Levesque Wealth Planning

Last year we wrote that the combination of monetary stimulus and “rampant” government spending and transfer payments such as the CERB would eventually lead to inflation. This is economics 101 and we are a little bewildered that central banks and governments didn’t see it coming or did they?

Inflation, of course, is being further exasperated by government covid polices. Shutdowns, Covid protocols and the like are in turn leading to supply disruptions and further price increases. Politics aside, the recent move to restrict unvaccinated truckers from crossing the border will likely lead to further shortages and price increases. Think frozen broccoli!

Why do we even care about inflation? Here are our reasons for concerning ourselves with core inflation numbers:

• First and foremost, inflation is a tax on our money. Savers are punished in an inflationary environment.
• Inflation tends to hurt lower income families the hardest. The irony here is that much government largesse is designed (on paper) to help the very families they are hurting.
• Markets have to reprice risk. We are, of course, seeing this particularly in higher growth and speculative investments coming down in recent days. This is being exasperated by Russian Ukraine tensions.
• Deleveraging takes place. Many investors in high-risk/speculative areas are coincidentally leveraged which adds to selling pressure.
• Planning (business, retirement, vacation) becomes infinitely more difficult if you don’t have an indication of what things will cost in the future.
• Prices (wages, food etc.) can begin to spiral out of control. This could prompt serious action by central banks to stave off inflation. Remember those 20% borrowing rates from the 1970’s.
• Massive government debt loads could eventually become debilitating. Hence the rise of such non-governmental currencies such as Bitcoin and Ethereum and the historical importance of gold and real estate.

Ironically, the best “cure” for high prices is high prices is not more government intervention. That is, eventually high prices will cause demand to fall. We are already seeing this in things like red meat consumption. Price controls generally reduce supply driving up costs (Think rent control).  How can we combat inflation?  In our personal lives we can combat inflation by spending less, buying in bulk and on sale, downsizing, focusing on necessities and investing excess savings.

Equities tend to do well during inflationary periods. Many, but not all, companies can pass through input price increases to their customers. Some industries can do this more readily than others. Think healthcare vs vacations. So, increasing equity allocations would be an obvious conclusion.

That said, this does not come without increasing risk. Bonds which tend to perform poorly during inflationary periods aren’t in a portfolio to generate outsized returns. Bonds act as ballast during financial turbulence reacting very moderately to gyrations in equity markets.

The challenge is to balance risk and return to limit downside, as best as possible, and try and achieve maximum upside within a stated risk parameter. Almost everyone would like maximum returns and zero risk. Mais, ce n’est pas possible.  Not all bonds are adversely affected though as floating rate notes and inflation protected notes tend to move up with interest rates.

As we move through this transitionary period, we do expect markets to be quite choppy (aka volatile). History has shown that staying the course, letting investment income compound, dollar cost averaging where possible, and diversification are the best ways to weather the storm.

On a more positive note, economists expect there to be a post Covid spending boom in the US and globally as things open and return to “normal”. Consumers who are sitting on piles of cash are expected to return to malls, stores, and vacation spots. Please call us if you would like to discuss this further.  Remember that the deadline for RRSP contributions is March 1st

Daniel Fearon, MBA, CFA, CPA(CA)
Sr. Investment Advisor
iA Private Wealth
Levesque Wealth Planning
One Corporate Plaza, 2075 Kennedy Road, 5th Floor, Toronto, ON M1T 3V3
Tel: 416-412-8018 / 1-800-322-4030
Fax: 416-332-6772
daniel@levesquewealthplanning.com

Linda J. Levesque, CFP®, FMA, FCSI®
Sr. Investment Advisor
iA Private Wealth
Levesque Wealth Planning
Insurance Advisor*
iA Private Wealth Insurance
One Corporate Plaza, 2075 Kennedy Road, 5th Floor, Toronto, ON M1T 3V3
Tel: 416-412-8018 / 1-800-322-4030
Fax: 416-332-6772
linda@levesquewealthplanning.com

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