Inflation Is Good For the Economy

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What I wanted to talk about is that we are here at records we are at highs on the S&P and the DOW, but still one of the things that dominates my conversations has been what can go wrong and I I've talked about this before on this podcast and it does seem to me that there isn't a willingness for people to center their thoughts on fear than there is on optimism and so I've really put a lot of thought into this and I'm wondering kind of why that is why do we tend to go to what will go wrong versus what will go right not just with money but I think just in life and in terms and so specifically when I get down to the money part of it I've been thinking about this.

I really think that a lot of the fear-based information that we get on or what could go wrong with these markets that is what cells in the news so if you wanted in know people been on CNBC and talked to those but if you want to get on CNBC you do need to say something that will get attention I think the market is going to crash by 30% that's going to get attention well why get attention is you know I believe that we should continue to invest expect to get a 7 to 8% return reinvest your dividends that's not going to work that's boring people don't want to let tune into that and so but that's the positive so I do think that a lot of the negative press is what 10 we tend to glom to what we tend to hear more of what it gets clicked on more on the Internet.

So what we're seeing clicked on the Internet talked about the most right now is inflation so inflation is simply the cost of goods going up and I have done some talk some podcast on this and one of the things that you've heard me say on the podcast is I really wish we could re-frame the whole conversation around inflation because what I said then and still will say today notest.

I'm using the word modest inflation is good inflation and I think we've been trained from financial classes from economic classes to think that inflation is bad and it's just not true let's break it down to the beginning all inflation is remember going back to high school supply and demand when there is more demand than supply it's going to create inflation so if there are more people wanting to buy widgets than there are widgets for sale the price of widgets will go up we're seeing that with real estate right now there are more people wanting to buy a home than there are homes available so you see prices in real estate go up inflation does not equal bubble inflation does not equal mania it can and it’s flat is usually the first part of it but just because you have inflation doesn't mean there's a bubble and just because you have inflation doesn't mean that there's mania so housing prices are going up it's another housing bubble no that's just where we happen to be in this part of the economic cycle.

So what I'm going to talk about more is why we're seeing the inflation and how does it affect people So what kind of got me started on this is I did have a client that called that he pays attention to a lot of this to a lot of the news and what you're seeing a lot of in the news or people Hawking gold and you going to buy gold you going to buy gold going to buy gold and he wanted to take it all of his money out of stocks and buy gold and I want to argue with him I told him my opinion but I'm not going to argue it and so he said that's what he wanted to do and because commodity prices are up so kind of looking just where we are today like lumber the price of lumber as you've heard is up a lot it's 104% so it's doubled the price of lumber and by the way it's down from the ties by 40% so it's gone up a lot natural gas is doubled but 98% crude oil from the lows from the lows from royal this year is up 81% all of the farming or the agriculture related commodities or up corn coffee soybeans that's all up around 50 to 65% cotton sugar and wheat 35 to 45 ish then in the metals copper which by the way goes in a lot of infrastructure is up 63% silver is a 45% you'd think go it would be up a lot too don't you it's not it's a point 1% it's just not there's hasn't been a lot of demand for gold and so we are seeing a little bit of inflation you should be seeing it when you go to the gas pump you should be seeing it when you go to the grocery store so we're seeing more of it because there are more people chasing less supplies in the market.

Well let's talk about why that is I think there was a really good explanation as to why that is so we're coming out of this pandemic so when we're in this pandemic it was much less so here in Houston than it was in other cities people I'm going to speak in a hole or locked down there was not a lot of spending unless it was on Amazon he had to deliver so there were certain areas that did well so if there's not a lot of spending there's not going to be any inflation there is no demand there so there is no inflation what the government was doing was giving us money giving us money giving us money in the form of this stimulus checks things of that nature and so we saw more money in bank accounts on average than we've ever seen before in our history so you had all this money coming in the unemployment rate reached a peak I just it was just under 15% I think 14.8 is kind of what we've been seeing and that was in May of this year so then we get to the end.

I'm not ready to call at the end of Covid but you know what I'm saying we're in the latter innings of this game and all of a sudden people say I going to get out of house I'm getting out of here I'm going to spend money just like we've been saying they were going to do and Lord have mercy have they been spending money it has been incredible how much that people are going out in their spending so we're seeing corporate earnings go up and go up and go up guys business is good.

