yeah, give you give you a bump up. So just to round out this conversation, because we've been talking about no inflation. And I mean, that's the headline that keeps driving everything. But you know, we have to think about it too, not just from, you know, our day to day lives, but like, you know, how do we allocate assets? How do people invest? What are people doing? And there's some interesting things and I shouldn't say that they surprise me because they really don't. But every once in a while you just see something, you're like, gosh, like, would the data just be wrong, or the historical research just be wrong, like once, but it seems to continually affirm itself. So I got this email that came in today from why charts, and it's the fun flows report that they send out. And it's just showing us a breakdown of like market returns from various indexes, economic outlook, different, you know, it's just a good data piece to look at. And so it shows like across the board, you know, one year I mean, excuse me, one month, three month year to date, one year, year over year returns from various indexes and so obviously, I could go and name them but the vast majority of these equity indexes are extremely positive double digits year to date, you know, extreme double digits I would say year over year, we know that we know the economic recovery or the recovery in the market isn't isn't anything surprising. But here's what's interesting knowing all of that so scroll down to inflows and fun flows and Ross What do you think the over the last only we want to go over the last year let's just go year to date, year to date. What do you think the most inflows what fund or fund type have had the most money put into it that year today?

Ross Marynell  18:51

What would you man? So I would hope that it would have been equities. We

Michael Baker  18:58

can hope all we want rather. But try again.

Ross Marynell  19:03

Yeah, so I'm assuming something low risk money markets bonds.

Michael Baker  19:09

Yeah. So money market funds, year to date. $286 billion. Actually, these numbers are big enough I can give you the decimal $286.8 billion year to date have gone into money market bonds. Do you want to know what the year to date return for that category is less than a quarter percent point 01 percent? All right. Now, let's continue. Do you know what so this this should be a gimme this should be a gimme. So there's the most inflows What do you think the most outflows year to date would be?

Ross Marynell  19:56

So probably large cap stocks.

Michael Baker  19:59

Well, 100% year to date, large the large cap growth has has had $77.8 billion leave that type of allocation large cap blend 62.8 4 billion year to date returns it care to care to gamble on a

Ross Marynell  20:20

17% year

Michael Baker  20:22

to date large cap for why charts This graphic shows year to date returns 13.17% look for large cap growth. So this is a classic investor behavior. You know full pie, if you will, I mean people they pull their money out, move it to cash. Cash is essentially it negative yielding if interest if if inflation is 5% and you're putting it into an asset class, it's got a point 01 percent year to date return mean you're essentially like going backwards. You're not sitting still you're going backwards. Listen, I won't we I've had multiple conversations. And I know you have as well. Lots of people are concerned about what's going on with the market for various reasons, concerns about the administration concern about the Fed concerned about inflation, concerned about their job, right job security. I think that there are valid reasons to look at de risking a portfolio and maybe moving to a different allocation versus like being tilted towards growth. But I struggle with trying to justify moving to cash. When I know cash gets me zero. What

Ross Marynell  21:37

are your thoughts? Well, Barry Ritholtz very, very well said at the best he said the best portfolio is the one that you can stay in during the best times in the worst times. Because trying to time these market movements in the big swings that people are predicting is very, very difficult. It is so hard to get right. It's hard to get right on the entry or exit. And it's hard to get right on the reverse, right? So if you think this is the time the markets gonna drop, you've got to be right on the exit. Well, you also have to be right on getting back in. And so you got to be right twice. And it's extremely difficult to do. And one of the things that we suggest is finding that comfort zone where when the markets ripping higher, you're not looking at your your portfolio and thinking, well Dang, how come I'm only up X percent of the market. At the same time when the market is dropping? unexpectedly and quickly. You're not looking at your portfolio, and why am I falling so far? You've got to find that perfect balance and when you can be happy on both directions,

Michael Baker  22:33

isn't it? But isn't it also like a lot of behavior to I'm thinking because I'm thinking from the standpoint of I mean, that what you just described that ability to time the market, it's so alluring, it's like the siren song of investors but it goes counter to everything does he think about it, like the time the probably the best time to get out of the market or I don't want to say get out of the market. But to get out of like your growth allocations is Win Win the growth allocations are smashing, right? Because you're at the top like they've been trending upwards. Our recency bias is in full effect like oh man, things are smashing, and then you sound like a buffoon. If you're like, hey, now's the time for me to get out. Likewise, when everyone's starting to get out, because you know, things are going bad, and there's bad headlines, there's bad economic data, the market starts to move downward, you know, and there's more selling pressure. Most people are like, you know, hey, getting in right now doesn't feel good at all like this. This looks like it's really going to go south, why would I put money to work now? And I think it's, that's one of the things that we have to constantly be vigilant about as investors is, you know, our feelings just betray us when it comes to what our money should be doing a lot of the times

