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We take a look at 10 burns on inflation, adding why it’s so high, whether it’s worse in the United States, and what can be done about it. And Fool analyst Aaron Bush responds to a listener about opting for the new Bitcoin futures ETF instead of the actual Bitcoin.
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This video was recorded on November 15, 2021.
Alison Southwick from Je’s and I joined through Robert Brokamp, a finance expert, here at the Motley Fool. This week, everyone can communicate about inflation and so can we. All that and Bitcoin in this. episode of the week of Motley Fool Answers.
What is the aberrant fixation of all that causes consternation and inflammation in the contemplation of economists?As we consulted the fluctuations in the CPI and the limits of the source chain for causality. It’s inflation, but what does that mean for your allowance and your monetary problems?Will all this lead to devastation? Calm your palpitations because Bro is there with his musings. One take. I have some embarrassing and simple questions about inflation and, fortunately, I have a brother to answer them. Inflation considerations came to a head last week when the Bureau of Labor Statistics announced that the customer value index rose 6. 2% in October. Now, let’s be clear, it’s 6. 2% last year, not 6. 2% in the month, yet it’s still the biggest accumulation in 3 decades. Secondary observation. The older I get, the less than 3 decades sound outrageous. The ’90s weren’t that long ago. Tell me nothing has happened since the 70s and I’ll sit down. But the 90s, I mean, oh, my brother, is Nirvana thought to be old now?
Robert Brokamp: As a helicopter, I hope not.
Southwick: Oh, shit. Anyway, I have questions, I can about you my brother for the answers. Come on, do you want to?
Brokamp: Let’s do it.
Southwick: Here we go. Remember I said some questions would be a bit embarrassing?What is inflation?
Brokamp: [laughs] Well, inflation is essentially the emerging value of the goods and facilities that are presented for sale. Now, since there are a ton of things and facilities you can buy these days, measuring it can be a bit tricky and frankly somewhat questionable. The federal government tries to measure inflation through two number one indicators, which can then be further analyzed if desired. You talked about the Consumer Price Index, which actually comes in various forms, however the maximum number commonly observed is the CPI for urban Americans, known as the CPIU, which covers about 93% of the American population. This is calculated each month after the values of approximately 80,000 pieces have been collected through surveys. Imagine that. Someone’s job there is to call the corporations and find out how much they are charging for things. The other important measure of inflation is the non-public public expenditure value index, also known as the PCE. It’s really not that good in those days. It stands at 4. 4% in the last 12 months. The Federal Reserve’s favorite inflation gauge, the core PCE, which excludes food and energy, has risen to 3. 6% in the following year. Typically, the CPI will be higher than the PCE for several reasons. The first is that the PCE includes more rural spaces and then there are other weights assigned to each of the measures. For example, the CPI has a higher weight towards housing and the PCE has a greater weight towards medical care. But you measure it, the values are definitely going up.
Southwick: We haven’t been afraid of inflation for a while, so why now?
Brokamp: Well, economists will tell you that inflation happens for many reasons, but the main cause is too much money for too little property. If you think back to a year and more ago, when the world economy was partially closed due to pandemic panic, brands are closed, unemployment skyrocketed, toilet paper was in short supply, it would have led to a global depression if governments hadn’t. acted to update paychecks. Uncle Sam alone provided more than $ 3 billion in stimulus. This government intervention boosted bank accounts at a time when other people were stuck at home with much less to spend. Personally, I have gone from filling my car’s gas tank once a week before the pandemic to maybe once every six to eight weeks after closing. Now the economy is opening up and other people are spending like crazy, but factories have yet to catch up. Personal spending in the United States has now reached more than $ 16 trillion, a record. Consider this quote from a recent CNN Money article: “According to a new report, there have been more than two billion cases of product out of stock online in 18 categories tracked in October through Adobe Analytics. This is an accumulation of 33% compared to the same month. a year ago and 325% since October 2019. “When a pile of cash runs after scarce goods, corporations raise their prices.
Southwick: I think today, if you can’t blame seasonal allergies, you can blame the chain of origin. What else can you tell me about the role of seasonal allergies in all of this?I am referring to the chain of origin.
