This is a letter sent to Casey Research from a senior citizen. His fear is apparent and well-founded. If he is correct (and I believe he is) many of his friends are apt to be wiped out when inflation hits. There are few ways to protect oneself against inflation and none of them are foolproof. That is no reason, however, for pretending that it will not occur. Conventional investments, as he points out, will be devastated.
I am a few months short of 70, lived by the rules my entire life, saved my money so as to not burden my children and enjoy the duration. In the late 1980s, I made two mistakes. I told my wife when our investment portfolio reaches “X” amount of money, we can afford to retire. The first mistake was telling her, because we hit that number and she expected I was going to do so. Mercifully, I did not. The second mistake was, I should have actually made the number 20% higher to cover inflation, unexpected expenses, etc. The numbers I used were the result of the computer program Microsoft Money, which supposedly took inflation into consideration.
After 9/11, all things went south and the portfolio fell well below our magic number, which was not only frightening but causes one to lose a whole lot of confidence in himself as an investor. I vowed then and there, if we ever got back above that magic number, I would take the chips off the table and never put that money at risk again… and I set the number higher, as mentioned above. Well, the day finally came, and I did something I had scolded my parents for doing decades earlier: I took the entire portfolio and put it into CDs paying 5-6%.
I was conservative enough to forecast a 4% return, so if we got a 5 or 6% return, we would be in tall cotton for the duration. The interest income, along with Social Security and some other income, allowed us to enjoy the retirement life we dreamed of – not jet-setter multimillionaires, but certainly very comfortable and not wanting for anything.
Then the first stimulus package went into effect, and I got jolted pretty good. Every pundit said the bankers were not lending – but missed the fact that the banks really took the TARP money to pay off debt. As a
result, I had almost 50% of my CDs called in and could not replace them with anything even close to the interest rates of the ones called in. At first I was angry, because I also had set up the CD ladder where 20-25% would be maturing in the next 12-18 months anyway. I quickly realized I was going to have to go back to actively managing our investment portfolio if I had any intention of surviving and staying ahead of the inflation game. TARP effectively robbed me of my income stream from CDs.
I rejoined Sovereign Society, signed up for many of the Casey reports, and I am glad I did. The good news is that we are having one of the best investment return years we have ever had. Now, with the understanding that very high inflation is on the horizon, I am cheering every time a CD matures or is called in. Those are the last thing to be invested in during hyperinflation.
Here’s the rub. Most of our immediate friends are retired and in similar situations. Some have pensions, some have more or less to invest, but the common thread is they have built their nest egg and have to live on it for the duration. As I talk to many of them about what I have been doing – diversifying out of the dollar, buying metals, and several things that make sense to me – I realize I am pretty much alone. I hear things like, “Those things are too complicated for me,” or “Arne has been my investment advisor for years and I do not want to hurt his feelings,” and honest to God, “My wife would never stand for me buying currency ETFs or a CD in foreign currency at EverBank.”
Near our summer home in Illinois, there is a little investment club up where, every other week, we have a ROMEO (Retired Old Men Eating Out) breakfast. During one of the meetings, the head of the investment club sat next to me and asked me to come and talk about diversification out of the dollar, which I agreed to do. As luck would have it, I got my monthly newsletter from Charles Schwab, and it had a bunch of pie charts on what they called their “conservative” portfolio. David, it was terrifying! For the most part it was in U.S. dollars, and if a senior invested in that, they would see their nest egg eaten up by inflation in record time. I started my presentation using that chart, saying if this is what your broker is telling you, then you really need to seek some additional counsel.
I am screaming at the top of my lungs to all retirees that will hear me, that they are going to be clobbered by inflation over the next few years. They smile, nod their head, and most all have an excuse to maintain the status quo. What really terrifies me is that many have heavily invested in the market to make up for their losses a couple years ago and have all their chips back on the table in stocks. I try to tell them that there will be millions of seniors moving back in with their kids if they are not careful – which, to me, is not only cruel but a total loss of independence, which many would find very, very difficult. David, I feel like I am banging my head against the wall, and I am truly frightened for many of our friends.
When you guys publish these newsletters, for the most part, you are preaching to the choir. Every once in awhile, I would love to see one that would scare the bejeezus out of seniors that I can forward to several of my friends to blast them out of their comfort zone. They are going to have to realize that when the hyperinflation hits, not only won’t they be able to play golf three times a week, they might very well be paying $100,000 for their next Camry.
P.S. When you talked about the top tax rate going to 50%, there is something you must also consider. Many of the folks earning over $250,000 are self-employed, so they also pay both halves of their Social Security and Medicare. The latter is 3% with no cap on it… and I think that is going to be raised also.