Ross Marynell  23:51

and, and, and a lot of times, the headlines betray us too. because like you said, We rattled off, you know, we spoke for 10 or 15 minutes about some pretty serious concerns we see about supply chain issues and and that's prevalent every day in the in the financial news media, and we start to think it should affect stocks immediately in, in some cases, it doesn't, it may take longer, it may never even occur. So it's really hard to predict the future movement of stock market based on just the headlines that we're reading is seeing every day.

Michael Baker  24:24

Well I will I will cap it off with this and this is a this is a direct quote from Jamie Hopkins his book requirement. He wrote it he wrote a chapter on retirement many chapters on retirement risk but Jamie, his Twitter handle I think his retirement risk so there you go. Bond is his quote here. Bonds used used to provide two main benefits a positive adjusted return, or excuse me, a positive inflation adjusted return and diversification from market returns. But today, the return is all gone with real rate. In 2021, for government bonds at essentially negative across the board. So listen, this isn't us saying that bonds are awful, they have a place at the table just like every other asset class does. But there's this idea that, you know, especially right now, with inflation, picking up I hate to use the there is no other there is no alternative, you know, the teen argument. But right now, I mean, unless you have like a really short term need for for the cash, like hoarding cash right now, it is going backwards. And I know that there are a lot of people that are doing that, because it helps them sleep at night. But we have to consider, you know, if you if you are in your early 60s, late 50s, early 60s, even your 70s you know, retirement is a multi decade long race, you know, how long do we sit out of, you know, potentially getting market returns because we think about average rate of return. And we tend to think linearly, but if to get the average rate of return, that means you have to be in the market for the length of time needed to be in the market to get that return. So just be careful right now, I know inflation is scary is dominating the headlines. But like anything else, you know, eventually, I believe we'll get it sorted. I don't know how I'm not smart enough to tell you how we're going to fix all these problems. But I do think that eventually they will sort themselves out because we tend to figure things out over time. Sometimes we have to learn a few lessons along the way. But inflation has given us some new things to consider. But thankfully for people that are on Social Security, we're getting a nice cola 5.9% that will start next year. And then, you know, who knows, we might see a whole new revolution in thriftiness and people getting online and telling people, you know, hacks of like how to cut costs and how to save effectively on their budget. You know, there's all kinds of stuff that come out of the woodwork when we see adversity. But that's what I that's what I had today, man, what else you got?

Ross Marynell  27:11

No, I think that's great. We covered a lot of ground today. A couple topics, we could probably table for our next get together. Unless you have something else you want to jump in with? No,

Michael Baker  27:22

I'm good. I think, you know, the biggest thing that I will tell everyone is one of the things that's happening. I mean, we've seen in the last few weeks, we've seen some volatility in the market, I would expect volatility to continue. investors can be tempted oftentimes, to only think about volatility when they think about downside volatility. But let's not let's not shot, you know, turn our nose up at the upside volatility meaning last two days, we've started earning season. So far, the earnings that we're seeing coming out, Bank of America announced great earnings. Goldman Sachs announced great earnings, you know, JPMorgan, great earnings, we're starting to see, you know, some of these, you know, our biggest institutions, you know, announced their earnings. And so far it's off to it looks like it's off to a great start, if that continues. I mean, we can't just be deniers of what's happening. I mean, our businesses are finding ways to be profitable. And if you're an investor, that matters to you. So let's look on the positive and let's stop just focusing on downside volatility, because upside volatility is also part of the equation. So hang in there. Yeah. All right. Awesome. If you got any topics you want us to talk about, feel free to shoot us an email. Our email is The Money Huddle at VC Planning dot com. And, as always, thank you for listening. Find us on iTunes, find us on Spotify, wherever you like to listen to your podcast. That's where we are. And we'll talk to you next time. Thanks.

Links:

4.3 million workers quit their jobs -- Source CNBC

SC Schools hit by supply chain issue for school lunches

Trucking crisis hitting US - Source Bloomberg

Heating bills set to soar this winter - Source ABC

Kraft Heinz article about food prices - Source BBC News

The Great Resignation - Source Yahoo

2022 Social Security COLA info - Source SSA

Medicare Part B Costs Info - Source Medicare

Jamie Hopkins Book - Rewirement

Ycharts Graphics: