To Beat Inflation, Buy Now!
-- Another Money Magic Secret
My wife and I just bought next years’ supply of Tylenol, paper towels, ink cartridges, printer paper, TP, sugar, Annie’s pasta (yes, it’s for kids, but we like it) , water filters, and we’re just getting going.
Are we hoarding, worried the sociopath running Russia will nuke our home town, Providence?
Not really. We’re too close to the center. (I will miss writing this newsletter. But heaven’s heaven, so surely they’ll let me do at least some ghostwriting.)
We’re buying now to beat inflation.
Well, think about Cottenelle TP. I’m talking the good stuff — the packages labeled “ultra clean with active cleaning ripples.” We’ve been using Ultra for years. Never once had a visitor or family member complain.
Unfortunately, like everything else, TP prices are rising. Today, you can buy a role of Ultra for $1.09 (in a 32 mega-roll bundle). Next year it will cost 8 percent more — $1.18 a roll, assuming Ultra’s price moves with other prices and inflation continues at its current 8 percent annual pace.
We’re good for two rolls a week, so we bought 100 rolls as an investment.
Like other homes built in 1720 (no kidding), ours is small. But we found the room.
Investment? What do you mean investment? You’ve locked up $109 in TP when you could have invested the money for the year and earned interest.
You’re right. We could have invested our $109 in 1-year T Bills. These are Treasury bonds (called bills because they are short-term). These securities are currently paying a massive, wait for it, 1.67 percent in annual interest.
Had we followed your advice, we’d have $109 x 1.0167 in a year or $111. At next year’s projected $1.18 a roll, our investment would have yielded 94 rolls. That’s the number we’d be able to buy in a year with the $111.
If we buy 100 Ultras now and hold them for the year, we’ll have 100 Ultras. If we follow your advice, we’ll end up with 94 rolls. So, the investment you’re advising has a real (after-inflation) return of negative 6 percent.
So, sorry. Your guidance would cost us 6 gorgeous rolls, not to mention their value as short-term artwork. If you stack the Ultras in pyramids, the rippled impression is stunning.
Forgive this pause, but I have to say how much I love the name, Ultra. Imagine naming TP after the British outfit that broke the Nazi code. Every time I use Ultra I feel I’m on a mission.
Negative return? You’re telling me Uncle Sam is, after inflation, charging me to lend him money?
You got it. In fact, if you want to get a guaranteed 1-year real return, buy 1-year inflation-indexed T-bills called TIPS (Treasury Inflation Protected Securities). They are yielding negative, repeat negative, 3.9 percent after inflation. That beats the 6 percent negative real return from buying the nominal 1-year Treasury.
This is, to repeat, predicated on the price of Ultras rising 8 percent. But TP inflation could be 20 percent. In this case, your proposed investment’s real return would be a whopping negative 7.5 percent! This is why people buy TIPS. They don’t want to take the chance of losing more than 3.9 percent for sure.
Actually, I’ve understated the brilliance of our buy now and hold anti-inflation strategy. I’ve left out taxes. Whether you invest in regular T bills or inflation-indexed T bills, you’ll pay taxes on the nominal return (whatever you get paid in actual dollars). Your taxes on the 1.67 percent nominal return are clear. But the taxes on the TIPS investment is uncertain. If inflation turned out to be 100 percent, you’d receive a big dollar payout to protect you against the realized inflation, all of which would be taxed.
Sorry. This is truly stupid. I’d invest the $109 in stocks, earn a fabulous return, cash out at year’s end and buy a lifetime supply of TP.
Ok, Warren Buffet, more power to you. But on a real, risk-adjusted basis, investing in stocks is yielding what you can earn on TIPS, which is the for-sure, aforementioned negative 3.9 percent real return. Again, that’s ignoring taxes.
And don’t tell me stocks are safe in the long run. They aren’t. Read my new book Money Magic to learn why.
To beat inflation and the market, buy now whatever your basement can hold. If you have a 1 year-old granddaughter, buy her a size-2 coat she can wear in a year. If you’ll be in the market for a car in a year, buy it now and park it in the yard. (I doubt car prices, new or old, will rise by less than the overall inflation rate.) Need to replace the roof in a year? Do it now. And that awful sofa that needs replacing? Do it today. Same with the piece of land you’ve been eyeing. Grab it now.
You get the idea.
I get the idea. But would this “buy now to beat inflation” strategy work in all circumstances?
Love your question. No!! It works now because the real return on buying stuff now is ZERO, whereas the real return on the market is NEGATIVE! And it’s a big negative. We haven’t seen short-term real returns this low since 1980!
Given today’s market conditions, buying stuff now and just holding what you buy is a pure arbitrage opportunity. Now, clearly, not everyone is liquid enough to do this, let alone at scale. Nor does everyone have the space. But we can all do some of this and come away thinking we’re done at least a bit to protect ourselves against inflation.
PS, Once you share this newsletter, far and wide (just share larrykotlikoff.substack.com), everyone will, of course, go on a spending spree. That will raise prices, which is one reason I think inflation will be higher than predicted this year. There are others I’ll discuss probably in my next newsletter.
Laurence Kotlikoff is a Boston University Economist, a NY Times Best Selling Author, President of maxifi.com, and Author of Money Magic.
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PPS, Subscribing is cheap and will give you access to all my newsletters right away. Also, the more subscribers, the more I’ll newsletters I’ll be writing. Demand creates its own supply.
What LK is describing in his PPS is a Self-Fulfilling Prophecy, a term invented by Robert K. Merton, the great sociologist and father of the Nobel laureate in economics, Robert C. Merton.