All men are by nature equal, made all of the same earth by one Workman; and however we deceive ourselves, as dear unto God is the poor peasant as the mighty prince.
We are in unique and somewhat unprecedented waters. As I observed recently in a client discussion:
- The last global pandemic was 104 years ago.
- The last time a sovereign European nation was attacked unprovoked was during WWII, about 83 years ago.
- The last time inflation was this high was 40-plus years ago.
- The last time inflation was this much higher than interest rates was over 70 years ago.
Historically, these were all independent events, meaning none occurred at the same time. However, now we are experiencing ALL of them simultaneously, which has caused (and will likely continue to cause) unprecedented behavior in both markets and people who are adversely affected.
So far, those who this convergence of events has negatively impacted have primarily been the poor – mostly in foreign countries and to a lesser extent in the United States.
Why are the poor disproportionately affected? That’s a complex question, but I believe it’s because they generally have fewer resources (whether financial or emotional) as a buffer to protect them against the negative consequences of current events.
As evidence of the poor experiencing more significant negative consequences, I’ll point to a host of indicators. The first is that poor people in the US and, by extension, developing nations spend much more of their incomes on food and fuel. The Wall Street Journal published an article last week which indicated that African countries such as Ethiopia, Nigeria, Ghana and Angola all have food inflation rates over 20% - and some as high as 40%. Troubling indeed if it were to happen in the US, where food represents only about 7% of total spending, but devastating to families in countries of Africa and the Middle East where people spend north of 40% of their income on food.
Dire circumstances lead to desperation – which unfortunately frequently brings social unrest. Countries such as Sri Lanka, Peru, Pakistan, and Kazakhstan have experienced severe tensions as parents make tough decisions on how and what to feed their families. If fuel prices remain high, expect further problems in colder regions, including Europe, this winter.
Domestic companies such as Wal-Mart and Target have also begun to see the impact of high inflation on customers. In recent disappointing earnings calls, both CEOs cited customers’ move to lower-cost foods and brands. Indications are that the lowest quartile of US consumers is moving their food buying behavior to dollar stores.
On the flip side, demand in the US for most premium brands, items and services has largely been unscathed thus far by current challenges. Vehicle prices are crazy – if you’re willing to wait nine months, you can purchase some new cars for less than a used one! Travel has boomed this summer as people finally get over Covid closures and want to get out and “experience.” Many have dropped out of the labor force - making workers scarce, so wages are high, and there is little sign they will abate anytime soon.
Interest rate-sensitive assets are already showing signs of trouble. Today the National Association of Home Builders index dropped to its lowest level since 2014 – what NAHB Chief Economist said was a “housing recession.”
Despite the Fed raising rates, inflation remains high for many items. The risk for inflation is that it lasts long enough to become an expectation and, as a result, becomes systemic. Unfortunately, we are reliant on inexperienced inflation-fighting policymakers – none of whom were on the front lines when we last experienced inflation in the early 1980s.
Bottom line: it’s an exceptionally complex environment. I’ve heard advisors and analysts with decades of experience say now is “by far” the most complex of their careers. It’s challenging when historically correlated assets have suddenly become uncorrelated and vice-versa.
What to do? My best guess is doing nothing is the best path forward. By “nothing,” I mean sticking to the plans dispassionately made with data. Inflation will probably stick around – but sitting in low-yielding cash is not a long-term answer. Resisting the urge to “do something” when things are uncertain and volatile takes both patience and resolve.