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Inflation’s Individual Impact

When the Federal Reserve acts to manage inflation through interest-rate hikes and by siphoning liquidity out of the US economy, it does so based on an obligation to the collective good.

The reality, though, is that inflationary impacts are highly individual: Chances are that you and your friends are experiencing them slightly differently depending on your circumstances. Someone who bought a home several years ago isn’t feeling it the same way as someone who is in the market now. People who only feed themselves won’t feel it in the same way as those who have large families counting on them. And your friend who lives in New York City and doesn’t own a car won’t feel it the same way that their friend, who moved to the hinterlands during the pandemic, does now that this friend has to commute 80 miles each way to the office a few days a week.

(Image from Yahoo Finance Instagram)

While the things that led to inflation in the first place were experienced pretty much across the board – high demand for goods and services at a time when all were scarce, compounded by liquidity flooding into the economy – the aftermath is more granular, which makes the Fed’s collective, one-size-fits-all approach to curing inflation a bit of a buzzkill for many. Still, it’s necessary for getting our economy back on track.

Markets as public-sentiment indicators

I’ve long held the belief that the markets are the swiftest indicator of public sentiment because of their of-the-moment, in-the-moment swings. And, in my opinion, the granularity of inflationary impacts is the reason behind the erratic swings and high velocity that we see in the markets this week: There’s no zeitgeist, no common sentiment.

As I write this, CNN’s Fear & Greed Index is tipping to ‘Fear’ – but it’s just as important to note that it’s also not too far from ‘Neutral.’

That gets back to my initial point in this post, as well as my previous post: Despite what we hear and read, the sky may not be falling…or maybe we’re just not too worried right now about the sky falling on our own heads. Or maybe we don’t anticipate that our own circumstances will get too much worse. The nut of my post last week was echoed this week in the Seeking Alpha blog’s Wall Street Breakfast post for October 20:

“Outlook: The U.S. is already in a technical recession following two straight quarters of negative real GDP growth (-1.6% in Q1 and -0.6% in Q2). Any decision on a formal recession is left up to NBER's Business Cycle Dating Committee, which has been responsible for setting the dates of peaks and troughs of the U.S. economy since 1978. The funny thing is that the committee generally waits a while after a recession has begun to officially pronounce it, and on occasion, even after it is already over.”

Whatever the case may be, we don’t seem to think that we’re in full-throttle ‘Fear’ mode.

Given the mixed messages, what do we know? Look at things we’ve discussed in past posts: Things normalize (even if there are new normals), people tend to return to old patterns and habits, life goes on.

There are a few things that could throw wrenches in otherwise predictable behaviors – things that include political shakeups abroad and at home or another extreme Covid outbreak, for example. Another thing that bears watching as the economy regains its footing is defaults on loans including, but not limited to, mortgages. This begs the question: Are we on the brink of another 2008-style housing collapse? In my opinion, no, not at all. The basis of the problem then was faulty lending throughout the industry. Now, though, I think the problem lies more with overleveraged individuals, like those who leveraged their homes to buy crypto.

Even still, we’ve been down this road before and we should have a pretty good idea of where it’s going. Eventually, all recessions end.

Learn from the past, but don’t lean too heavily on it

Instead of looking to 2008 for guidance, it may be more useful to look back about four or five decades, to the 1970s and 1980s – the last time we dealt with inflation and interest rates that were comparable to what we’re experiencing today. At that time, a confluence of geopolitical and economic factors led to skyrocketing energy costs, entire industries pulling out of the US and soaring unemployment and underemployment.

What can we learn, if things were so difficult? That yes, it stunk to pay mortgage-interest rates of 10%, 12% or more, but we did it. Maybe we (or our parents or grandparents) didn’t wind up with dream homes, but they made it work, raised their families, even went on vacation from time to time. They saved a bit and invested a bit, too, and created generational wealth that they passed on to their children and grandchildren. This isn’t to say it was ideal: It wasn’t easy and it certainly wasn’t equal across the board for all Americans – but it did seem to offer hope and opportunity, more so than many people are feeling right now.

It was all they knew and it was okay.

Live your life

Maybe that’s the lesson that we need to consider, maybe our parents’ and grandparents’ approaches are the correlative behaviors that we need to emulate now.

What would that look like? Be calm, consider what you need, be proactive, not reactive. Make informed decisions and know what you can afford to risk. Personally and professionally, consider your strengths and build on them, don’t try to be all things to all people. Look at people you admire and figure out what’s made them successful, in whatever sense you consider success. Try to emulate them.

And remember: We can do well during a recession (or, at least, well enough until the tide turns) – the generations that preceded us have shown us that, time and again.

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