I talked to a lot of small business owners I'm sure some of y'all are small business owners I haven't come across too many that are telling me you know Brad is really stinks right now it is really tough out there Nope there are issues and there are problems there are always issues and problems but overall business is really good people are buying products and here's what we're running into the problem we haven't had anybody working remember that unemployment rate I just talked to it almost 15% factories shut down places shut down the truck drivers are shut down to deliver the products and so there was no product for people to buy so when you had all of this demand hit the market boom you had this instant inflation so the term that I'm going to introduce you to that's kind of getting popular over the last several months is the term transitory inflation so you're you've probably heard that and there's more and more people using that term now transitory inflation is simply where we happen to be now but not permanent so the inflation is not going to be permanent it's just a part of what's happening right now as more people are going out and spending money as more factories come online as trucking increases as more people get into the economy I think what you're going to see is these inflation prices coming down we're already seeing it with lumber.

I mentioned lumber happened to be up 104% over the course of a year but remember that's half of 40% off its highs so we have a lot of demand still out there but the supply is increasing so that will help with the inflation aspect of the trade so we've got all that so why what's also pushing some of this demand one of the things that I think people tend to forget about is the term is demographics and demographics is just studying different age groups and I want to take you back and talk about the millennials or Generation Y so right now these are the people they were born and that's kind of hard to really pinpoint it but let's say the early 80s to the mid 90s people in their 30s are the millennials right now the they are the largest portion of the US workforce it's been the baby boomers forever but baby boomers have been retiring and so the largest portion of US workforce right now is this Generation Y or the millennials and they do have some common traits and we can look at a lot of these common traits one of the things that we've noticed with the millennials is that they are getting married later and as a result having less children so if they're getting married so people will say millennials are having less children I don't think we can say that yet because their childbearing years they're in the middle of it right now so we may find out that they're just putting off having children until a little bit later than life they're also wanting to buy homes I think that is one of the biggest drivers of the real estate asset prices we have seen is more and more millennials are buying homes than ever before.

Remember the old complain about the millennials so they're coming back to mom and dad well they did and they were living at home they're moving out in their buying homes and so we're seeing the home prices continue to rise I don't think they can continue to rise at this percentage rate because in the straight line that would then we'd be in a bubble but we're not I don't think that will happen I think it will subside a little bit but as long as the millennials we will continue to buy homes it should be a pretty strong underpinning to the real estate market a lot of who they're buying from or the baby boomers who are selling and they're moving into different living arrangements than a single family home.

My buddy Iggy Grillo go I've mentioned before you know he builds apartments for those who are 55 and over and the demand is still extremely strong for that cohort of people moving into that so they had a home and they're selling it to I'm guessing millennials we've got several that have moved in up the street it's kind of neat when you see new folks moving in and there they've got little ones so you have to drive a little bit slower but it's fun to see the little ones out playing in the street and we're seeing a lot more of that in my neighborhood which I think is just further sign of the millennial growth other things that we need to consider with the millennials that 40% of the millennials have at least a bachelor’s degree that's pretty short and airy think about if they're the largest cohort in the US and 40% of them have a college degree that's a lot of college degrees that's a lot of different jobs have you ever heard people talking about.

Oh well now we have too many educated people we don't have enough ditch diggers well it's kind of true and This is why because we have so many kids that now have an education so 40% have a bachelor’s degree what comes along with 40% of people having a bachelor’s degree more student debt than we've ever seen on the books before have you been hearing that talked about in the news lately yes they're focusing on well we going to do some about the student debt problem because we have more educated people entering the workforce than ever before so you've got all these people in remove the workforce that means they're having job.

Another neat quote I came across it is projected that approximately 82% of millennials who are working contribute to a retirement plan or 401K that's an extraordinary number that is so much higher than the baby boom generation ever did partly because they were in more of a pension environment then my generation did it was the next generation behind them and so the baby boomers are really good it seems at contributing to retirement plans they should be everyone I could always say should be contributing more but that's what they're doing and the other thing that you'll see millennials on is social media they're driving folks they're the ones who are driving that train and so think about if there's that many people who are utilizing social media it sure makes sense in my opinion to at least pay attention to social media stocks because the business is there in the business is good and we're only seeing more and more and more we could talk about the downside of social media all we want there are believe me it seems like the every time we start talking about social media someone wants to go to the my child did this and my child saw this and here's the bad side OK I know there's a bad side but I'm trying to look at there's a if there's a bad side there's a good side too and I think with social media there is more good than bad we just tend to focus on the bad so you've got all these millennials also coming into the workforce.

