Power Up Wealth podcast – Sticky Inflation – Episode 24 transcript:
Sharla Jessop 0:00
Inflation numbers are out and the bottom line is startling. I’m Sharla Jessop. And today my guest and colleague James Derrick will dive into the numbers and what we can expect looking forward.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics. Preparing you to make smarter decisions with your money.
James, thank you for joining me today.
James Derrick 0:47
Yes, I’m glad to be here.
Sharla Jessop 0:49
James Derrick is our Chief Investment Strategist at Smedley Financial Services, and he also holds an MBA. He’s the knowledge behind the numbers here at Smedley Financial, and I’m so so grateful to have you join us. A lot has changed with inflation. Everyone was expecting that the numbers were going to be lower. And when the numbers came out, even though they were lower, they were higher than expected. And the market has really reacted.
James Derrick 1:12
There a lot of people might look at what has happened in you know, in the month of September and and wonder why the stock market was so surprised when inflation came out at 8.3%. But the reality is, is that many, many investors were expecting a big improvement when all we got was a little one.
Sharla Jessop 1:34
You know, that’s so interesting, because for months now, the Fed has been telling us we’re not out of the woods. We’re going to continue fighting inflation. We’re going to use every tool we have. And yet investors when the number came out for July, we’re really excited and we saw that in the market. The numbers that we had today were really quite shocking to the market.
James Derrick 1:57
Literally! It feels like we are stuck at higher levels at this point in time. June, in June. To June, so one year inflation from June 2022 to so excuse me from June 2021 to June 2022 was 9.1%. The July number was 8.5. And now the August number which comes out in September, it was 8.3. So 9.1, 8.5, 8.3. We’re headed in the right direction, but it’s, the progress is just so slow. Normal inflation is like 2%, 2 to 3%. And we need to get back to that level. And one of the reasons why is because inflation should not be the focus of our lives. Like we need to be living our lives. And if we’re in our work, we need to be doing our work. If if the focus in your job is on inflation, then you are not able to do your job as well. And so we need to get back to the point where the change in price is so small, that people are not as worried about it. It’s not something they think about every single day. And I can tell you from going to the grocery store recently, that I just I was stunned. Like those sales prices looked like regular prices. I mean, it’s unbelievable.
Sharla Jessop 3:19
And when we look at inflation, we see a number but that number is really broad. And it encompasses so many different things. Share with us what is encompassed in inflation. Many of us are seeing it like you said, we go to the grocery store and come out with sticker shock. But it’s beyond that.
James Derrick 3:35
I mean, the thing that we noticed most is gasoline. And it’s probably because when you fill up at the pump, we’ve talked about this before in the podcast, Jordan and I were talking about this. You fill it up, and you’ve got nothing else to do, but sit there and watch the numbers go up. And so you’re very aware of what the gasoline prices are. Gasoline is up 25% in the last year. Massive increase. However, it’s down 18% in the last two months. Now, I know here in the West, we are paying way above the national average, but it’s still coming down for us, as well. And so that has improved and I think because of that improvement investors thought oh we’re gonna see improvement in in all inflation, but we didn’t. Let me go over some of the other things. Shelter 6% increase. Medical care 6% increase. I mean, that’s not that much. But let’s face it, 6% is still a lot higher than the long term average. New vehicles 10%. Used vehicles 8%. Those have been down over the last two months though. At one point in time used cars were up 42%. 42% increase is like people were you know, the old saying was when you buy a car and you drive it off the lot it’s dropped in value, but now it was like you drive it off the lot and it’s going up in value. It just made no sense. And so that’s one area coming back down a bit. Natural gas up 33% We’re gonna feel that in the wintertime when we’re heating our homes. And then the final one that I want to mention. And we’ve gone through all the major categories here really, is food. And this is a big one. Because if homes go up in value, you can choose not to move. Most people have some choice there. With a car, you can choose not to buy a new vehicle. Try to fix up your old one and keep it running longer. The average length of a vehicle age is now almost 12 years. So you can keep your old car going. But when it comes to food, it’s not something you can avoid. So food away from home is up 13% in the last year and food at home, groceries, is 11% in the last year and it month to month has continued to be just a powerful and high rate of inflation. And so it’s a big one. And it’s going to be a big one for all of Americans. The Federal Reserve as just has to do something and they know it.