Brokamp: Actually, it’s the origin chain. There are a large number of moving parts, both literally and figuratively, to obtain a product from its conception to its creation, distribution and consumption. But let’s take cars as an example. The typical automobile has 30,000 parts. All of these portions start out as raw fabrics somewhere, then they have to be transported to a factory and made into portions, which are then shipped to assembly plants and made into a car, and then the car has to be transported to a dealership. This procedure reaches tens of thousands of people in various countries. Any break in this source chain has knock-on effects on the procedure. The chain of origin reaches both portions and other people. Reuters recently reported that Toyota, which is the world’s largest car seller, expects to restart production in December at its Japanese factories, which fell due to COVID-19 outbreaks at factories in Vietnam and Malaysia. Then there are all the container ships waiting offshore, turning their propellers because they can’t unload their car, in component due to a lack of dockworkers and truckers. The challenge really is that, despite last year’s physically powerful recovery, the US workforce is still more than 3 million down from the end of 2019. If component-based immigration goes up reduced, you will see why many American corporations are in trouble. to locate workers, which means they have to increase their wages to make them employees, and those higher prices are passed on to consumers in the form of higher prices.
Southwick: What are the main drivers of existing inflation in terms of goods? Is everything more expensive or are there some things that motivate you here?
Brokamp: Certain things are definitely more expensive than others. The main parts of the recent Consumer Price Index are gas, with a 50% increase, car rentals with a 39% increase, used cars and hotels with a 26% increase, beef with 20% and furniture and bedding with 12%. However, not all pieces enjoy such dramatic increases in value. In fact, many parts, such as airline tickets, prescription drugs, and smartphones, are less expensive than a year ago. While the value of food overall increased 5. 3%, many products such as cheese, lettuce and hot dogs experienced declines. Yes, the CPI report has that point of detail. I think it is also vital to note that those increases are fair compared to what they were in value in October 2020. It does not necessarily mean that values are now at all-time highs for all pieces. For example, a gallon of gasoline and a gallon of milk were more expensive in 2008 and the early 2010s than they are today.
Southwick: How far can it go? I have visions of wheelbarrows that cash can’t buy. You think of countries that are invaded by inflation. How bad can this be for us?
Brokamp: Let’s start with the story. In the United States, the worst inflation episode of the last century was that of the nine years 1973-1981, during which inflation averaged 9% consistent with the year and reached more than 13%. There were many reasons for this flow of costly years, however One was the OPEC oil embargo in retaliation for US aid to Israel. While tensions are not as high today, rising oil costs can be attributed in at least one component to geopolitical tensions. OPEC, along with other oil-producing countries such as Russia, is restricting production and resisting pleas from the United States, Japan and India to pump more oil. I don’t think we’re going to see the inflation we saw in the ’70s and actually not the inconsistent hyperflation in Weimar, Germany, where they were actually pushing wheelbarrows of money. I wish things were as bad as they were 50 years ago.
Southwick: How to fight inflation? By us, I mean the Federal Reserve and I guess some other people in the federal government would be left out because of concern about this.
Brokamp: The federal government is taking steps to ease origin chain bottlenecks at ports like ports. The White House has created a supply chain disruption task force, it even has a blog. The Biden administration says many of the provisions of the Build Back Better plan will ease some inflationary stresses caused by the replaced infrastructure. We will see. As for the Fed, when the virus crisis began in the winter of 2020, it took all sorts of drastic measures. They cut the federal laughter rate to almost zero, and bought more than $ 100 billion worth of bonds and mortgage-backed securities each month. This increases the demand for bonds, which puts downward pressure on interest rates. However, starting this month the Fed will begin to cut or cut, as they say, the purchase of bonds. You haven’t yet made a commitment to when you’re going to raise rates directly, however a little laughing site called the CME FedWatch Tool predicts that the maximum peak period will likely be the maximum probably next summer. Higher rates cool the economy, which can lower demand and thus inflation. Significantly, higher rates can put the economy in recession, which happened in 1981 under Fed Chairman Paul Volcker. It worked. They gave the federal government a laugh rate of more than 19%. The 10-year Treasury spending yield was at most 16%. Dragging the country into a recession and reducing inflation, but in charge of the pain of transience.
Southwick: You said that in Japan, they can’t make cars because of portions in Vietnam. It turns out that it’s not just America that’s suffering. Even though as Americans, we only care about our own suffering. [Laughs] Let’s be honest. It seems like a global problem.
Brokamp: That’s because what happened during the pandemic and the origin chain issues that resulted from it happened all over the world. The average inflation rate of the 185 countries followed through tradingeconomics. com is 4. 3%. States is higher than the maximum in other countries, if that hurts you, be grateful that you are in one of the countries experiencing hyperinflation, adding Iran, which has an inflation rate of 39%, Argentina 52%, Lebanon 144% and the winner. is Venezuela, an inflation rate of 1. 946%.
