The Great Recession Blog
by David Haggith
The economic gurus and magic-chart advisors who told you inflation was going to be transitory or that it wouldn’t amount to much or even the dimmest of all who proclaimed it wasn’t happening at all could not have been proven more foolish and blind to the obvious all around them. Now they are revising themselves faster than I can write about it.
Before talking about what you can do the easy way to protect yourself a little, let’s review the track-record of some of the so-called experts who couldn’t see what they don’t want to see by looking at just one major bank’s predictions for inflation this year and how they have had to revise their prediction skyward month after month.
The great and squidly Goldman Sachs has struggled all year to catch up to where I have been saying for the past year inflation was clearly headed this year, and its latest forecast is still lower than where I believe inflation is headed, but the experts at GS will get there as their trail of errors demonstrates. Just look at how they have revised their forecasts for 2021 from month to month as inflation has become more clearly NOT transitory and more clearly NOT a mere “symmetrical” move above the Fed’s target of 2%: (In fact, GS’s starting position early last spring was well above the Fed’s target.)
Actual inflation ran ahead of their forecasts about as quickly as they could revise them, and it will do so again. To see proof that we are entering the stagflation I said this would turn into, let’s look at how Goldman Sachs has also revised its predictions for economic growth (annualized as what it would be if it held at that quarterly rate for a year):
- Prior to July, GS’s forecast for the second half of 2021 was +9.5% for Q3 and +6.0% for Q4.
- In late July, GS revised its forecast down to +8.5% for Q3 and +5.0% for Q4.
- On August 18, GS revised its forecast down to +5.5% for Q3 but raised its Q4 prediction to +6.5%.
- Last weekend, they revised Q3 down again to +4.5%, and decided their previous upward revision for Q4 was bassackwards and dropped Q4 to +5.0%.
- Finally, this weekend GS cut its GDP growth forecast to +3.25% Q3 and +4.5% Q4.
Plunging week to week by that much, it seems Goldman’s number runners just can’t keep up with the nation’s speedy decline. The Atlanta Fed predicts much worse. Now at a pre-recessionary 1.3%, the Fed’s predictions have plummeted continually as you can see:
Put all of those rapidly deteriorating predictions together (inflation and GDP), and you have stagflation — rising or high inflation in a decelerating economy. In fact, you have rapidly rising inflation in a rapidly decelerating economy. It is, of course, when you get into an actual recession (negative GDP “growth”) that you have true stagflation.
Prediction: What few of the gurus are telling you, which I will, is that we’ll be in a recession by sometime this winter.
In fact, I think Q4 growth will prove to have been negative when we see the numbers in print next year. If not, then very close.
The descent in GDP toward actual recession is happening quickly. The shortages talked about in my recent posts are spreading like a flood tide across a wide, shallow beach. People are not returning back to work in near the numbers some predicted they would (not I) when enhanced unemployment ended for the reasons I laid out months ago. Soaring inflation will now curtail spending and result in more businesses closing and rising unemployment.
This is stagflation — going down the drain hole where you have that dichotomy wherein prices rise even though people buy less (demand is falling) because they cannot afford as much. Prices rise because supply is already falling faster than demand. (Remember the formula for price inflation is too much money chasing too few goods.) What happens in such dire return to rising unemployment during high inflation is often the opposite of what helps. Government leaps in with rescue money so the unemployed can keep buying, in spite of the high prices, which results in everyone bidding up the prices of scarce goods even further. It rapidly becomes a vicious vortex if you try to solve shortage-induced inflation with more money because that doesn’t get to the heart of the problem and create more goods.
The scariest thing this Halloween
As hard as higher prices will make things, the real scare this fall and winter will be the shortages that push prices upward. You can make moves to save money and can prioritize your spending to create room for the expensive essentials, but what if you can’t even get the essentials?
I foresee a winter at some times and places where you’ll feel for the first time in American life like you have slid down the rabbit hole and ended in a version of the USA that looks and feels more upside-down than the old USSR where stores have a lot of empty shelves, and complaining can do nothing to fill them.
I think we can all share some of the foreshadowing that we’ve already seen in our own locales (and it might be interesting if you do in the comments). My latest experience was to walk into a Rite-Aid drugstore to look for some Halloween decorations for the school kids and find the selection unusually thin because the store is having a hard time getting seasonal items shipped to it in time.
But it wasn’t just the seasonal stuff. I also wanted a basic computer cable, and found Rite-Aid’s computer supply section had half an aisle with the shelves removed from their supports and posters all along the support saying the space was empty due to the chain making stock adjustments to serve you better in the future. In other words, stock was out for the present, and they’d try to find some way in the future to secure similar supplies from other sources.
I expect Christmas decorating supplies will be equally lacking this year, as well as availability of gifts. So, shop now for Christmas gifts and consider buying your frozen turkey for Thanksgiving now. There might be enough turkeys, especially at Goldman Sachs, but not enough rides to get them to market so we can eat them.
We can all handle a lack of large seasonal stock. In fact, we can pretty easily handle no decorating supplies at all; but do you really think it is going turn out any different for food and fuel and other essentials?
