Lazy Man and Money

What Does a Recession Mean to You?

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There’s been a lot of talk about a recession lately. For the purpose of this article, I’ll use an informal definition of “recession” as a “really bad economy.” After all, there are probably only 10% of Americans that know the real definition of a recession (decline in GDP in two successive quarters, blah, blah, nerdy stuff). If you ask me, I’d say we are in a recession (remember using the “really bad economy” definition) because everyone’s complaining about inflation. Also, the stock market seems to border bear territory depending on which day you look at it.

I have been avoiding writing about these market conditions recently. It wasn’t a conscious decision. It was only a couple of days ago that I realized why I hadn’t been writing about it much.

The recession hits different people in different ways. Some people aren’t largely affected by it. For example, if you have a steady mortgage, don’t drive much, and eat frugal foods inflation may not hit you too much. We check most of those boxes so the market conditions aren’t too bad for us. We aren’t drawing down on our investments, so we don’t have to sell stock at cheap prices. Instead, we continue to buy low. In 20 years, we should be able to sell these shares we are buying today at high prices.

However, there are a lot of people who are on fixed incomes. The rising prices create significant problems in their lives. These people may be drawing down on their investments and selling at the wrong time.

It’s difficult for me to write about it because it is so personal, and in this case, we’re not greatly impacted. That may change in the future. For example, advertising is one of the first things companies cut back on in a recession. Advertising from this website will likely suffer. Travel is another thing that people cut in a recession. When people don’t travel, my dog boarding business suffers. So while I may be impacted, a lot more of our money comes from my wife and her government is secure until she finally decides to retire.

It may be a case of “too little, too late”, but here are a few things that have helped stabilize us even if there is a recession. You may not be able to implement them today, but maybe consider them for the next recession:

  • Multiple Streams of Income
    I mentioned my blogging and dog sitting income above, but I also run the customer support for a small company that has a lot of international clients. The company isn’t recession-proof, but that’s three very diversified businesses.

  • Fixed Mortgage
    We bought our place in 2012. The rental estimate for the house is roughly $3300. That is $300 more than our 15-year mortgage. We could refinance that mortgage to an $800 monthly payment now. If we were in the market to buy the same house today, we would have to put 20% and make payments of $4000. There are some very good reasons to rent, but I’m very happy we have the payments that we do.

  • Paid Off Cars
    We bought new cars in 2012 and 2014 and we intend to drive them into the ground. We’ll have to buy cars again someday, but it’s nice to not have those payments.

  • Solar Panels
    We went solar about 7 years ago and we’re at the point where the panels have paid for themselves. With rising energy costs, we’re only paying for a little extra energy (we use more than we produce), which keeps our bills very low – usually less than $300 for the whole year.

  • Chest Freezer
    I’m sure our second freezer is one of the reasons why we use more electricity than our solar produces, but it allows us to stock up on sales when they happen. This has been very helpful in keeping food costs a little lower during this time of high inflation.

A lot of these boil down to the idea of being fiscally ready for disaster. Not many bloggers remember the dot-com bust of 2000, but it was a very bad time to be a software engineer coming out of school.

I hope that we come out of this financial situation soon and things rebound. I’m optimistic that the threat of recession will cause oil prices to go lower. Global banks are raising their interest rates to fight inflation. If all that goes according to plan, maybe it won’t be too bad.

I’ve rambled enough for one article. I’d like to turn the attention back to you. Please leave me a message and vent about your personal situation in this economy (even if it’s in generics).

What We Can Learn from the Baby Formula Debacle

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Unless you’ve been living under a rock lately, you’ve heard the news about the baby formula shortage. As a father, I thought I’d leave it to the mothers to cover the whole conversation. I’ve seen a lot of very, very bad uninformed opinions from men on social media. However, I did a lot of feedings, and baby formula was critical. I feel like I should be able to avoid those “bad takes.”

If you haven’t heard, the problem is that one of the major factories that makes baby formula was shut down due to possible contamination. There are only a few companies that make baby formula and those companies consolidate their manufacturing in a few facilities. When one company or one factory is shut down there’s a lot less supply.

There’s more to the story than just that. NPR has a great article on the things that have gone wrong.

Money Lessons from the Baby Formula Debacle

One of the most basic lessons in investing is diversification. It’s okay to buy one company if you are a 6-year-old who loves Disney. Aside from that, most people should be low-cost mutual funds or ETFs that hold hundreds or thousands of companies. Many people may be too young to remember the collapse of Enron, but many of the employees had their retirement money in Enron’s stock. Not only did those people lose their job, but they lost a lot of their retirement money.