Southwick: Wow, that’s mind-blowing, and we’re going crazy above 6%?
Brokamp: Yes, exactly.
Southwick: Wow, what can you do with your money, your moola, your savings?I don’t know, all that.
Brokamp: All that, all the and caboodle.
Southwick: All the and caboodle.
Brokamp: Inflation is due to corporations charging in line with values. One way to gain an advantage is to own a business, which you can do by buying inventory. As Wharton Business School professor Jeremy Siegel established in his research, adding his old book, one of my favorites, Stocks for the Long Run, inventories provided a subsequent inflation of 6. 5-7% consistent with the year above. of the maximum of the longest holding. consistent with the periods. In fact, this figure has become Siegel’s constant. However, in the short term, inflation can weigh on inventories, especially if it causes interest rates to rise, which then slows down the economy. Let’s go back to that period-consistent 1973-1981 period and see how the various assets performed. Note that during this year-on-year period inflation averaged 9% year-on-year. Let’s take a look at the constant source of income values. Cash gained 8% in line with the year, intermediate past government bonds 6%, long-term past government bonds 3%. All these categories of constant income sources have not been consistent with the formed inflation, thus losing purchasing power and long-term bonds underperforming. Today we have so-called inflation-protected bonds, then they didn’t have them. In fact, these are getting bigger these days. Inflation-protected Treasury securities gained about 9% over the prior year, compared to a slight loss for the bond market as a whole. Then there’s the 7. 12% you can now earn on iBonds, whatever we talked about last week. Now looking through inventories, how did 1973 to 1981 fare? It was really combined. Inflation was 9% consistent with the year, the S&P 500 was 5% consistent with the year. It was actually sub-consistent with inflation formed up to 4% consistent with the year over the consistent with the year. But small cap inventories, 19% consistent with the year, genuine real estate investment trusts, 12% consistent with the year. It is combined. In fact, I think it makes sense for investors to ask whether the corporations they own will be able to transfer their values consistently without cutting their profits. Some other assets you might hear about when inflation rises. Commodities can perform well during inflation peaks, and indeed it has been this year, commodities are up around 60%. But in the long run, the functionality of commodities is particularly less than that of the inventory market and is even much more volatile. Perhaps surprisingly, the asset that other people consider the maximum productive coverage against inflation, that is, the passld, is actually down 10% since August 2020, and is close to the value it was there. ten years.
Southwick: I don’t know if I told everyone I had exactly 10 queries for you, but we’re at number nine here, so we’re on the stretch of the house. This question is, is it so serious? A lot of comments, for example, in the Washington Post articles I read about this, other people are like a big scream, last year I paid six dollars worth $100 worth of groceries. what do I take this to?
Brokamp: Well, I would say that nobody likes to pay higher costs, of course, and it actually depends on what you are buying, your specific basket of products, economically. For example, if you drive a lot, you actually revel in more inflation than someone who works from home. In fact, this can be a challenge for low-income families whose source of income is not sustained. It seems to be the case. Compensation increased 4. 9% in the last year, but that is less than the 6. 2% of the CPI. The big question is whether costs will continue to rise at the current rate or worse, and the answer is, of course, no one can say for sure. But the Federal Reserve believes that the points currently driving costs up are generally temporary. I’m not an economist, however I would say that my existing sentiment on this was summed up in a recent article via Cullen Roche of Disciplined Funds, who writes the Pragmatic Capitalist blog. He explained why he believes that the current point of high inflation would possibly last until mid-2022, but then drop again. Essentially, he argues that the same forces that kept inflation in check before the pandemic will virtually remain in effect. Four things, he says, will keep inflation low in the long run. Number 1 is demographics. When you have an aging population and a declining population that puts downward pressure on aggregate demand, technological inventions are inherently deflationary. There is inequality in our economy and less cash in the hands of those who have a greater propensity to consume means a decrease in demand. Then there is globalization, and this puts downward pressure on domestic wages and costs. Hopefully, in a year or so, we may not be as engrossed in this inflation consideration.
Southwick: My tenth and final query is: What is the query that a smart user would have asked you and that I didn’t do?
Brokamp: Well, to be clear, very smart.
Southwick: I have my moments.