Well, because you can see why because that impacts especially food when you talk about food and food insecurity. That impacts so many people, everybody equally. You know where gasoline or buying a home, like you said you could choose to buy a home or maybe for gasoline you don’t have to drive your car. Maybe can use mass transit. Or there are other options. But there’s not really another option for eating. I think food prices impact every single person. It’s painful, especially for those who are on lower incomes or fixed budgets. And sometimes we think of lower income as young families and stuff. But a lot of times it’s retirees that fit into that who are living on a fixed income with Social Security. And so the impact there’s is broad. What’s the Fed going to do? How are they going to continue to tame inflation?
I mean, this gets really interesting, because there are a lot of things the Fed cannot control them. And they don’t control the rain, obviously, the shutdowns and shortages. COVID shutdowns in China. The electricity shortages in China. Russia’s invasion of Ukraine. I mean, they have, obviously they have no impact on these types of things. But they can affect one thing, and that is interest rates. So they raise their own interest rate, which indirectly affects all interest rates. And I say indirectly, because just just because the Federal Reserve increases rates by half a percent, that doesn’t mean that a mortgage goes up. Mortgage rate doesn’t necessarily go up half a percent, but it indirectly impacts it. And so that’s what we’ve seen is the Fed has increased rates over and over again this year already. They’re going to keep doing it. And so I think we can expect that other interest rates, like on mortgages and auto loans, which have gone up will probably continue to go up. It’s gonna have a big impact on demand.
Sharla Jessop 8:06
Well, let’s talk about that when we’re talking about interest rates going up. What about housing? I mean we’ve seen a hot market in housing over the last year. And I know that’s cooled down a little bit, but talk to us a little bit about the interest rate and how that’s going to impact housing because people think, oh, yeah, the market slowing down, that’s great. This is my time to buy.
James Derrick 8:24
Yeah. So because the the Federal Reserve’s tool is so broad, and blunt, when they raise interest rates, it, it just affects everything. And so housing will be sort of like collateral damage in this. Interest rates have gone up. They’ve nearly tripled. I mean, if they if we, I think the average new rate that I saw last week was 6%, in the United States. And if you shop around, maybe you can do better than that. But this is this was the national average that I saw. And if it goes up any more, I mean, it’s just going to continue to have an impact on affordability and affordability has never been worse. So it puts pressure on prices. I mean, if if the interest rate goes up, then that means your monthly payment goes up, unless your buying price goes down. So it you can just see how this might just balance and we’re kind of like at a tipping point, with interest rates going up so much that people selling their homes are not going to be able to ask for top dollar anymore. They’re going to find out the hard way that the homes aren’t worth what they were just six months ago.
Sharla Jessop 9:35
Unfortunately, all of this doesn’t help the buyer who’s been trying to get into a home because all it means for them is you’re going to pay the same price. You’re just going to have to buy the home at a lower value because interest rates have taken up the difference.
James Derrick 9:47
Yeah.
Sharla Jessop 9:47
Of what your home price would be.