There’s not enough diversification of companies nowadays. It’s most profitable for baby formula companies to consolidate their operations in one place. It’s fundamental capitalism to pursue the most profit. However, it seems like there’s not enough competition in the baby formula space. Maybe smaller companies can’t get their products space on store shelves? Maybe they don’t have the big advertising budgets? Maybe they don’t have the scale to produce their products at competitive prices?

I think that if capitalism was really working we’d have competing companies jump into the baby formula space to fulfill demand. I’m not sure that other companies can jump into the space quickly. If the problem is temporary then by the time the new companies get up to speed they might be crowded out by the existing factory coming back online (which it already is).

The lack of diversification isn’t limited to baby formula. As the NPR article above mentions the meatpacking company JBS’s ransomware attack stopped 20% of America’s beef and pork industry temporarily. We also saw that a similar ransomware attack on the Colonial Pipeline cause gas prices to go up.

Baby Formula, Politics, and Common Sense

When the problem happened with the suppliers, one of the first places people turned was the government. The popular cry, “HOW CAN THIS HAPPEN IN AMERICA?!?! WHAT IS THE GOVERNMENT DOING ABOUT IT!” It’s a natural reaction.

However, should the government be regulating the baby formula supply chain to make sure there is ample capacity? I think most people don’t want the government to be involved with private businesses. Some may argue that there should be a national stockpile of baby formula. That’s reasonable, but it does expire and the government will need to be continuously buying up whatever the available supply is and then discarding it… unless we also create a program to give free baby formula (before it expires) to people below a certain income level.

The NPR article mentioned another issue – the problem of importing baby formula. High tariffs are making it not worth importing baby formula. There are also labeling laws that make it impossible to import some baby formula. Hopefully, common sense will prevail and these artificial, man-made restrictions can be lifted in times of emergency.

A friend of mine sent me a message about a news story. It was a famously conservative publication, but I don’t think she was aware. The Republican politician in Florida said she had a friend at the Texas border who sent her pictures of pallets of baby formula for potential immigrants at the border. What struck me as interesting was that there was no journalistic integrity. The “news” article was simply that a politician Tweeted something that may or may not be true. No one in Texas was reporting it. No Texas Republicans were in the report. No organization said that they did a fact check. The only thing that made sense to me was that a politician was trying to score some political points by increasing social media outrage.

Final Thoughts

There are a lot of things we take for granted. Perhaps we shouldn’t. On one hand, the supply generally works so well that we expect that it is infallible. It’s a good thing that it is this reliable. On the other hand, when the supply chain does have a problem, it can be an emergency.

I’ve long felt that there wasn’t enough competition among companies. There has been a lot of consolidation over the years. The stories that companies tell us are that they can be more efficient at a larger scale and pass better prices to the consumer. However, I think we are seeing that once the competition is gone, companies can raise prices. Over the long term, the market may correct itself, but sometimes consumers can’t wait for the long term.

I wish we could start to have discussions about this under different circumstances. Once the immediate emergency is over, I’m hoping we can focus on some long-term solutions.

Skimpflation?

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Have you ever heard of Skimpflation? That was a new one to me until a couple of weeks ago.

You might be familiar with SHRINKflation, but that’s different than SKIMPflation. If you aren’t familiar with SHRINKflation, that’s when companies subtly give you less product for your money. Instead of getting a half gallon (64 ounces) of ice cream you were used to buying, it might be 56 ounces or even 48 ounces.

I’ve gotten used to shrinkflation by now. Sometimes, you can catch a deal where they advertise “Now 10% more!” where they give you back some of the product they’ve taken away.

So let’s get back to the new kid on the block – SKIMPflation. SKIMPflation is when companies skimp on a service. I first came across this idea in this NPR article. Ironically, I came across that article while on hold with Southwest Airlines for four hours. See, Southwest has skimped on the customer service representatives.

NPR coined Skimpflation with this description:

The economywide decline in service quality that we’re now seeing is something different, and it doesn’t have a good name. It’s a situation where we’re paying the same or more for services, but they kinda suck compared with what they used to be. We propose a new word to describe this stealth-ninja kind of inflation: skimpflation. It’s when, instead of simply raising prices, companies skimp on the goods and services they provide.

About a week after my problem with Southwest, I found a friend had the problem with Singapore Airlines. Several days later, another friend was having a problem reaching the IRS. I tried not to laugh at that one, because there are so many articles explaining how hard it is to get ahold of anyone there. Their problem was particularly tough. They needed an ID number that the IRS had assigned to them and their tax specialist instructed them to call to get it. It wasn’t your standard question on how to fill a form – the only person with the information was the IRS.

When I discussed this with my friend, I explained that it seems to be going on everywhere. My wife has been reporting that the government’s mantra is “Do more with less” for the last two decades. Stretch… stretch… stretch. I have a theory that when one person quits they only fill that position some fraction of the time (maybe 50%?). That leaves more work for the remaining people, which makes it more likely that someone else will quit from being overworked. Maybe the last 10 years of big stock market gains makes people confident they have the money to retire?