Let's talk about the workforce for a minute, the only inflation that really I think can be detrimental to a business is wage inflation wage inflation is the only one and there is a lot of wage inflation going on out there let me give you a few examples I recently was talking to a mechanic and we were talking about his business and he operates three bays, in other words where you can pull a car in and they could work on it and where the margins are in his business are going to be on the more as you would imagine the more intensive mechanical work in an engine so margins aren't very good with an oil change you do that pretty much for free you know or lose a little bit of money for an oil change however there is a large number of people that come in for an oil change so we're looking at saying OK let's do if you do 5 days as opposed to your three two of them will be dedicated to oil changes to get a mechanic who just does oil changes maybe swaps out the filter you can pay that mechanic about $20 an hour for a high end mechanic today it's going to cost you over $60 an hour for a mechanic to work on a car if you're a auto mechanic shop a year ago you could have paid him 35 bucks and found a really highly qualified mechanic that's not today it's over $60 an hour to get a high end mechanic to come and work on your vehicle so there's wage inflation.

The good thing is there is business to be had still even by paying a mechanic at $60 an hour the last time that I spoke with this business he had I think it was 32 cars in the what he called the Q in other words 32 cars waiting to come into the Bay to be worked on that he can't get to 32 that's a lot so there is business there it's just people were having trouble getting to the business I think there's business everywhere that we're having trouble getting two hits the inflation again they can't get enough people to come work for him yet that want to go to work in the factory to make the widgets to then work in the trucking to get the widgets to the stores and then sell the wages to the consumer therefore the price of the widgets have to go up we're seeing that in in wage inflation kind of across the board.

I sat down with a friend her name is Tiffany Wallace and she owns Dagon personnel here in Houston and we happened just meet at a wedding and we met before we knew each other but they had a city it was one of those weddings where you sit down after the actual service and you have a sit down meal and they had a same table mean much to Laura my wife chagrin that opened me up to talk about business the entire time which I'm prone to do it's not it's defective character but I like to talk about business and so I sat down and talked with Tiffany Wallace about business so she runs to this employment agency and she was telling me that for the first time in her career it she is seeing something very different in normal times she will have several employees that she's trying to place in various different positions or with various different employers for the first time that she can remember she has more employers calling her than she has employees that are willing to work supply and demand what do you think is going to happen as a result of that particular scenario you're going to have more people who are going to say you know what I need higher wages wage inflation so as long as there are less people entering the workforce so today the unemployment rate happens to be sitting at where are we today 5.8% so in in case you don't historically keep up with unemployment numbers that's a little bit historically speaking I think 6 or 7% unemployment is good it's a good solid little number if you get below that then you can see some wage inflation if you get above that then you'll see more people that or unemployed and it is bad for the economy.

Early 2020 when this was all getting started remember we were at 4% Unemployment so this would have been may or I guess February of last year we were at 4% which is one of the hottest employment markets we have ever had since after World War Two and in that that was a different environment remember because a lot of the young men went off to war the economy still need to get going so the different factories switched over to making musicians like Fords and all that making you know and a lot of women then came to work and it changed the dynamics of US workforce however so that's why we had a small employment number I mean a small unemployment number then so it was then 3.6 at its lowest in June of last year 3.6% S that is incredible we've seen in this summer of 2000 it was at 4% and in March of 07 it was at 4% it got as high as almost 15% in May so 15% to 5.8 and where we are today that is a huge leap that is a lot of people with jobs and there's still a lot of people out there that need positions to be filled I happen to be one of them that's one of the reasons why I've been talking with Tiffany Wallace so much as I happen to we're looking for two to three people who were going to come into redfish Capital Management and different based types of positions but it's tough to find people and what I used to be able to say well I think I would pay somebody this or going no, you're going to have to pay a little bit more than that so it's like OK but that's the environment that we're in so you're going to have to pay a little bit more and the employees can be choosy are on finding a job that says you know what I want this kind of a benefit I want.

That kind of a benefit on top of that in today's news there was a bipartisan committee that sat down with president Biden to hammer out the details of a infrastructure bill I've been talking about an infrastructure bill forever the Obama administrator installation could not get it done the trump administration could not get it done it looks like this administration is going to get something done on infrastructure bill is only going to add to the employment numbers that's going to be a lot of jobs that we're talking bridge building Rd building part of it is also the expansion of the Internet for lam our pipes I think one of the other aspects of this infrastructure bill are going to be taking all water pipes that are lead based out of the ground and replacing them so there in other words there's going to be a tremendous amount of business out there.

