The fade

In a normal world (remember that?) 70% of the economy is derived from spending on services. But when a virus hits and lockdowns happen, everything can change. And it did.

The last 18 months brought serious nesting, home renos, new hot tubs, boxes of stuff from Amazon and Wayfair, furniture buys, electronics and (especially) laptops, computerized kitchen appliances and puppies. Lots and lots of puppies. The amount we shoveled into restaurants, airlines, child care, haircuts and clothing stores plunged.

Now the pandemic is ending. The supply chain is a mess. Factories that had to close for a while because of Covid can’t keep up with demand. Look at semiconductors. The car guys can’t get enough to make vehicles. Apple just announced iPhone production will drop by ten million units. No chips. No phones.

Demand is shifting back into services and prices are exploding there, too. Lumber and golden retrievers may cost less than last year, but energy is surging. So food will cost more, along with gasoline, natgas and everything made from oil. The implications for your finances, portfolio and retirement are growing more profound. Are you ready?

It continues. Oil is over $80 a barrel and on its way to a hundred bucks, many believe. Gasoline prices have hit all-time highs in much of the country. There’s an acute shortage of natural gas as the global recovery sucks off supplies. Electricity costs are going up, since these fuels (and coal) are used to make it. Energy is one of the biggest components of inflation. It’s bordering on being out of control.

And look at China. The world’s biggest exporter. Second-largest economy. Power shortages there cut factory production in 20 provinces last month. Prices are rising at the fastest clip in 26 years. Bad news for Wal-Mart shoppers. Official inflation in the States is 5.4% and in Canada’s it’s at 4.2% – far above the Bank of Canada’s target rate of 1-3%.

Economists here figure our CB will let inflation run hot since ruining the fortunes of retirees is less of a danger than crippling the post-Covid economic recovery. The Bank of Canada’s cryptic boss, Tiff Macklem, has downplayed the surge, saying this is all ‘transitory.’ This week the head of RBC disagreed. No wonder. At over 4% inflation is the highest in two decades and, in reality, the sting is far worse than that. Look at housing prices. Insurance rates. A litre of gas. Tomatoes.

The central bank’s mandate is being renewed this year and the T2 gang has to decide to up the inflation ceiling or leave it be (at 2%). In other words, should the BoC let inflation rage in order to assure more growth and jobs, or start chilling with rate hikes? If you’re retired and living on fixed income – like a DB pension or GICs – it’s a simple ask. Quell prices and grow interest. But for working and mortgaged Canadians the desire is for exactly the opposite.

The bottom line is simple. Inflation erodes the value of money. Your income buys less. Purchasing power is destroyed. The ‘inflation protection’ baked into pensions, union contracts, CPP or OAS is a joke, based on the official estimates. So far it looks like Tiff will turn a blind eye to this. CB rate hikes are not expected to click in until the second half of next year.

What to do about it?

Crypto and Bitcoin have been on a tear while the supply chain flounders and inflation rages. But these assets are backed by nothing, are prone to fraud, essentially unregulated and immensely volatile. Many believe BTC will ultimately go to nothing and be the world’s biggest financial scam. Put your pennies here in retirement? Fuggedaboutit.

Gold has been a traditional inflation edge, but bullion pays neither interest nor dividends and has performed poorly during the entire pandemic. Oil’s proven to be a far better bet as the world economy rekindles, and a decent way to gain exposure is through an ETF that owns the Toronto stock market – where commodity exposure is high.

Real estate has inflated wildly, but more due to emotion, FOMO and WFH than demand as a hedge against rising costs. The threats are current over-valuations and the certainty of higher mortgage rates in the next few years. Unless there’s a big move up in incomes, there could be a serious correction in house values.

Equities give excellent inflation protection, but also being danger. For example, the FAANG guys are intensely interest-rate sensitive and could be impacted as CBs eventually more to normalize rates. Banks, on the other hand, like hikes in interest. Overall, having a broad diversification, through ETFs that own an entire market (like the S&P500) is a wise move in times like these. Ditto for REITs. Real estate investment trusts offer the intrinsic inflation-protection of that asset class, along with tax-advantaged distributions.

And speaking of tax, these are the days to ensure no room in a TFSA or RRSP goes unfilled. Remember if inflation is 4% and you need 4% growth to fund your needs, then assets must grow by 8%. So shelter them from tax. Income-split with your squeeze. Fund your adult kids’ tax-free accounts. Have a spousal RRSP. Considering investing some home equity with tax-deductible interest.

GICs and HISAs? Nope, Losers. Move some of that loot into preferred shares instead. The rate reset kind, through an ETF. They rise in value as interest rates increase. More stable than common stock. They pay a regular dividend two or three times greater than a GIC. And you get a tax credit. Everything but a hug & a tickle, both of which are apparently now illegal.

About the picture: “I’m a long time reader if your blog. Thanks for continuing to beat the B&D drum,” writes Michael. “Every time I get the itch to day trade or pour all of my money into bitcoin, your latest post appears and reminds me to stay the sensible course. I’ve attached a picture of Hutch, my wonderful Great Dane who left us yesterday after 9.5 years. This photo is from years ago. When we took him for what would be his last trip to the vet, he was clumsy, drooly and gassy – and I miss him terribly. The house just isn’t the same without him. I would be honoured to have his picture appear on your blog. “