👶 Will Inflation Eat Your Baby?
FIRE BTC issue #5 - How inflation could put your FIRE plan at risk
Inflation is a hot topic right now.
In the past four years, the cost of pretty much everything has risen substantially. The presidential election is next week, and the Trump campaign has worked hard to lay the blame at the feet of the Biden/Harris administration.
That would make sense, except Trump was in office when the covid ordeal began, and it was his administration that facilitated the first round of money printing and economic shutdowns. Of course, this accelerated under Biden, and we all have felt the pinch.
The Democrats are claiming to have gotten inflation under control, pointing to the inflation rate dropping from close to 10% at the peak to now under 3%. That’s no relief for the millions of people who are struggling to fill their grocery cart now that the cost of eggs, for example, has more than doubled since 2020.
Now, prominent voices in the financial world are concerned that the inflation monster may have not yet been slain. I would encourage you to check out The News Block from October 3, which highlights concerns raised by the likes of Jamie Dimon and Stanley Druckenmiller.
So how does inflation fit into your plan for FIRE, and how can you make sure you’re protected against it?
📊 Your inflation rate
Every month, the financial world waits with bated breath for the latest Consumer Price Index (CPI) number to drop. Markets react, and pundits pontificate.
But for you and your family, this number can be safely ignored. Inflation can’t be boiled down to a single number; it is a vector, multi-variate and multi-dimensional, that effects everyone differently.
What matters is your inflation rate.
As I wrote in issue 2 of FIRE BTC, understanding your expenses is a fundamental building block of a FIRE plan. You can read the full issue here 👇
Where you live and what you consume is unique to you, and therefore your inflation rate will be different than everyone else.
I mentioned above that the cost of a dozen eggs has more than doubled since 2020. That’s true in aggregate, but the aggregate doesn’t reflect your specific reality. In various individual locations, the actual increase was more or less than double. Separately, the more eggs you consume, the more an increase in the price will effect you. The same logic applies to all other goods and services.
This should all be very obvious, but it’s helpful to spell it out to highlight the importance of understanding your expenses and being intentional about them.
In fact, despite the massive general increase in costs since covid, my family spends less now than before the pandemic - the result of getting intentional about our expenses and tracking them closely. Intentional spending was a key reason we hit financial independence so quickly after embarking on our FIRE journey.
⚠️ Inflation could put your plan in jeopardy
The core of a FIRE approach is to build a savings portfolio large enough to last through your retirement years. The Trinity Study concludes that in the overwhelming majority of cases, you can draw down on a portfolio of stocks and bonds at a rate of 4% annually and those assets will last for 30 years or more.
However, the study also assumes a relatively low inflation rate. If inflation is elevated for a long period of time, the real return on your portfolio may not be enough.
This is especially true if you hold a large portion of bonds, as the Trinity Study includes. We recently concluded a 40+ year period of structurally declining interest rates, where bonds performed relatively well. Even so, many needed products and services have risen in price much faster than bond returns.
This dynamic has changed.
Interest rates have come off historic lows and look likely to remain higher. With sovereign debt loads exploding, the only way out seems to be increased inflation. Higher inflation and volatile yields lead to depressed bond prices and lower returns. The government needs bonds to return less than inflation so the debt load can be serviced.
Take a look at yield of the 10-year US Treasury note in recent years. This kind of volatility makes bonds a tough own.
So the composition of your savings portfolio is just as important as its size when pursuing FIRE.
If your expenses are increasing by 5-10% each year as inflation runs hot, the assets you own need to at least keep pace. The stock market will likely continue to be a good choice, but I expect the growth in bitcoin will far exceed any amount of inflation we are likely to see.
🗒️ A note about debt
Some people in the personal finance space think all debt is bad. I disagree.
Our financial system is built on credit, and its continuation requires a constant expansion of debt and debasement of the money.
While that is terrible for holding money directly and forces people to invest to avoid purchasing power erosion, it is great for people with access to credit who know how to use it wisely.
The most relevant example for most people is a home mortgage. If you own a home, have the ability to take on a mortgage below your expected rate of portfolio growth, and are comfortably able to make the monthly payment, this type of debt can help you build wealth faster.
The mortgage allows you to gain leverage. The proceeds of the loan can be used to purchase strong assets now, the value of which you expect to be much higher in the future. Meanwhile, the fiat financial system will continue to do its thing, debasing the currency and fixed-rate debts denominated in it, thereby making your mortgage easier to pay off in the future.
Foregoing the use of all debt is extremely sub-optimal. Of course, it must be done wisely.
I’ll dig more into this concept in a future issue.
🐉 Slay the inflation beast with bitcoin
Iconic investor, Paul Tudor Jones, was on CNBC last week discussing is outlook for the economy. He thinks the most likely scenario requires inflation:
I think all roads lead to inflation. […] I would own zero fixed income. […]
The playbook to get out of this is that you inflate your way out.
- Paul Tudor Jones on CNBC, 10/22/24
I highly recommend watching this entire 5 minute video.
If PTJ is correct, and I believe he may be, FIRE practitioners who stick to their plan will likely stay ahead of inflation. VTI is good, but bitcoin is better.
In last week’s issue, I showed how even a small amount of bitcoin can make a meaningful impact on a FIRE portfolio. You can find it in the archive.
That’s it for this week. Thanks for reading!
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Until next week,
Trey ✌️
Sell the Bonds buy the Bitcoin 😃