Dear <<First Name>>,
Staying safe, healthy, and warm throughout a winter that has provided plenty of chilly and frigid days is the task at hand for many of us. Yet the dawn of the year has brought another challenge for all of us. Unlike the seasonal weather, which we know will change, the challenge called inflation is far harder to gauge. Inflation, very stealthily, erodes your wealth and quality of life. This month I discuss it and some ways to try and get it under control for the benefit of your investments and future enjoyment of warm places.
As always, thank you for reading these writings each month and providing your comments, thoughts, and questions, which continue to educate and inform me. I look forward to your continuing thoughts.
Sincerely,
Walid L. Petiri
Chief Strategist
Financial Management Strategies, LLC
1330 Smith Avenue. Suite 7
Baltimore, MD 21209
(p) 410-779-1276
(f) 410-779-1302
A dollar today will not buy the same value of goods or services 10 years from now. This we’ve all come to understand over the last half-century. Prices rise over time as cost increases that vendors/merchants incur get passed on to the end customer.
Inflation is a natural occurrence within a market economy – but realizing that doesn’t make it any easier to handle while prices rise at historic levels.
It does help to assess the severity of inflation and what monetary regulators are doing to attempt to remedy it. Last year, as measured by the increase in consumer prices (the Consumer Price Index, or CPI), inflation was 6.9%, the highest for any calendar year since 1981. It has since topped 7% and remains one of the clearest drags on the economy and on any economic recovery.
To tame inflation, the Federal Reserve (Fed) will accelerate tapering of its bond purchase program to remove the pandemic monetary stimulus it created in 2020. Plus, coming into 2022 we basically expected the Fed to raise interest rates about three times this year, starting in the third quarter/summer.
The Federal Reserve’s recent policy statement (plus Chairman Jerome Powell’s post-meeting press conference) made it clear they look ready to start raising short-term interest rates in March, looking for 2% inflation long-term.
“In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0.0%-0.25%,” the Fed said. “With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate.”
The Fed added that beginning in February it will increase its holdings of Treasury securities at least $20 billion per month and of agency mortgage‑backed securities at least $10 billion per month.
The Fed has its work cut out for it, as this won’t be a six-month, one-year, or likely even a two-year task. The supply of money in the market economy, known in economics as M2, is rampant due to the multiple programs of the Fed combined with the Covid-19 spending of the Federal government. Putting the inflation genie back in the bottle may take several years – if it can be done at all.
Meanwhile, a disciplined investor can mitigate risk and maximize returns by investing in asset classes that outperform the market during inflationary climates. Such assets can include gold and commodities; various real estate investments such as property (which tends to increase in value during inflationary times) and real estate investment trusts (REITs), which are more effective than property for liquidity; and real asset opportunities, both equity and debt, such as logistics, warehouses, data centers, infrastructure, and farmland.
Other options can include bank loans and other related types of private credit with floating rate interest terms and Treasury Inflation-Protected Securities (TIPS). Floating rate loans are very interesting hedges: The loan payments will keep pace the more the Fed raises interest rates, maintaining the “true interest” rate return for you as a lender.
On the other side of the coin, being able to borrow money today – at these historic low rates for a longer term – to purchase appreciating assets is another technique for the skilled investor (though definitely not for the faint of heart).
The Fed’s goal is a reduction in inflation while making a cozy, soft landing for the economy without tipping it into a deep recession. A year from now, we’ll have a much better idea whether it can meet both these goals.
Still, as investors it would be wise to get ahead of the Fed’s train and become strategic in your investments.
Written by Walid L. Petiri
Walid L. Petiri is the owner of Financial Management Strategies, LLC (FMS) a Registered Investment Advisor established in 2000. He has over two decades of financial experience that covers virtually all areas of finance from tax, insurance, stockbroker, personal financial planning, and personal banking to corporate credit, business planning, and consumer lending. In 2017 FMS Institutional Services was launched and he leads the institutional consulting services delivered that include; investment policy preparation, asset allocation, manager search, due diligence and selection, and the design and implementation of diverse and emerging manager programs.
He is a graduate of New Jersey’s Montclair State University with a degree in both business management and finance. Mr. Petiri is a recipient of the Accredited Asset Management Specialist designation from the College of Financial Planning in Denver, Colorado.
Mr. Petiri has frequently been heard on WEAA (88.9 FM) as a financial commentator, who appeared on WMAR-TV 2 regarding the 2008 & 2009 economic downturn. Mr. Petiri has been interviewed and quoted by the Investment News magazine and Bankrate.com, written for the Journal of Personal Finance, The Register, Popular Finance (of China), Minority Enterprise Advocate Magazine, The Wall Street Journal, Aging News Alert, Morningstar.com, USAToday.com, TheStreet.com, Wall Street CheatSheet and publishes a monthly financial advice column called the Foresight.
Walid was featured in SmartCEO Magazine - Baltimore for the 2012 Top Money Managers Wealth Management. A member of Bethel African Methodist Episcopal Church, he is a devoted parent to his son and daughter. Walid serves on the Finance Committee of Associated Black Charities, and he serves on the Board of Directors for the Reginald F. Lewis Museum and Chair of the Investment Committee.