Foreword
This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.
Almost exactly 2 years ago, I made a post about inflation at the time, with some guesses on what will happen in the 2 years hence, i.e. ending around now. Let’s see how badly I did, now that the latest inflation print is out (4% for May 2023).
As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.
If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.
Background
On June 6th, 2021, I made the first in the series of inflation related notes. That was followed quickly by a clarification on August 30th, 2021, and then an update on April 30th, 2022.
Keeping score
In the three posts, I made some guesses on what would be coming next:
- Given Janet Yellen’s press conference, at the time, I suggested that the Fed may be getting ready to hike in 2022-2023.
- Score: 1
- As we now know, the Fed started hiking March of 2022, 9 months after the first post.
- I guessed that it would be unlikely for the US to get high inflation in the “next 1-3 years”, where high inflation is defined as 5-10% inflation.
- Score: 0
- As we now know, inflation got to a peak of ~9% since then, and it’s only been 2 years.
- I further guessed that if it did get to high inflation, it’ll probably be transitory (1-2 quarters).
- Score: 0
- Inflation was above 5% for almost 2 full years — it hit 5% in May 2021, and just went below 5% in April 2023. Data here.
- I also guessed that we’ll hit medium inflation (2.5% – 5%) and maybe stay there 4-5 quarters, up to 2 years.
- Score: 0
- We’ve been in medium (or higher!) inflation for 2 full years now.
- I suggested that certain “bare necessities” stocks would perform better in this inflationary regime.
- Score: 0.5
- The performance of the 4 bare necessities proxies are below. While 3 of the 4 clearly outperformed SPY, the last one (real estate) flunked, badly. The average of the 4 also comes to around 3% returns, much below SPY’s 6.46% return.
- That said, I wanted to point out that in the original post, I didn’t actually say real estate, but “multi-family housing”, and at least the multi-family funds that I’m holding are performing much better (they aren’t losing money for one thing…). However, I’m still giving myself a score of 0.5 because not all multi-family housing is doing well — while the funds I happen to have invested in are doing OK, multi-family housing on the west coast is doing horrendously, and quite a few of them are very likely losing money.
So, a score of 1.5 out of 5. Not too bad! If I saw a Yelp review of a restaurant with 1.5 stars out of 5, I’ll definitely go there… if I’m severely constipated and need help to “smooth things out”.
Excuses, excuses
Now that we’ve established I’m terrible at guessing what the future portends, let’s do my favorite part of the exercise — giving excuses for why I suck at this.
In terms of the inflation guesses, the main excuse I have is… Russia, Russia, Russia! Not predicting that Russia would invade Ukraine, and that the war would drag on for more than a year, and thus lead to chaos in supply chains, was probably the biggest miss.
In terms of stocks performance, there are 2 main misses:
- I did not foresee the Fed ramping up so fast and so much.
- The Fed going from 0% to 5% in around a year is a very dramatic move, essentially the fastest pace of hiking ever.
- I did not realize how many real estate businesses were using adjustable rate mortgages.
- I was thinking with my personal mortgage in mind, and thought that given the historically low rates, everyone would be eager to get a fixed rate mortgage.
- Instead, a large number of real estate businesses were actually using adjustable rate mortgages, so the rate hikes hit them really hard.
Summary
While I made a mess of the guessing game, my personal portfolio has done pretty well — most of the stocks I’ve picked are doing better than the SPY (1), while my private equity multi-family real estate funds are all doing pretty OK as well.
That said, it should be noted that the private equity funds doing well is quite a bit of luck — I missed the crucial adjustable rate mortgages issue, but luckily most of the funds I’m invested in used fixed rate mortgages, or were not too terribly affected.
So, the lesson from all this is… being lucky is important for financial success. If you are not lucky, work harder at being lucky. 🙂
Footnotes
- If you follow me on StockClubs (disclaimer: I invested in this app, and I’m only showing 1 out of 10+ brokerage accounts on the app), you’ll realize that I had a few short bets (via puts) with varying degrees of success. I’m excluding those from the analysis, because they were mostly “for fun” bets, and the net result of all of them is around $0 (I used the winnings to buy a bunch of puts on QQQ/BITO that did not work out).
Janky Thoughts 