Dear Mr. Berko: I’ve enclosed my portfolio, and hopefully you will have the time to look at it and give me some advice.
My wife and I are scared to death about inflation. We see the costs of so many things increasing so much more than the 2.5 percent inflation rate published by Washington. We are also concerned about rising interest rates but hope they do rise so we can get more interest on our cash investments.
I remember in 1970, 1980 and 1981 when the inflation rates were 11 percent to 15 percent and, considering the rise in commodity prices, I am worried that this will happen again this year.
Could you look at my portfolio and let me know if you would make any changes? – M.T., North Port, Fla.
Dear M.T.: The first thing you should know is that the inflation numbers are a spoof, a spooky statistic spoon-fed by Congress to reflect the politics of Washington, not the reality of the marketplace. The costs of automobiles, carpets, homes, computers, TV sets, appliances — a very important component of our market basket of goods and services — are used to compute the rate of inflation.
However, many observers suggest that this goods and services market basket relies too heavily on items that most folks purchase every few years. They rightly suggest that there should be a heavier emphasis on items representing repetitive daily use or consumption. How many homes, computers, entertainment centers, stoves, microwaves or rolls of carpet will Mr. Jones buy this year?
But Jones may take his family to a restaurant, purchase an apple, a pound of meat, a ticket to a baseball game, a gallon of gas, a kilowatt of electricity, etc., more frequently than once a year. And he will pay more for his health insurance coverage, his homeowner’s policy, a pack of smokes, cereals, condo maintenance dues, a plane ticket and myriad other goods and services that represent important components of Jones’ daily cost of living.
These items and many more have increased much more than 2.5 percent in cost during the past 12 months. How can you trust Congress today when it has done such a superb job in the past of deceiving the voter and demonstrating that it cannot be trusted?
On the other hand, economists tell us that 70 percent of inflation’s rise is labor-related and 10 percent is related to materials costs. They also tell us that capacity utilization — the amount of output that can be produced by factories — is significantly below levels that create demand-pull inflation. And these economists, considering all their lofty eco-babble, are as right as can be. They agree that inflation will move higher this year — but only a tad higher — and will not reach a “discomfort zone” in 2011.
I have little respect for economists, most of whom drive Volvos, have handshakes like a glove of Jell-O, use Old Spice, wear shoes that squeak even when standing still and have personalities not unlike that of warm, flat beer. In spite of all the above, I hope that they are right.
But I marvel at their low-inflation consensus in spite of the fact that in the past 12 months, oil is up 21 percent, copper is up 42 percent, corn is plus-41 percent, cattle rose 21 percent, wheat has risen 43 percent, soy beans have increased 38 percent, sugar increased 52 percent, coffee rose 63 percent and cotton has risen 90 percent.
So your jockey shorts have outperformed the Dow Jones, which was plus-11 percent for 2010. Meanwhile, real wages, adjusted for inflation in the past quarter-century, have risen one-half of 1 percent.
So, yes, I share your concern for rising prices and rising interest rates but more so for 2012 than for 2011. Meanwhile, your very fine adviser has your portfolio smartly invested in good dividend growth issues that should do well in an inflationary environment.
You are very fortunate to have a knowledgeable, wise and experienced money manager. You don’t have to hit the panic button.
So be mindful that nothing is ever as bad as we think it might be and, conversely, nothing is ever a good as we think it will be. Stay the course and listen to your money manager’s good advice.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at firstname.lastname@example.org.