Inflation is surging as the economy heats up, and international demand impacts the supply/demand curve.
Oil – up 12%
Steel – up 200%
Chicken breasts – up 110%
Eggs –up 4.7%
Major appliances – up 14.5%
Ground beef – up 5.5%
Home prices – up 16%
Lumber – up 280%
Federal Reserve's printing of money reduces the value of the dollar.
Shipping via container ships is well behind demand.
Massive demand by China and other countries.
Climate issues in Brazil.
We have just finished a decade of historically low housing prices (nationally). In the last decade, we averaged under 1M house starts – a low historical number. Post-pandemic people are now focusing on the house- adding Zoom rooms, expanding into the backward, and millennials moving into the market. Housing demand is up 20.7% since February 2021. Higher demand with supply constraints had led to a super storm of a seller's market
Forecasters look at the affordability index (medium income required to purchase the medium-priced home), historic housing starts, and interest rates when predicting the housing market. Low interest rates keep the affordability index high. Given that Jay Powell (Federal Reserve Chairman) wants to keep rates low through 2024, the market is predicted to remain robust.
Commodities: In a Super Cycle
Goldman Sachs, in a recent article, noted that the commodities sector is in a "supercycle" that has only occurred four times in the last 100 years.
From the article:
There have been four such supercycles in the last 100 years, with the last one having peaked during the global financial crisis in 2008. "It's easy — and largely accurate — to present the 2021 commodity outlook as a V-shaped vaccine trade," said Goldman Sachs in a recent report, adding that a recovery in commodity prices "will actually be the beginning of a much longer structural bull market for commodities."
Low-Interest Rate Environment – Bad for retirees, and I argue bad for the rest of us.
Low-interest rates drive retired Americans out of safe investments (bonds) and back into higher-risk equities in a race to chase returns. Retirees on fixed incomes face rising fuel, food, lumber, steel, and natural gas prices.
Bonds in retirement are poor options; the inflation-adjusted 10-year Treasury yields-real yields are negative for only the second time in 40 years.
Moving out of lower-risk investment and into higher-risk investments now exposes retirees to market risk and a number of other threats. A strategy of investment bucket balancing (tax efficient), covering fixed retirement expenses with guaranteed income, and using the rest of your investment dollars for growth as the inflation hedge can be a sound approach.
Low-interest rates and printing by the Federal Reserve create lots of borrowing, drives down the purchasing power of the dollar, and backs all Americans deeper into the national debt hole. The Federal Reserve Chairman, Jay Powell, predicts low rates will be with us through 2024. But the question presented by many – does this economy still require low, low rates given predictions of 13% growth (The Atlanta Federal Reserve) or 5.5X pre-COVID levels?
Expect to be paying higher prices for some time to come.
Expect housing to remain active through 2024.
Do you have commodities (lumbar, steel, copper) in your investment portfolio? Just food for thought.
Use this period as an opportunity to ask yourself - how would I manage these economic conditions on a fixed income in retirement?
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This article is strictly for educational purposes only, and all investment decisions should be reviewed with your investment, tax, and retirement advisors.