What’s interesting to me is that the NPR article ends with the Federal Reserve and Treasury Department saying that the inflation is likely transitory. NPR said that they were probably right. The article is from six months ago and we know that inflation hasn’t disappeared. We know that the Federal Reserve was wrong. The Federal Reserve is acting to raise interest rates now and they have to balance curbing inflation without sending the economy into a recession.

In the meantime, what do you think? Do you find that services aren’t as good as they used to be? I do, but I also wonder if it’s a trick where nostalgia for the good old days is clouding my judgment.

Inflation Thoughts – Part 2

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Phew, we made it through Christmas. My wife got back 7 days before, so we crammed as much Christmas in as we could. She’s still working on sending out the holiday cards. Our 7-year-old is turning 8 in a few days, so we don’t have a lot of time to relax until after that.

I was still able to follow most of the news and the big topic on the financial front is inflation. It’s a big topic to get into during this holiday week, so I’ll be keeping this as quick and light as possible. Before Thanksgiving, I wrote about inflation blame and fixes. It may be helpful to read that article first and I still stand by everything in it. It covered a lot of reasons for inflation. If you are just curious about reasons why gas is so high read this. In any case, it’s worth another look because we got more inflation numbers and once again inflation went through the roof. Some polls are saying that inflation is a bigger threat than COVID.

As I mentioned last month, we haven’t felt the effects of inflation too much. Our mortgage stays the same and cars are paid off. Our food is a little more expensive, but we still have a chest freezer full of food that we are trying to eat down. Every time we make a little progress I find some good deal at Aldi or our local Shaw’s supermarket and it fills up a bit again. There are certainly fewer deals to be found nowadays, but we shouldn’t be forced to pay high prices for quite some time. Our gas prices are up, but I’m not sure if they are that much more than last year. I expect to spend $250 during the winter and that’s what we’re spending. Maybe as it gets colder in February we’ll have some $300 or $350 bills that hurt.

I realize that we are not most people. We probably have it better than 90% of the people. If you have to renew a rental lease or buy a car you’ll feel the pain of inflation. I want to be clear that just because we don’t personally feel it, it doesn’t mean it doesn’t exist and it doesn’t mean it can be a big problem.

I was talking with a friend about this and she was worried about how people on lower incomes are going to deal with inflation. After all, if you make a big income you can withstand food that is a little more expensive. If you are on a low income a raise in rent can be very tough.

I didn’t want to dismiss those concerns, but I think lower-income people have had some positive changes lately. The Child Tax Credit has reduced child poverty tremendously. For people on a limited income, several thousand dollars goes a long way to offset inflation. Unfortunately, that’s going away soon since it seems we can’t get 51 senators to agree to continue it. Also, the Child Tax Credit only helps if you, umm, have children of course. It doesn’t help senior citizens for one example. Senior citizens collecting Social Security will see an increased paycheck in 2022. I’m reading that it will be a 5.9% increase which should counter the effects of inflation.

Another thing to factor in is that we’ve seen a good deal of wage growth lately. I’ve read a lot of stories about it on a national level. Locally, in Newport, Rhode Island, nearly every place (has a help wanted sign promising $15/hour and several with bonuses. That includes fast food, gas stations, and places like that. I know that wages haven’t grown everywhere, so those areas that aren’t keeping up would be the ones I would be concerned about.

There’s another thing about inflation that isn’t getting much attention. When I started this blog back in 2006 the accepted average inflation calculation was about 3.5% or 4%. It was just assumed that would be the long-term inflation number. We’ve had 15 years of about 2.2% inflation according to some government numbers. When I ran the math it showed that prices could DOUBLE overnight and we’d just be where we all thought we would have been years ago. Is it possible we got too used to low inflation? Are we giving back a small fraction of the great, great fortune we’ve had over a long time? If so, is that so bad?

Finally, there’s another thing to consider. It seems that many Americans are doing fairly well. Holiday sales were up the most in 17 years, “fueled by purchases of clothing and jewelry.” That’s usually a sign the economy is doing quite well or at least that consumers aren’t stressing about putting food on the table.

So what do you think? Is inflation a reason for huge concern? Is it temporary, while we work through the Great Resignation caused by COVID? Is it mostly media coverage because people have price shock at the stores? Let me know in the comments.

Inflation Blame and Fixes

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Politics plays a role in macroeconomic issues such as inflation. I understand that some readers don’t want to read about more politics, but it is necessary to discuss the financial topic that’s on everyone’s mind.

