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Welcome to the Stay Wealthy Podcast. I'm your host, Taylor Schulte, and I am excited to be back on the mainland and behind the microphone after an amazing trip to Hawaii with my family. This
This year is my 10-year wedding anniversary. And while on our honeymoon in Kauai 10 years ago, my wife and I always said that if we were fortunate enough to have kids, that we would take them there to celebrate our 10 years. So that's what we did. And while it was a long six-hour battle with my one-year-old on the plane each way, we
We enjoyed every minute of our trip, but it's good to be back. It really is. And before we kick things off today, I just want to publicly thank Jeremy Schneider one more time for stepping in and doing an amazing job taking over the podcast while I was out. If you're on Instagram and you have not checked out his account over there yet, I highly, highly recommend it.
There is a reason that he has created a very engaged tribe of over 400,000 people there. He has such a unique gift of distilling complex finance and investing topics into these easily digestible images that he actually designs himself.
You can find him at Personal Finance Club. And if you're not a regular Instagram user like yours truly, check out his website, personalfinanceclub.com, which has tons of free investing resources and an online forum that you can engage with and ask questions.
Okay, let's get into today's show. I was only away from the mic for six weeks, but a lot happened during that time period. The S&P 500 rebounded over 9% after plummeting 20% to start the year. The Fed announced another 75 basis point interest rate hike. The definition of a recession is, I guess, now up for debate. And of course, the elephant in the room, inflation in June jumped to 9.1%, setting a new 40-year high.
While inflation continues to be the hot topic, today I want to talk about the case for and the risk of deflation. So specifically, I'm going to cover what deflation is, how deflation impacts our economy, and why it's a risk that we should be considering. To grab the links and resources mentioned today, just head over to youstaywealthy.com forward slash 163.
I think it's safe to say that everyone knows what inflation is, but to quickly recap, inflation is the rise in prices for goods and services over a given period of time. This increase in prices in turn causes our purchasing power to decline. For example, during inflationary time periods like right now, it takes more of our money to buy that same gallon of milk.
Moderate inflation is normal and it's expected. Hyperinflation, as discussed here on the show, is catastrophic and unexpected. And while pundits have been screaming about hyperinflation since the 08-09 recession and have doubled down since the COVID crash in 2020, the risk of deflation is probably a more realistic one to understand and consider as a possibility.
Deflation is when prices decrease. It's the opposite of inflation.
During deflationary time periods, our purchasing power is increased. In other words, we can buy that same gallon of milk at a lower price. So why then is deflation a risk? If prices are going down and our purchasing power is going up, why is deflation something to worry about? Well, for one, if prices are going to be lower in the future, you and I might be more inclined to save our money versus spend it.
In addition, during deflationary time periods, wages typically decline and even worse, unemployment spikes. A decrease in consumer spending coupled with smaller paychecks will not so surprisingly weaken the economy. And to top it all off, despite people losing jobs and making less money, consumer debt obligations typically don't change.
In other words, in a deflationary environment, consumers are now trying to make that same mortgage payment or that same auto loan payment with a smaller paycheck or maybe no paycheck at all. Finally, with prices on goods and services dropping, corporate profits can be squeezed during deflationary times, causing stock prices to drop, which in turn, for those of us that invest in the stock market, causes our investment account values to go down.
To recap, because that was kind of a lot during deflationary time periods, we often see five things hinder the economy. Number one, a decrease in consumer spending. Number two, lower wages. Number three, higher unemployment. Number four, debt obligations unchanged. And then finally, number five, corporate profits being squeezed, causing lower stock prices.
When deflation comes up in conversation or makes headlines, we often immediately think of the Great Depression in the 1930s because this was, of course, the most dramatic recession and deflationary environment that we have ever experienced.
Since then, the only other deflationary period here in the U.S. was in 08 and 09, the second worst recession in history, often referred to as the Great Recession. And thankfully, deflation was not as severe as some had predicted during the Great Recession.
