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Investing

More Thoughts On Inflation

I read an article from The Guardian which reported high levels of people retiring early in their 50’s, based on stats from the ONS (the UK equivalent to Stats NZ).

I can definitely see why this would be a thing. I’m age 40 and ready to retire once I’ve managed to exit my largest private holding (so I can put the money into something that can give me a reliable income).

We’ve all enjoyed over a decade of bull markets throughout the developed world and people must be flush with cash and/or assets which can be deployed into an early retirement.

Interestingly, NZ’s low unemployment figures suggest that this phenomenon isn’t happening over here. Nevertheless, anecdotal evidence suggests that this is also happening in other countries, such as America.

This has got me thinking about inflation risk. Yes, sorry, I’m taking about inflation again, but you were warned in the title of this article and it’s the most significant financial thing happening at the moment which needs to be considered, planned for, and therefore predicted… hostilities with large trading partner countries coming a close second (a brief note on this at the bottom of this article).

Anyway, I have two thoughts on this at the moment.

Firstly I think that with a mass exodus of the employment pool, there will likely be high inflation resulting from inefficiencies (including restricted growth) due to lack of staff, leading to supply and logistics issues. We all know what that means. This will put pressure on GDP, which will make these countries poorer by this measure.

Secondly, due to affluent newly retirees with all that extra time to spend their permanent holiday money, this could put additional demand on economies.

In other words, I foresee additional pressure on both sides of the supply and demand diagram, which leads to higher prices and less supply. To rephrase that into non school of economics speak, on average people will have less money because things will cost more and people will have less things over time because less stuff is being made. In other words, we could be looking at really big inflation over a number of years.

This change of GDP profile also adds to my theory that the trading / industrial profile of such countries will change. For example, those countries whose GDP is mostly made up of financial products might change to be mostly made up of manufacturing products. Such a change would be very disruptive to employees being made redundant, retraining and taking lower wages as novices in their new fields in lower earning companies with less money to pay people. Foreign consultants with newly required skill sets could become the flavour of the day… though this will take along time to play out.

Finally, it’s worth a quick note to say that I will be reducing my exposure to business that rely on trade with countries that could potentially become hostile and are not politically well aligned.

I feel like the coming years will be very difficult to pick long term investments in, due to the volatility, with lots of opportunities for mistakes. I suspect agile investors could be in a position to make a lot of money. This does not bode well for my aim to have minimal effort managing my portfolio and tax.

Categories
Investing

A Review Of Current Risks Part 3

In my last review of current risks, I identified a number of risks and hypothesized that inflation would tick along until attitudes towards COVID change. I think that attitudes to COVID are changing, albeit at different rates around the world, which infers that workforce efficiency could improve.

Although notably, China is maintaining it’s Zero Covid policy, which means that workforce efficiency will remain low for trades relating to China.

Addendum

Another contributing factor to this will be higher global OCR rates that will increase people’s dependence on their employment. Coupled with the fact that rates have been increased at such a fast rate that it’ll be difficult to see the effect of the volume of change, it’s entirely possible that the rate changes alone will push the world into recession early-mid 2023. All these factors will likely kill off the high demand for labour and quash wage inflation.

We also have Putin who will likely be becoming more desperate as despots who lose wars usually lose their power (excuse the pun). I feel that he will be unlikely to use nuclear weapons because everyone fairly unanimously views using nukes as bad for people who choose to live on Earth. While this won’t deter Putin personally, even his allies would struggle to defend his actions, which would give NATO the freedom to turn the full power of their technologically superior arsenal directly on Russia to set them back to the stone age and remove any possibility of future threat.

In summary, I predict that 2023 is lining up for:

  • Recession.
  • Wage deflation.
  • Continued high inflation for energy due to a continued stalemate between Russia and civilized society.
  • Medium-to-low* Medium-to-high inflation for necessary goods that depend on energy / logistics (food), though these will feel expensive because of the wage deflation.
  • Low* Medium inflation for luxury goods due to increased costs because of energy/logistics, but tempered by the lack of demand from the recession.
  • There are many countries with unconventional economic policies from unconventional leaders, such as England, Turkey, etc. Who have lead their country into a dire economic situation. I don’t know how this will affect the balance of global trade when it settles, but there could be some industries that are no longer viable in particular countries and other industries that are new to those countries due to currency values changing – this will lead to inefficiency, paucity and lower wages.
  • Property will likely continue to fall as recession hits demand, OCR reduces affordability and population growth remains lackluster.

* Revisions made due to the above addendum relating to China’s Covid issues.

It’s hard to know where best to put the money to preserve it in line with inflation, never mind investing for growth. That said, my personal financial strategy remains to cover my risk of exposure to debt by reducing liquid holdings and claw back what I can of my illiquid holdings.