Brokamp: Well that question may simply be, how is inflation affecting my finances? One answer is that Uncle Sam uses inflation figures for all similar limits, payments, and tax figures. For example, many figures similar to social security are adjusted each year for inflation. Beneficiaries get a life adjustment fee each one year and through 2022 the checks will be 5. 9% higher, the largest upward adjustment in 40 years. As for other people still active, the amount of item from source of income to social security contributions is adjusted each year. By 2022, that number increases to $ 147,000. That’s an increase of $ 142,800 in 2021. The biggest hit to retirees is next year’s premiums for Medicare Part B, which go down as much as 14. 5% in part. due to inflation, but also to other points such as the increase in the use of fitness services. There are many other examples of how Uncle Sam adjusts for inflation. The amount of source of income needed to move to the next tax bracket will also be higher in 2022, and the 401K and 403B contribution limits will increase to $ 1,000. When it comes to how inflation affects various figures similar to those of the passing government, it is a mixed bag.
Southwick: All right, brother, any of my questions for this week anyway. We’ll see if I find more for later. But thank you, you’re still the best.
Brokamp: It’s Time for Answers Answers. Normally, Alison makes the query and I answer, but this time, I will make the query and much more qualified will provide the answer. That’s Aaron Bush, an advisor here at The Motley Fool who works on our Rule Breakers, Blast Off and Platinum services. Welcome Aaron and thank you for joining us.
Aaron Bush: Hi, brother. Thanks for having me.
Brokamp: The last time you gave the impression on our screen almost exactly 4 years later and helped us to be more informed about Bitcoin. We asked him because we have a query from a listener about Bitcoin and it comes from Soufan and here it is. “Approximately 5% of my diversified wallet is in Bitcoin, held on a reputable exchange, Coinbase. Even though the exchange is giant and reputable, I am still worried that the exchange or my account will be hacked and my Bitcoin holding will go to zero. Now that the futures-based Bitcoin ETF exists, I wonder if it’s a smart concept to transfer my Bitcoin to the ETF. Couldn’t someone hack my ETF or underlying futures?A threat counterparty for term holdings? Finally, would the Bitcoin Futures ETF greatly monitor the functionality of Bitcoin’s long-term value?”Aaron, what do you think?
Bush: There are a lot of smart questions out there, and let me unwrap them a bit, starting with a few notes on piracy threats for those who are listening. The threat of crypto hacking has been maximally targeted at exchanges. For example, Bitcoin itself has never been hacked, but exchanges that collect cash centrally to facilitate everyone else’s transactions have. It is sometimes thought that it is the ultimate productive practice not to hold cash on exchanges. Something like Coinbase is more of an exception, as security equipment is the highest level of sensible, designed for professional custody, and also provides partial crime insurance if Coinbase is ever breached and budget stolen. But at the end of the day, it is still a trusted third party, which is why many OG cypherpunks recommend that users have their own keys. Private keys are what give you access and control over the cryptography you own. We can just dig rabbit burrows there. But in a climax, many other people preferred hardware wallets, which were like USB drives. Many other people use software wallets, which are things like browser plugins. Some other people have their assets spread out elsewhere to mitigate the threat that only one location is threatened. Really, there are a plethora of options, and other people can take on whatever point of threat and non-public duty they need. However, I think for the max of other people, who are just looking to buy and hold, anything like Coinbase is actually a wonderful option. But it’s not necessarily for everyone to explain how you need to use crypto and how much control you need to have over your own keys.
These are just a few of the things that should stay in the brain related to security risks. On the subject of the Bitcoin ETF, my position for some time has been that other people who need to buy and hold Bitcoin for the long term deserve to own genuine Bitcoin. It is not a tracking entity like Grayscale Bitcoin Trust or a long-duration ETF. The challenge with a long-duration ETF is less with Bitcoin, in fact, than with the basics of how a long-duration ETF works. I’ll unwrap this a bit and you can get on with anything that doesn’t make sense. For those who are not interested in finance, a long-term contract is the legal responsibility to buy or sell an asset at a later date at an agreed price. Simply put, a long-term ETF is not really the owner of the underlying asset. In this case, the long-term Bitcoin ETF does not actually own any Bitcoin. It is a derivative that holds the asset contracts, allowing long-term trading. Its operation is that each month the fund withdraws its long-term contracts, sells them and then buys new ones. With this long-term contract rotation comes a unique type of charge. If long-term contracts are trading above the spot price, as is often the case with Bitcoin, then the market position is in what is called contango. Contango is a hidden charge in addition to the general ETF payments that can reduce the ETF price by 5-10% or more through the contract renewal procedure, for the industry to take a position in a given year. Together, if Bitcoin remains stable, you will end up wasting cash because this arbitration and payment procedure is opposed to you, as long-term contracts are made on a month-to-month basis.