Look, my goal today is not to ring the alarm bells and suggest that 08, 09, round two is around the corner. My goal is to simply make sure that we are aware of potential risks, to be informed, to understand what's possible and what it means to us as investors so that we don't get caught off guard and react irrationally and let our emotions lead us to make bad decisions with our money. When everyone is looking left, we might want to look right. Inflation is getting all of the attention right now.
But what if the longer term risk isn't inflation? You might recall episode 152 when I talked briefly about stoic philosophy and I shared a quote from Ryan Holiday that said, the only guarantee ever is that things will go wrong. The only thing we can use to mitigate this is anticipation because the only variable we control completely is ourselves.
So now that we have a basic understanding of deflation and why it can be bad for the economy, let's explore why I'm even talking about this as a potential risk and why it's at least a possibility to consider.
Some of the commonly referenced reasons that you might come across for considering deflation as a possibility include COVID-related shutdowns, monitoring supply chains, improving two quarters of negative GDP growth and the likelihood of fiscal drag on the economy continuing. And then finally, a very recent report showing that U.S. personal savings rates are now below pre-COVID levels. In other words, people are saving less money.
But there might be a bigger reason for considering deflation as a possibility, and that is the housing market. As we all know too well, housing has a major impact on the U.S. economy. When the housing market goes through difficult time periods, so does everything else. And while the housing market is certainly much healthier today than it was in 08-09, we do have a unique scenario where real estate has been skyrocketing to record levels, and now mortgage rates have jumped and joined the party.
We're seeing some early signs of slowing down in the housing market, and maybe you've witnessed them yourselves just walking around, driving around your local neighborhood. But we may not be able to clearly see how this sector is impacted until next year.
If housing prices, rent and interest rates continue to remain high, the likelihood of deflation certainly increases. And of course, much of what happens is also dependent on what the Fed does and if they continue to aggressively fight the inflation narrative and the risk of a recession or if they back off.
Speaking of a recession, historically, recessions have reversed inflationary trends. So if we can ever land on a definition of a recession and we do find ourselves in one officially, the chance of deflation or even disinflation increases.
And disinflation is where I want to wrap all this up. Disinflation is when the rate of inflation slows down. For example, if the rate of inflation goes from 9% to 5%, well, prices are still increasing, but at a slower rate. And many of us are very familiar with disinflation because it's largely what we experienced from 1980 to 2015.
As you might imagine, in today's current environment, disinflation would be positive because a certain degree of inflation is healthy and normal for an economy. And we know now that deflation can do some serious damage. So slowing the rate of inflation, i.e. disinflation, would be much more appealing than the rate of inflation going below zero, i.e. deflation.
The good news is that we don't have to wait very long to get an inflation update. Tomorrow, Wednesday, August 10th, we will be presented with the CPI report for the month of July. And speaking of these monthly reports, someone recently posed a good question, which was, why don't we have access to daily inflation readings? And why do we have to wait an entire month to get this backwards looking information?
My good friend Colin Roche chimed in and shared that there are, in fact, a handful of companies that do sell daily inflation data, but it's very, very expensive. And he also noted that he's not sure how helpful it really is, since a lot of the important prices that impact CPI, like rents, don't change very often. So daily inflation data just might not be all that useful as monthly.
Okay, lastly, two important things before we part ways today. Number one, high prolonged inflation is certainly still possible. I don't want to dismiss that. My goal today was simply to bring a different topic to the surface for us to intellectually explore and be aware of as a potential risk. If the war in Ukraine and Taiwan worsens, if supply chain issues continue, etc., high inflation could very well continue.
Number two, oftentimes we feel compelled to do something, to take action, especially when we learn of new potential threats. And for that reason, I was tempted to discuss how to invest during deflationary time periods or how to protect your portfolio. But I just didn't think it would be that constructive. As always, your financial plan, your needs, your goals, those should drive your investment decisions, not the possibility of an event that we have zero control over.
To grab the links and resources for today's episode, just head over to youstaywealthy.com forward slash 163. If you have any questions, comments, or ideas for future episodes, please shoot me an email at podcast at youstaywealthy.com. I'm really excited to be back and I have some great content lined up for you for the rest of the month and beyond.
Thank you, as always, for listening, and I will see you back here next week.