So I think there's going to be a lot of employment still and some wage inflation which brings me back to the markets if we have more people working and employed than what we're used to seeing in our history that means you have more people working employees that are putting money in their pockets that means they're spending more than what we're used to seeing that means the company's earnings that trade on a public market are typically going to be growing what do you have with growing earnings in a stock you tend to have a stock that goes up so while everyone wants to focus on the inflation oh this is terrible I'm just not I'm looking at what's causing the inflation and I'm still saying that inflation is good I'm not saying it out of control inflation but inflation as a whole is actually a good thing it is a sign of a healthy economy it's a sign of a economy that is growing and I think that's what we're seeing so I wanted to come on today and just talk to you a little bit about you know what I've been hearing out there and and talk about why inflation doesn't scare me right now.

In fact at all can the market still correct absolutely I still not going to be shocked to wake up and see to 10 to 15% correction in the market I'm not shocked or I'd love to see 5% but it didn't shock me at all it's supposed to happen every now and then it happened in awhile so I'd love to see something like that so that we can continue to March upward which is what tends to happen after a little bit of a washout it's a good thing it's cleaning out the base system that's all the correction does so I'd love to see that happen.

I think we will continue to see some inflation there are some oil traders that I talked to who are betting on $90 by the end of the year there were a couple that were bidding on $100 by the end of the year$90 by the end of the year there were a couple that were bidding on $100 by the end of the year one of the other.

One of the other fears that people talked about move not too long ago when the price of oil got down to 30 and people in Houston panicked just it's the green energy's fault and it's this bodies fall and I'm just nervous that we're not going to have a job anymore and I was like oh stop it stop it it's cyclical it's cyclical in here we are back again i don't know where those people went they were all crying and worried but it was wasted fear and wasted worry is here we are back at 7330 over the long term i do believe in green energy that will continue to take a cut however I'm not real concerned about it today one of the other questions I wanted to get to real quick and I'll just hit this one quickly as a lot of people have been talking about Bitcoin.

Bitcoin is obviously falling off quite a bit here recently a lot of people follow the various doge coins and bitcoins and things of that nature Bitcoin as a whole is up maybe 12% year today but if you go back one year it's up 240 so it's just it's it's up huge and so people have been talking about Bitcoin mining and so people have emailed me some questions perhaps what do they mean by mining I didn't I didn't think Bitcoin I thought it was all in the cloud it is but they used the word mining just to make it simplistic to think OK we're actually going to go and build another Bitcoin and normally when you find gold you have to big it might it that's not the case here even though they do call it mining Bitcoin mining is the creation of another Bitcoin now the problem with creating a different Bitcoin or additional coins that go into it is the technology or the computer processing power needed to create one of these coins is about the size of the Houston energy grid it's it is massive and so that's why you're hearing people say we don't want to have Bitcoin mining in our area because it is such a massive draw on the energy spectrum in in it and truly it is because for the amount of computing power I think the average size of a mining operation there is lined up wall to wall computers around the length of three football fields so this is a massive amount of computer processing that is going on and the amount of energy that it takes to mine a single Bitcoin is mind boggling so when people are talking about it being environment unfriendly to the environment that's what they're referring to.

Is just the amount of energy that it does take go back to your supply and demand if it takes a whole lot to create a single Bitcoin it takes a whole lot of money that means the supply stays Watt low when the supply stays low and the demand is high what happens to prices or they go up 240% of the course of one year so I've gone to my I try to keep this 2020 or 30 minutes and I'm about 7 seconds away from my 30 minute limit but I did want to come on today and just chat with you guys a little bit about what I'm seeing and with riot it rounding everything up just to say I'm still optimistic.

I'm very optimistic about the economy I'm very optimistic about people in their money right now I'm not fearful I don't see a lot of negative things in the economy in people’s lives to be negative about to be fearful about I'm strictly talking about money I think it's there and I think it's going to be flowing for a while we have a very low unemployment rate I think it's going to go lower they'll be some good inflation ahead of us that's why I'm going to continue to stress that we just continue to plan continue to put money into your retirement plans continue to slug it away it's been great talking with all of you I look forward to speaking to you individually as well.