We see this decline in other long-duration ETFs like the VXX, which is a long-duration ETF on the VIX, the volatility index. This is a super financial thing, but something to be aware of because it is vital when owning those things. Also, and I’m not familiar with the express case of the Bitcoin ETF being approved, however, as a general rule, long-duration ETFs cannot hold 100 percent of their position on long runs. They regularly target around 85% I think, which creates even more lag compared to owning the actual underlying asset, especially if you think that asset is going to accumulate significantly. Really, those long-term ETFs may make sense for certain types of traders, but they literally don’t make sense for buying and holding investors. This ETF can exist because it does not contain Bitcoin. I believe that at some point we will see a spot Bitcoin ETF that represents true ownership of Bitcoin. It would make a lot more sense for other people to own, especially in accounts like IRAs and 401 (k). But the SEC didn’t do a wonderful job of pulling something like that. We will have to see how it goes. But literally my bottom line is that it is regularly more wonderful to own real crypto, and there are steps you can take to protect it yourself. It is not as complicated as it might seem.
Brokamp: This futures ETF is presented through ProShares. The symbol is BITO, and it has accumulated more than a billion dollars in assets in the first two days, so there is a lot of interest in it. But I looked at the contents of the portfolio, at least according to Morningstar, and only part of it is futures, and the other part is effective, because as you pointed out, it cannot be absolutely in contracts. A Wall Street Journal article quoted the CEO of Bitwise, who was looking to create a Bitcoin ETF, and then subsidized it because prices were too high, claiming that the contango scenario can charge you 5-10% a year in return. The futures contract will not give you the same value functionality as Bitcoin.
Bush: No, this contango adds up. If you look at the volatility index, for example, volatility is usually a measure that means it returns over time; it’s going up, down, but it’s going back to average. in the same position you started in terms of cost to the volatility index. But the ETF eventually, because the contango wastes between five and 10% of its cost each year, it will fall by about 95%. that this will take a position with Bitcoin. Si Bitcoin rises, this long-term ETF would possibly also increase slightly. But when you have a 5 to 10% contango against you on the most sensitive fees of general ETFs, it’s a pretty high impediment to the returns you want to see from the underlying asset so that your time will cost you.
Brokamp: One last one here, the segment before this segment, we talk a lot about inflation, what do you think about knowing if Bitcoin is a smart hedge against inflation?
Bush: That is a smart question. I think seto is a strong word because it is a direct correlation shown mathematically. I don’t think Bitcoin has shown a directly correlated ability to technically hedge inflation. Honestly, this has been too volatile to correlate with too much of anything or cover up with too much of anything. That said, it does have a few qualities, namely the scarcity of its tokens that will likely make it less inflationary than fiat currencies that print new money. From this point of view, it could be like a hedge, but it is not designed to be a hedge and most likely will not exactly serve as a hedge. I recently had a similar verbal exchange with David Gardner. My simplistic view that academics might not literally like it is just that the most productive hedge against inflation is owning things that they so much overlook. Traditionally, this has referred to business property that can increase your costs or real estate that can increase your rent. These entities have beaten inflation for more basic microeconomic reasons, and I truly believe that the same is true of cryptocurrencies. All cryptocurrencies work differently, so do your own due diligence on this. But if you think Bitcoin or some other cryptocurrency will work well grounded in its basics, it will most likely help you beat inflation. However, I would not propose to own it just to control inflation. It is not for that nor for what is probably happening to the painting.
Brokamp: It looks good. I appreciate you taking the time to help us here, Aaron.
Bush: Absolutely. I can’t, it’s been 4 years, but I’m glad we’ve come full circle in Bitcoin. Thank you for having me.
Brokamp: There were also years when you and I sat down aspect by aspect in Fool HQ. I apologize for all the aerial dances and drums you had to go through this time.
Bush: You’re a colleague. I miss it.
Brokamp: Aaron, take care of yourself.
Bush: Thank you, brother.
Southwick: Well, that’s the screen. We’ll be going out next week because of Thanksgiving, and you do the same, but we’ll be back on the 30th when the brother interviews Michael Kitces, who is probably the most attractive time to make crazy monetary plans I’ve ever heard. of. It will be a smart display. As always, this exhibit is organized, rain or shine through Rick Engdahl. Our email is answers@idiot. com for Robert Brokamp, the first maximum attractive idiot of making monetary plans that I have heard of.
Brokamp: I think you were talking about Suze Orman.
Southwick: No, it’s you, big idiot. I’m Alison Southwick. Be stupid, everyone.
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