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Markets seem to be rounding out 2021 swimmingly. Tech heavy S&P 500 is trading higher by more than 20% and we’re even starting to see some life out of diversifying asset classes such as emerging markets, international and, don’t look now, but even gold seems to be making a run into the end of the year.

Little did I know that our ‘Inflation Freight Train’ webinar that we did last year would come to fruition with such accuracy, as we not only discussed the coming price increase among staple goods but the final piece of the puzzle, wage inflation, which would be the real kicker to the inflationary equation. Well, unless you’re living under a rock, you’ve seen this final piece unfold before your eyes with wages being hiked across the board from bus drivers to line workers. Retirees will also be getting a healthy boost in their social security checks to the tune of around 5% due to a cost of living adjustment we have not seen the likes of since the 1970s. Through it all, assets of all shapes and sizes have increased in value as cash on the sidelines continues to lose value. Lest we not forget the conclusion to the webinar where we surmised ‘Markets will continue to advance, but take heed, it’s a bull market, we’re not that smart.’

The point was simple, really: if the inflation train chugged into the station, stocks would inevitably rise as money moved from cash into stocks to keep pace. These were not wild predictions but rather an understanding of history, economics and the laws of supply and demand. Where we go from here however, well, now it gets interesting.

Historically, inflationary cycles play out as follows: dollar devaluation = asset appreciation = wage inflation = asset appreciation = wage inflation, etc. As inflation rears its ugly head, the Fed then steps in to raise interest rates, tighten money supply and slow down the economic engines, thus reducing demand and therefore stalling inflation. This would be the logical next step, however today we have quite the conundrum when it comes to this scenario. The Federal Government, State and Local Municipalities and most of the corporate world are leveraged to the hilt such that any intentional rate increase beyond a reasonable amount will not simply slow the economy but rather, in my view, slam us into a concrete wall.

The question that no one seems to know the answer to, however, is whether or not the Fed will actually try to raise rates and curb inflation. You see, for the time being, the Fed has adopted a wait and see policy allowing inflation to continue, asset prices to rise and easy money to rule the day. I get the impression they’re hoping and praying as much as I am, that inflationary pressures somehow abate on their own, allowing them to rest easy and not touch rates any time soon.

How could inflationary pressures abate? I’m glad you asked. Technology to the rescue!
You see, there is one part of the equation that no one seems to be taking into consideration, which may have the answer for rising prices with unfortunate consequences down the road, particularly for low income workers.

Before a recent flight from the Cincinnati airport I grabbed a sandwich in the terminal. As I walked up to the crowded restaurant packed with people, I did a double take as it seemed as if no one was working. I saw no servers, yet just about every table enjoyed beverages and food. As I sat at the one open spot, I noticed on the table a sign with the now famous QR codes, however this one was a tad different. Not only did the QR code pull up the menu but it also instructed me to order and pay from this very code as well. Within minutes I placed my order and paid my bill, not quite sure what would happen next. In the next few minutes someone from the kitchen came walking out and sat my sandwich down on my table, promptly returning to the kitchen to run another order. I snuck a peek and to my amazement one cook and one food runner was servicing the entire restaurant which had to include 30 – 40 tables, at least. No servers, no busboys, no extra staff to check people out, just a cook and a food runner and that was it. While other restaurants in the terminal were closed due to a lack of workers, this restaurant thrived with a fraction of the staff. Do you think this restaurant owner will hire back workers? No way, that ship has sailed.

Just the other day I was at Sam’s Club picking up groceries. I had been intrigued by their new app and knew there was a way to scan my own items and check out on my phone but admittedly I had yet to use this feature and always preferred to greet a human being at the end of my shopping trip. This trip however I was pressed for time and as I was preparing to exit noticed there were only two checkout lines packed 10 and 12 carts deep. It was time to try something new. I opened the app, proceeded to scan each of my items, adding them to my virtual shopping cart and with a swipe of my thumb checked out. The process took all of two minutes and produced some sort of scanned receipt which I showed to the person near the door. I bypassed the entire checkout process and will more than likely never use a checkout line at Sam’s Club again. Do you think Sam’s will hire a complete staff of checkout workers?

In a Chicago airport I have seen staff-less stores where an individual enters through a glass door type mechanism after entering their credit card. Once they find the items they want, they leave, at which point the door mechanism scans their products and charges their card.

You see, in the past more workers were the only answer to increased demand for products and services, however today we have technology that can replace those workers cheaper, faster, more accurately and with far less coffee breaks.

While I’m not sure we don’t first go through a few hiccups as inflation induces some sort of short-term Fed action, the idea that hyperinflation leads to an economic collapse seems highly unlikely to me. Rather, my view is that technology ultimately will take the place of our labor shortage thus resulting in zero need for higher rates and a debt cycle that continues to roll right on down the road.

While I have no crystal ball, I feel strongly that there are a few things people can do to safeguard themselves from whatever the future may hold.

Pay down debt – Fixed payments, especially in retirement, are manageable when other expenses are not on the rise. However, this changes when variable expenses such as groceries, utilities and the like are increasing exponentially. Despite the allure of low interest rates, I believe the wisest thing to do is pay down debt, allowing yourself to remain liquid and in true control of your financial future.

Avoid Elevated Illiquid Asset Purchases – I’m not going to beat around the bush on this anymore. Buying large assets in this environment is hazardous to one’s financial health. It’s really that simple. We’re in an inflationary cycle with extreme pent-up demand. This is resulting in prices being paid for large illiquid assets such as real estate, which by historical standards, are beyond exorbitant. While this demand remains at unprecedented levels, builders are busy trying to push out inventory as fast as possible, thus increasing supply. Eventually this supply will overwhelm demand and when it does, prices will fall. Whether you are wanting to purchase a car, a house, build an addition or remodel a kitchen, patience will prevail and soon the eventual glut of houses, autos, contract workers and remodelers will far surpass those looking to purchase. Prices will fall and bargains will be found.

Asset allocation and diversification – Many will ask then why I continue to favor stocks if I feel asset prices are elevated. My primary answer will come back to the liquidity of these instruments. You see, at any moment, I can sell an investment as there is a market or buyers on the other side. Yes, the price may be lower than where I would like, but the liquidity is there and at any moment cash can be raised. This is why I will always favor stocks and why I believe diversification in asset classes such as emerging markets, international, gold, etc. is critical. In addition, I feel allocation or weighting of stocks is of critical importance as well. If you haven’t yet, please watch the video we recently did on Risk, which discuss this in more detail HERE.

In summary, the inflation freight train has arrived and in the near-term prices for all goods and services are going higher. This urgency, however, will expedite the rate at which technology is adopted and supply chains are fixed, which will ultimately result in a glut of inventory big and small on the market leading to significant price erosion with ample opportunities to purchase whatever it is you want at reasonable prices and beyond. Remain patient, remain disciplined, avoid large purchases, and pay down debt. I can’t imagine that in the next few years you won’t look back and smile at those decisions.