Adjusting lifestyle to fit the new world
Massive changes are headed our way. This isn’t hyperbole; it’s a thoughtful analysis based on the restriction of supply as a result of the Russian/Ukraine war along with 14 years of western monetary policy coming to a conclusion with the Fed raising interest rates. The combination of the two will set in motion high inflation and personal challenges not even yet considered. As an investor, there are ways to help protect the purchasing power of your portfolio which can be read in my recent article, How to Survive Inflation. But, how does one go about reducing the effects of these dynamics from impacting our daily lives?
The west (mainly North America and Europe) has enjoyed declining prices in most consumable goods over the last 70 years since the end of WW2 and since Bretton Woods, the agreement that replaced gold as a dollar-backed reserve with other currencies. Declining interest rates drove higher investments, such as houses and stocks, but also dropped the cost of food and allowed for higher production of consumables.
The Russian/Ukraine war will create a new supply shock of most goods, driving prices higher. Russia still supplies almost half of Europe’s energy and 3% to the US, both of which will soon be cut or replaced with other sources, driving all energy prices higher. Ukraine supplied 30-40% of total grain production for the world to consume, with mountains of grain currently sitting stationary due to their inability to export due to the war. Materials for semiconductors and electric-car batteries that were resourced in Ukraine are now no longer available. Russian cargo ships sailing to the west have returned to port due to recent trade restrictions. Russia supplied almost half of total global timber. These are a few examples of new trade dynamics that will soon impact each of us in ways not fully yet understood.
There’s no question that this will impact our daily lives. Already we’ve seen record gas prices; the competition for other resources is only soon to begin and will show up in higher food prices, electric cars, and materials for building construction.
Prepare for higher prices. It will be reflected in food, energy, and construction materials mostly, which are what we mostly use on a daily basis. Growing your own crops is unfeasible but be prepared to increase your grocery budget. Energy prices can be mitigated by installing solar panels or buying an electric car sooner than later. Owning a home instead of renting will also help shelter you from higher rents and a tightening housing market.
Buying an electric car, if under $45k for a sedan and $60k for an SUV, you may qualify for a $7,500 federal tax credit and $2,000 California credit if your AGI is under $150,000. (Teslas don’t qualify.) President Biden is vying for more credits, so watch out for opportunities. Also, note that it’s increasingly difficult to buy an electric car these days as demand is only increasing along with continuing supply issues. Solar panels may also help reduce increasing utility costs and tax credits also come with when you file your taxes the following year. (Check with your tax advisor to see what you qualify for.)
Buying real estate to live in and as an investment property will also help as a hedge against higher prices along with the benefit of real-estate tax benefits. Some of the features can be replicated in an investment portfolio, but depending on your risk tolerance and interest in managing real estate, adding a second property that’s fully rented may turn into a healthy addition to the portfolio.
At Eureka Wealth Management, I advise clients on how to mitigate risk beyond what’s in an investment portfolio. I also do financial planning and retirement analysis. Call for a free, initial consultation at (760) 537-0791 or book online at eurekawealthmanagement.com.