James Derrick 9:50
Let’s dive into that a little bit because it might be confusing to people but basically like yes, the prices should come down, which is going to be good for people who are looking to buy a home, but because of the interest rates have gone up, you’re actually not any better off. Your monthly expense will probably be similar at this point. And so it’s not quite the bargain that it might seem on the surface. If you could afford to wait, if you’re in a family situation where you can afford to wait, then that seems like the wiser thing to do at this point in time. Although, if you’re looking for a reasonable home to buy, and you can find one that you can afford, and you’ll be fine. You’ll be fine. But if you can wait, I think that there’s going to be a sort of a, a bunch of dominoes that fall, and it takes time for it all to happen. So if you wait until 2023, I think that there’s going to be better values out there. And interest rates at some point in time should stop rising. And I think housing prices could continue to fall. And then at that point, people are getting a better deal. And then I would add that also there’s the possibility of refinancing. I’ve you know, I mean, I’ve there have been so many times in my life where I have refinanced and thought I will never refinance again, you know, rates will never come back down again. And, you know, they have.
Sharla Jessop 11:16
Right, it’s not the end of the world. As I’ve mentioned before, our first mortgage was at 13% interest. When we got six and a half, we thought we’d died and gone to heaven. And then when it dropped 2%, we couldn’t believe this was real life.
James Derrick 11:28
It was too good to be true. And that’s why it didn’t last forever.
Sharla Jessop 11:32
Right!
James Derrick 11:32
It did not last forever.
Sharla Jessop 11:34
It’s cyclical, like everything else, though, is cyclical and the numbers will they go up and they come down, and you just manage and adjust through that wave.
James Derrick 11:42
We’re gonna see the same thing play out in the auto market. But it’s a little bit different, because again, it’s it’s not as big of a purchase, but it’s still pretty big. The car prices have gone up a lot. The interest rate has gone up. I think that it is also getting close to 6% on average, although I looked around, and you can definitely find much better rates than that. But I’ve seen the average is pretty high. And so the affordability gets more and more difficult. The problem is just like in housing where where there’s a shortage of housing in the country, there’s a shortage of, of automobiles still. And if you go to the dealer and you’re looking to to buy today, you might be disappointed. You’ve got these competing forces, one, the shortage keeping prices high. And then the other interest rates that are up that are making affordability worse and and they’re going to bring down prices. And I think in the end, you know, fast forward 12 months from now. I think in the end, we are not going to see prices increase much more for autos, but that is just a guess, I don’t know. And I what the other thing I’m not sure about is whether they will actually come down or not. When we talk about inflation falling, if the inflation rate falls from 8.3%. And let’s say that six months from now we’re at 4%. That would be a really good thing. But 4% still means prices are going up. And so even 0% inflation means prices have not come down. So when we talk about the Federal Reserve getting this all under control, what they’re trying to do is decrease the demand for things. And they’re trying to change the way not just the people spend, but the way people think. We’re in a dangerous situation now where inflation has become the new normal. And the Fed does not want that. They don’t want employers giving 10% raises. They don’t want Social Security doing a 10% raise. And I don’t think it’s gonna be quite that much. But you get the idea. They don’t want this to become normal, because it can get out of hand. And that’s something that we have not seen in the United States before. And, or at least not in my lifetime, and they don’t want to see it. They’re gonna make sure that we that inflation doesn’t get any worse and they’ve got all the tools they need to do it. It’s just going to cause some pain.
Sharla Jessop 14:22
There is going to be pain. We’ve already experienced some of it throughout this year. This year, I’d say, inflation wise, it’s been painful and market wise has been painful. So let’s talk a little bit about how inflation and how these numbers are impacting what’s happening in the market.
James Derrick 14:36
Yeah. So when I think about inflation’s impact on the market, the first thing I want to always remind myself of is that the Federal Reserve is going to win. So they will stop inflation. They’re committed to doing it, they talk about it every chance they get. They’re going to bring inflation down and then they’re going to make sure that it stays down. The impact it has is important to them. But it’s not as not as important as inflation. So that’s the I mean, just never forget that as we move along in the conversation, because that’s really, really important to this. This is not like a scenario that we’ve been in, in recent history, because in recent history, every time there was a slowdown, the Federal Reserve, lowered interest rates. And sometimes they would buy up bonds to try to push up the value of financial markets and stuff. And so they were doing what they could to create growth. We’re not in that situation right now. We’re in a situation where the Fed is actively trying to slow things down. And so as a result, the bond market is actually down. When interest rates rise, bonds, bond prices generally fall, that’s been unusual. It’s been an unusually tough year for bonds. And then also for the stock market. It’s also been a very difficult. We had an incredible bounce over the summer. A lot of people have been talking about the bottom is probably in. We’ve seen the worst of it. The markets going up from here. I don’t think that’s the case. I think that I think the Federal Reserve is going to continue to do more. And it’s going to be very difficult for financial markets and investments and investors.
