Everybody’s freaked out about inflation. What if this is the 1970’s!!!!!! Everybody has their eyes glued to the CPI. The CPI is the wrong thing to look at. The CPI is the wool being pulled over your eyes. It is a narrowly defined government number designed to deceive. If you wonder where inflation is simply look at the stock market.
The FED has been expanding their balance sheet basically this whole time. You can see the little downward dribble in Q3 2018, this was when the FED’s QT program begun in 2015 and accelerated in 2017 forced the repo market to become illiquid causing over night lending rates between banks to sky rocket to 10%. Since that time QE has been restored and the market steadily rises. What happens if you divide the S&P by the size of the FED’s balance sheet?
Growth is essentially a flat line dating back to the GFC (actually much longer). In real terms using CPI as the deflator (denominator), the market has seen a 9.7 annual rate of return since June 2008. Happy days are here again!
Yet using the FED balance sheet as the deflator growth is flat aka deflationary since long term growth is 3%. So what is it? Are we growing or are we living in a CPI tainted illusion? It’s very much politically in the government’s favor to paint everything in the CPI illusion. It makes everybody who own assets to feel rich. It also allows the government (and loan holders) to pay their debt in cheaper debased dollars/ But what if you’re not a loan holder? What if you’re some retired guy who Dave Ramsey’d your debt decades ago and live on proceeds from “fixed pile” since you are no longer employed? My grandparents were retired in the 70’s and lived off a largely fixed income bond and CD (non equity) strategy. Because of a fixed income lifestyle the 70’s caused the invention of the early bird special. On Friday or Saturday as a retiree you could have the illusion of going out to eat and still not blow the budget. It was sensible commerce since if there wasn’t an early bird special, those meals served would have been lost. It’s a dilemma. When you are working it’s the work that pays the bills and wealth increases, but in retirement it’s the pile that pays the bills and as can be seen from the above graph REAL real wealth is flat.
If you read Bernstein, the REAL way to retire is to have enough money to cover your expenses for the # of years you expect to live taking into account inflation. It’s not living 30 years on 25 years worth of money inflation adjusted. It’s not living 45 years on 33 years worth of money inflation adjusted. According to the above graph 9.7% market return just keeps your nest egg even given the FED balance sheet deflator. If you intend to pull out 4%/yr you would need 13.7% return to keep your nest egg even. The alternative is to die soon after you retire before the FED can debase your nest egg into fairy dust.
Retiree’s these days no longer live in a fixed income environment but have moved out on the risk curve into the land of FED caused bubbles. It’s like living on an avalanche. Consider the 2020 dip in the SP v FED sheet. Consider 45% of all new debt in history occurred since that 2020 dip.