At times like these my dad used to say: “Things are
never as good or as bad as they seem.” He had a very high
stress job which often involved life-and-death situations. But he kept things
even keel and rarely brought his worries home with him.
His point was this: Whenever you’re on a roll -- whether in business, sports, investing,
gambling or even your romantic life -- there are “cracks in the foundation” you’re
not seeing because you’re caught up in the euphoria of your winning streak. And
when it seems like you can’t get a break, no matter which direction you turn,
there are actually good things happening all around you, but you’re not seeing
them as you wallow is pessimism or self-pity.
Lessons from the Super Bowl
Case in point: At least two recent Super Bowl winners (2017
Philadelphia Eagles and 2015 Denver Broncos) have been in painful rebuild mode
ever since they hoisted the Lombardi Trophy. Did they just get cocky or lazy
after becoming world champs? No. They were simply a team of over-achievers that
came together for one magical season despite all the aging veterans hobbling through
in the final years of their contracts. They defied the odds with a roster held
together with duct tape and safety pins. It makes for great stories the media
and call-in-shows, but doesn’t set the foundation for a dynasty.
Momentum myopia works the same way when
you’re on the schneid. Take the markets. While the S&P 500 officially
entered “correction” territory today, did you know the index is still up more
than 98% from where it was at this time five years ago? That’s better
than a 14% annual rate of return!
While we’re
seeing jaw-dropping year-over-year price increases for things like gasoline (+49.6%),
used cars & trucks (+37.3%) and energy +29.3%), let’s remember we’re coming
off the extraordinarily low pandemic era prices when nobody went anywhere or
did much of anything.
Let’s go back
to 2019, a full year before the pandemic. According to the U.S. Bureau of Labor
Statistics, the CPI stood at 255.7. Today it stands at 281.9, including a
substantial jump last month. If my math is correct, the CPI has risen just 10%
over the tumultuous last three years, a compound annual rate of about 3.3%. Not
much higher than the historical rate of inflation in the U.S.
Still not convinced? Take a look at gas prices, which
everyone can relate to. Some of my earliest childhood memories are of around-the-block
gas lines during the Arab oil embargo of the early 1980s. You may be old enough
to remember it was the first time that gas prices first hit an un-American $1 a
gallon (gasp!)
Today the price of
gas has more than tripled to $3.44 a gallon according to U.S. Energy Information Administration stats.
That seems pretty steep, but if you do
the math, you’ll see it’s a compound annual growth rate of less than 3%. There’s
that 3% number again -- the long-term historical rate of inflation. When it
comes to gasoline, we just got spoiled by $2.10 a gallon during the depths of
the pandemic (November 2022). Same goes for interest rates. Even if the Fed
invokes four separate rates hikes in 2022, each hike is likely to be no more
than 25 basis points. So if rates are a full 1% higher than they are today, the
will still be extremely low by historical standards.
It may get tougher for those with huge credit card debt or variable rate
mortgages they never should have qualified for in the first place, but I don’t
think that’s the case for most of your clients.
I feel your pain
I know rent and housing costs keep spiraling upward. I just
got whacked with a 25% increase for my office space. I was pissed when I first saw
the new lease – especially with so much commercial space available. But my wife
reminded how much nicer the building is than when I moved in a dozen years ago.
And now the lease includes a fully renovated office, VOIP phone service, high
speed internet, unlimited coffee and access to a stunning roof patio and a modern
24/7 gym right in the building. So even though I’m paying 70% more than I did a
dozen years ago. Do the math: it’s an average annual increase of only 4.1% for
much nicer digs. Don’t tell the building owner, but that makes writing the monthly
rent check a little less painful.
Bottom line: let’s take the long-view here and not get
spooked by the doom-and-gloom headlines.
Conclusion
Writer and humorist, Sam Ewing, once said: “Inflation is
when you pay $15 for the $10 haircut you used to get for $5 when you had hair.”
Perhaps, but eventually you get to an age in which you don’t need as many haircuts
as you used to and or you stop caring what you look like on Zoom calls. So, in
the long run everything evens out.
Don’t agree? Tell me why.
#inflation, #marketcorrection, #volatility
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