Easy evasive moves that might afford some protection
You cannot prepare for it all to make yourself bulletproof to stagflation. If fuel runs low, for example, having an extra barrel of gasoline laid away in your garage is risky and won’t get you very far down the road for long anyway, and gasoline doesn’t store well through the winter because it deteriorates. So, you can’t easily prepare for everything, but I’m going to lay out a really simple plan that will help with exactly what you really need and will use that costs you nothing extra over the course of the winter.
Since you cannot do much about the energy shortage, other than make sure to lay away plenty of firewood if you have a wood-burning option, food is your biggest concern. Everyone has heard the preppers’ advice to “store lots of canned and dehydrated goods” that you never really want to eat that will stay good for a decade or longer, but I’m talking about something more practical and with no net cost as a form of insurance.
When you are encouraged to store all kinds of emergency-shelter goods that you can dine on for the next ten years because they last almost forever, you may be like me and think, “What if the shortages don’t materialize, and then I have to eat all this dehydrated crap?” There is a better way that provides a buffer, and here it is:
Each time you go to the store in the weeks ahead, buy 2-4 times more of the things that are on your normal grocery and household-supply list than you need to restock the kitchen and other parts of the house. However, buy extras only of those things that will last through the spring. Put the normal amount of restocked items in your kitchen, bathrooms, etc. as you normally would, and then store the rest away in your garage, basement, or whatever works for you, and leave it alone.
When you run low again in the next week or two and would normally go shopping, don’t go to the basement and use your stash, make another grocery run like you did when you didn’t have the oversupply. Treat the extra supply like a rainy-day fund in the bank that you don’t touch until you actually find that the things you need or want are not available. Each time you restock rooms in your home this fall, buy 2-4 times more than of those things that will preserve through the winter (depending on what your cash flow can manage) so long as they have shelf lives that will take them through the spring.
You’re not planning for the apocalypse or a take-over of the USA by the Chinese. Thinking that catastrophically defeats many people from preparing at all. You’re planning for a hard winter that may likely have shortages, and you simply don’t know what items will run short in the nation. So, you stock up on all of them that will keep Here is the beauty of this simple plan. You are buying only the things you like and that you will be using and normally purchasing anyway. So, if I’m wrong, and there are no shortages at all, you can stop shopping for a couple of months in the spring and slowly use up the stock of items you squirreled away in the fall. No harm done.
You don’t wind up doing any extra work or spending any extra money, and all you have stored away is the things you like and eat or use regularly. In fact, because inflation is a certainty, you will have saved yourself money by purchasing items now. You do it a little at a time so it’s not some huge effort or cash-flow burden and doesn’t strip the shelves bare for others. It’s just a little extra effort each time you go to the store while supplies last. Never dig into your cache, even when prices rise to horrible levels, until you can see the problem with shortages is fading in the rear view mirror or until things are getting a little too close to their shelf life.
It’s a buffer, not a Mad-Max end-of-the-world-living-in-a-bomb-shelter plan.
To prepare financially, I’m avoiding stocks and bonds and moving out of cash somewhat and into commodities and real-estate-investment trusts that are not too heavily into commercial real estate (and I’m going light on the real-estate trusts because the whole real-estate market could tip sideways when all the forbearance programs are finally ended; but for now prices are still rising). I would consider investing our 401Ks in energy and mining stocks, but ours don’t have options that are tilted heavily toward those sectors.
I’m not a financial advisor, and I don’t write an investment blog. This is an economics blog. I can tell you what I’ve done, but those are just ideas for you to weigh on your own. I believe most stocks and bonds are ultra-high-risk right now, and even cash is nothing but a planned loss due to inflation. Bond funds that invest in inflation-protected bonds may provide a safe parking lot, but that is all. Cryptocurrencies could rise by more than enough to help you through this winter, but they can (and often have) just as easily crashed by 50% like the stock market, so don’t use crypto as the resource you can depend on for the winter. It may rise after it crashes, but that won’t help you if supplies are short when crypto comes up short, too. From a retirement standpoint, the crypto currency you’ve invested in may not even exist when you’re ready to retire — so I’d keep crypto a side bet.
There are lots of stocks you might individually pick if you have that acumen, but I am speaking mostly to those who have 401Ks they seek to protect and who have limited options in those plans that only allow them to choose between major types of funds because that is the only plan their employer provides.
This is all for you to weigh, but those are moves I’ve made in our 401Ks where options are limited. (Of course a service like Perpetual Assets, which advertises in my sidebar, can help you convert everything to a self-managed IRA where you have a huge range of options, but I am neither recommending them with this article nor not recommending them, as I have no personal experience with their service. I am just saying there is a path there that one can work out on his or her own or get some help with setting it up right legally to keep the tax man quiet.)
Outside of 401Ks, I’m not someone who invests in stocks at all. Our investment, other than retirement funds, has been real estate. For example, investing in the home you’re going to live in for years by owning it as close to free-and-clear as you can is a good safe-haven investment because it is something you will always need and have to pay for anyway. Though rents could drop in bad times, saving you money, while a payment on a home your buying remains the same, rents have usually been a drain hole and have usually risen, making them generally the riskiest option in the shortterm and always the worst over the longterm. Usually rents rise and mortgage payments, at least, remain stable for decades to come. Secure the home front.
Those are simple low-risk, low-energy things you can do to help yourself weather through this long, cold, energy-short, possibly food-starved (for some) winter that cost you nothing over a period of months but can save you money and hardship.