purchasing power

The 3% Solution

photo shows a red basket full of red apples in the grass

Finding potential bargains is one of the hidden joys of stock market disruptions. (And seeking bargains is a core principle for us!) Sometimes, economic setbacks affect the value of enterprises that are actually quite durable, companies that will probably survive and ultimately prosper.

We noted a few months ago that bargains had emerged among those providers of basics—like food, clothing, and shelter—and that we were likely to still need these things in the future.

Now we are noticing another benefit to some of these prospects.

Dividend yields in the 3% range in name brand companies, although not guaranteed, offer the opportunity for actual recurring investment income. You know another one of our core principles is owning the orchard for the fruit crop. Well, a share of ownership in a profitable enterprise, when some of those profits are distributed as dividends to the owners, can be like owning an orchard.

While the value of the orchard (or the ownership share) will fluctuate, the crop (or the dividend) may be a sufficient reason to simply own it.

Why are we mentioning this now? Income-producing investments may be a way to offset the twin Federal Reserve policies of near-zero interest rates combined with the intent to raise the cost of living by 2% per year. (Officials speak of wanting to “hit a 2% inflation target,” but that is just another way to say “increase in the cost of living.”) When savings is earning less than the inflation rate, purchasing power erodes day by day.

Let’s keep our eyes open.

Clients, if you would like to talk about options for your cash or any other portfolio issue, please email us or call.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.


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A is A

© Can Stock Photo / hurricanehank

At the height of ancient Greek civilization, the philosopher Aristotle taught the Law of Identity. A is A. Everything has a single identity, not two or more, and two different things do not share the same identity. A is A. A dog is not a cat; an orange is not an orangutan, an olive is an olive.

One wonders what has been lost through the centuries, when considering Federal Reserve Bank policy. The Fed, as it is known, is charged with a dual mandate. It is supposed to promote maximum employment and stable prices.

If Aristotle were alive today, he might teach that stable prices are stable prices. This would be in accordance with the Law of Identity. A thing is what it is. Yet the Fed has adopted a 2% inflation target, supposedly in accordance with its mandate of price stability1.

At 2% inflation, a dollar today buys only 98 cents worth of goods next year and about 96 cents the year after. Prices would double every 35 years or so, under this inflation target. Over the course of a century, a dollar would shrink to about 12 cents in purchasing power. In what sense is this ‘price stability?’ It violates the simple precept that Aristotle taught 2,300 years ago.

One error some people make is presuming the things we can measure are important, and the things we cannot measure are unimportant. Higher dollar volumes of activity are presumed to be good. So when productivity or technological improvements reduce prices of things we purchase and use, we are obviously better off—but conventional economic statistics may indicate otherwise.

There are ramifications for us as investors. The threats to our prosperity from inflation may be discounted by the Federal Reserve. The advantages of technological progress are understated. We think this means we need to be more sensitive to the damage that future inflation might do to our wealth, and the opportunities presented by technological progress.

Clients, if you have any questions about this or any other pertinent topic, please email us or call.

1Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/faqs/economy_14400.htm


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.