Inflation is here. I’ve always said that I’d find some way to adapt to inflation. I’ve since come to realize that isn’t always possible. However, we’ve been doing fairly well to battle inflation. Take most people’s “big three” expenses:

  • Housing – Our housing costs aren’t rising as our mortgage has stayed the same. We haven’t needed too many services such as plumbing, but I think we’d see rising costs there.
  • Transportation – Our cars have been paid off for a little while now. The price of gas is high, but we are still working from home and not driving very much.
  • Food – The price of chicken hasn’t risen nearly as high as the price of beef. We’ve been eating more chicken for a while now. It’s starting to get boring, so I may need to pony up for more beef. Ground beef is still cheap. I can notice prices are higher, but Aldi still keeps prices fairly low.

As bonus, computers are very cheap despite a lot of talk about how chip shortages are supposed to make them expensive.

As you can see, things have been good for us, but I can see how it is bad for others. I’ve seen rent go up. People trying to buy cars have to pay more now too. If you have a long commute the price of gas can be very challenging.

I hope you are only seeing mild effects from inflation. It might help you feel better to blame someone. However, blaming doesn’t make things better. We need true solutions.

Blame Joe Biden for High Inflation?

There are a lot of people looking to blame Joe Biden for inflation. While the President of the United States has a lot of power, he doesn’t control everything. He promised to end COVID through vaccines, but there are still a lot of people who haven’t taken them. Also, the delta variant made things ten times worse.

Consumers are upset that gas prices are rising. However, NPR explains quite well, Biden, or any US President can’t do anything about gas prices. Biden wasn’t the cause and can’t fix high gas prices. Over the long term, Biden’s policies on electric vehicles and solar power would drastically cut the cost of commuting.

What about food prices? The Conversation says that fuel prices, bad weather, and COVID are to blame. We covered fuel prices. Scientists have conclusively shown time and again that “bad weather” is due to climate change. Biden has pushed for better climate change policies, but again, this is a long-term solution. We might never be able to reverse the damage climate change has done, but the more action we take and the earlier we take it, the better we’ll be in the future. Finally, the closer we get everyone to being vaccinated, the fewer effects of COVID on the economy. Biden has done everything he can to try to get all Americans vaccinated.

What about housing prices? The American Action Forum explains that it’s all about COVID. There’s a combination of unprecedented demand and a labor shortage to create new housing. It seems like this was a limited-time phenomenon – I haven’t seen prices go up in a few months. As mortgage rates rise, prices likely fall and maybe get more acceptable.

Taking all these together, I don’t think it’s fair to blame Joe Biden. Any US President would have seen the same circumstances leading to the same inflation. However, there’s one last thing out there…

Biden (and his administration) approved a $1.9 trillion COVID stimulus package. This was on top of the 2.2 trillion CARES package and a $900 billion bipartisan stimulus that Trump signed in late December 2020. At the time Trump was disappointed that more money wasn’t given in the form of direct payments and called it a “disgrace.”

So putting specific politics aside, it’s easy to say that both parties agreed to put a lot of money out there. I don’t think this was a bad thing, it helped many people get by during a global crisis. There have been some very positive things to come out of it such as child poverty rates dropping to 5.6% from 14.2%. I’m not going to criticize the stimulus because I think everyone made the best choice they could at the time and I’d rather err on the side of helping people in a crisis and worry about inflation now.

All that said, it does need to be noted that there’s a lot of money out there and fewer products available due to the supply chain.

The Real Blame for Inflation?

Robert Reich, a contributor to The Guardian gives his compelling analysis for inflation, big corporate America. Specifically, he points out how industries have consolidated over several decades. This has left little competition. For example, he points out that Proctor & Gamble and Kimberly-Clark control the diaper market. When P&G said they were prices, Kimberly-Clark did the same. P&G’s profits are extreme, they don’t need to raise prices. P&G had enough money to spend $3,000,000,000 to buy its stock back. He gives a similar example with Coke and Pepsi.

What can fix this problem? He says the answer is better antitrust law. If that’s indeed a solution, the Biden administration is the first one I’ve seen in a long time that is looking to real antitrust action.

CNN has an inflation explainer. It places all the blame on COVID and getting vaccines, the result of going from 0 to 100 in the blink of an eye.

Final Thoughts on Inflation

Inflation is complicated. It doesn’t seem like there is a short-term solution. The good news is that the economy looks like is back on track. In addition to that, the stock market is hitting new all-time highs seemingly every week now. I know that there’s more to the economy than the stock market and retail sales numbers, but it also seems like Americans have more savings than they’ve had in years, maybe decades. Combine that with the aforementioned drop in child poverty and I feel like the economy is in a very strong place.

I’m even more optimistic about the future. The longer-term solutions (limiting climate change problems, limiting reliance on fossil fuels) seem to be heading in the right direction.

Maybe I’m looking at things through rose-colored glasses? What do you think? Let me know in the comments below.