Page 96 - June 2021

FINANCIAL PLANNING
INFLATION, SPECULATION, AND ANIMATION
by Cade Peterson, Financial Planning Associate
Are you shocked to hear that the U.S. govern- ment has spent more than $6 trillion on coronavirus relief? If we adjust for inflation,
the spending during the pandemic was higher than the amount spent on World War II. The government spending is at an all-time high and at some point, that money is going to have to be paid back. If you haven’t experienced inflation already, I anticipate that you will in the near future. Aside from inflation, you may have heard of the cryptocurrency trend and do-it-yourself investors thinking they can outsmart the market. In the following article, I will shed some light on inflation, speculation in the markets, and other euphoria that may be important to note.
CURRENT STATUS WITH INFLATION
Where do we stand with inflation after
the record spending by the Fed? With all the money being printed, equity markets have performed well. The stimulus checks gave individuals the opportunity to spend more money and stimulate the economy. After the most recent stimulus package was pumped into the economy, the buzzword has been inflation. We can’t continue to borrow trillions of dollars without a tradeoff. Some sectors have already been hit with inflation. For example, let’s look at a recent study done on the prices of lumber. The prices of softwood lumber are 112%
higher than they were in the first quarter of 2020. The housing market has been booming with such low interest rates. This has caused
a drastic increase in prices for most building materials. To give you a more simplistic example of inflation, we can look at gas prices. So far in 2021, we have seen gas prices rise roughly 31%. According to the United States Department
of Agriculture, the prices of beef and veal have increased by 9.6%. We should expect higher prices across the board. Hopefully that spills over into the yearling sales. Luckily, there is
a way to keep our money increasing in value rather than decreasing. Proper investing has been a great tool to offset inflation. Interest offered on cash sitting in the bank can’t compete with inflation, especially in 2021. Reach out
to your financial advisor to consider investing strategies to hedge against inflation.
CRYPTOCURRENCIES
For those who don’t know, cryptocurrency
is a digital currency that in theory, can be used
to buy goods and services through a secure
online platform. However, you cannot physically touch this type of currency. In recent months, cryptocurrencies have been an interesting talking point. Many people are wondering if digital currencies are legit or if they are another get-rich- quick fad. With that being said, I’m going to take you back to 1637. If you haven’t heard of the tulip bulb bubble, I’d encourage you to do some light reading on the topic. In short summary, tulip bulbs became an item of great value to the Dutch people as a sign of wealth and prestige in the early 1630s. In some cases, a tulip bulb could be sold for six times the average person’s yearly wage.
This was clearly an asset bubble now that we have hindsight, but at the time, people felt investing in tulip bulbs was both wise and safe. Something a bit more recent was the dot-com bubble. This era brought about a new frenzy called “day-trading.” There were a large number of internet startup companies that went public. These companies claimed they were going to “change the world.” People lost all concern for rational valuations and began investing in these companies, which had zero earnings. These start-up companies became extremely overvalued. Both the tulip mania, and the dot-com bubble ended the same way, a gut- wrenching pitfall with complete losses in many cases and a humbling lesson learned. Now as of 2021, there are over 4,000 cryptocurrencies that are, in my opinion, based entirely on speculation. Two of the main cryptos that are shining under the light of the media are Bitcoin and Dogecoin. Dogecoin started out as a joke on social media with a dog’s face on the coin. Now it has a larger market value than Chipotle Mexican Grill and eBay at close to $70 billion today. Dogecoin
has zero earnings and is flirting with a 7,000% gain in 2021. Does that sound at all speculative? Charlie Munger and Warren Buffett called these cryptocurrencies, “disgusting and contrary to the interests of civilization.” Old school investors and businessmen like Charlie and Warren have seen this type of speculation time and time again. You’d think younger, inexperienced investors might listen to what they have to say.
DO-IT-YOURSELF INVESTORS
With the new digital currency craze, we are beginning to see an increased number of people who think they can support their basic living
needs through investing. The term I use is do-it- yourself investors. Within the financial industry, I have heard several interesting stories about people investing in digital currencies and penny stocks in order to provide for their family. Investing in these types of stocks is extremely risky. The stories I have heard are the occasional home run and the more common swing and miss. I consider investing to be instrumental to becoming financially independent, however, that all depends on how you’re invested. By investing in penny stocks and cryptocurrencies with zero earnings and wild price swings, you are playing with fire. If you hit a home run with one of these risky investments, I will say congratulations. I hope you realize the gains before it is too late.
In summary, I will remind you to keep inflation on your radar. There are ways to hedge against it if you choose to look in the right places. Keeping money in the bank feels much more
safe and secure, but keep in mind your money
is losing value every day. The rates on a savings account aren’t capable of competing with inflation. Growing up in a small town, my dad has always told me to do the opposite of what the crowd does. The digital currency trend may be exciting, but
I will caution you, history has a way of repeating itself. The tulip mania and dot-com bubble started very similar to what we’re seeing right now. It might be wise to take a step back and look at the big picture rather than follow the crowd.
Cade Peterson
94 SPEEDHORSE June 2021