Sharla Jessop 16:24
So what are we telling investors are here, a lot of people are trying or thinking maybe I shouldn’t be putting my money in the market right now. Maybe I should reduce my 401k contribution percentage. Or maybe I have money that’s sitting in savings that I was planning to invest. But maybe I shouldn’t do that.
James Derrick 16:38
Yeah two important things to think about here. First of all, never lose the long term perspective, because in the long run, the market has always recovered. I have no, there’s no doubt in my mind that the market will recover. And so it’s, it’s just critically important to continue to save, and continue to contribute to your 401k and, you know, the place to make adjustments, the first adjustments are in your personal spending, not in your investment accounts. Now when it comes to investment accounts, though, like, it’s not crazy to want to make a change. In fact, a lot of people will be making changes in their accounts. But the timing, when we talk about making changes, we’re talking about timing and timing the market is just incredibly difficult. And even for professionals, it’s just very hard to do. And so I want to warn people off of it. For most people, the best thing you can do is just continue to save and continue to think long term. You will be much better off. Now in our actively managed accounts we’ve made some changes. Actually a great deal of changes. And the timing of those changes has been good. But I just want to emphasize that it’s very difficult to do. And so we’re not recommending that people do it.
Sharla Jessop 17:59
I think the DALBAR has done studies for over a year over year over year of investors trying to make the decision and time to market on their own. And they haven’t done well. And I think a lot of it falls back because it’s easy to get out of the market. But it’s much more difficult to decide when to get in and people don’t get back in typically until after the market has recovered. And you know, they’ve missed opportunity.
James Derrick 18:22
People tend to sell when they’re certain that the market is going down. And that’s when it typically turns around and goes back up. And vice versa. You know, they buy in when they feel confident that the worst is behind them. They feel good about it because it’s already gone up. Like it’s like we say in life like follow your gut. But when it comes to investing, actually that’s very difficult advice to follow. Because at the moment you feel confident that you know what’s going to happen. It’s probably the moment when the market is going to surprise you. So it’s really is quite difficult. Most people should just focus on the long-term they will be they will just be so much better off that way.
Sharla Jessop 19:03
I agree. I don’t remember who said it. I believe it may have been Warren Buffett, but I could be speaking out of turn. But it’s the only place the market where people run when it’s on sale rather than embrace it.
James Derrick 19:13
That was Warren Buffett and I love it. I love it. And he also said “When the tide goes out, we find out who’s been swimming naked.” Also a great quote and referring to the markets, you know, people who take excessive risk will find a difficult market unbearable. So take the right amount of risk for you that you can handle. If you don’t know what that means. Come meet with a financial advisor, a wealth consultant. Find, you know and find out you know what is the best for your situation?
Sharla Jessop 19:49
I think that’s great advice. I think having a financial advisor in this scenario in this day and age makes all the difference in the world emotionally for investors to be able to stay invested, because they have somebody aren’t just focusing only on investments, but also the plan, their goals, their values and what they’re trying to accomplish long-term. I think it takes the focus and some of the severity out of the market and to make sure that people are invested based on their own personal risk tolerance and objectives. And I think that goes a long way. James, thank you so much for joining us today. We appreciate this information.
James Derrick 20:23
So happy to be here. Thank you.
Shane Thomas 20:29
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn.
The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Lorayne B. Taylor, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
