As the Federal Reserve’s balance sheet approaches the $9 trillion mark, the FOMC released its latest monetary policy statement.  The Fed expects to fully taper (stop inflating) in the next couple of months.  And if nothing crazy happens (which is unlikely), then we should expect to see the federal funds rate target raised from near zero in 2022.

It is almost unthinkable where we are now if you step back and take a look at the big picture.

At one point in 2008, the Fed’s balance sheet was less than $1 trillion.  Here we are less than 14 years later with the balance sheet nearing $9 trillion.

While the Fed is tapering, it is still inflating at this point, even if at a slower pace.  The Fed has kept short-term rates near zero while the government continues to increase the national debt in the trillions every year.  This is the current policy while the government’s official price inflations statistics show 7% annual price inflation.

In the late 1970s, the official price inflation was in the double digits.  Some will argue that if we calculated current price inflation the same way it was done in the past, then we would be in double digits now.  But even aside from that, the Fed is far more “accommodative” now than it was in the 1970s.

If the Fed raises its target rate in 2022 (if there is no crash), then where is the rate going?  Are they going to a whopping 1% interest rate while price inflation is roaring at 7%?

I have already pointed out that real wages are going to fall for most people.  How many corporations are giving out annual raises of 7% for doing the same job?  And are employees going to get anything above this for actually gaining skills and experience on the job?

So workers are falling behind, generally speaking, but at least they can make up for it over time.  While middle class America is losing purchasing power, it is better to be a worker where you can at least make up some of the difference.

But what about investors?  What is someone supposed to do with any wealth that has already been accumulated in the past?  It is hard enough for people who are actually invested in investing.  In other words, even if you follow the markets closely and understand the financial markets to some extent, it is hard to know what to do.  It is almost impossible for someone who has very limited knowledge of the financial markets.

Investing and Speculating

The government and the Federal Reserve have, to a large degree, forced regular people to become speculators.  This is why we have an Everything Bubble.

It makes some sense that real estate prices have boomed in most areas.  It is the easiest thing for novice investors to understand.  If you don’t know what to do with your money, and you sense that you are losing purchasing power, it makes some sense to put it into real estate where you live.  At least you can understand it, and at least you can slowly pay down the mortgage in depreciating dollars over time.

At the same time, you can’t usually retire on your house.  You need somewhere to live.  It’s possible that you could buy a house and see it appreciate in dollar terms many times over.  When you go to retire, you could sell the house, downsize, and pocket the profit.  But how many people will do this, and how profitable will this be?  And what happens if the plan doesn’t work out?

And then there are people who have a little bit of knowledge, but sometimes a little bit of wisdom can be detrimental.  It reminds me of all of the people who thought they were virus experts in 2020 who got almost everything wrong.  The same can go for investing.

There are many in the financial independence (FI) community, along with followers of people like Suze Orman and Dave Ramsey who have some wisdom.  FI people will hate that I lump them in with followers of Orman and Ramsey because many FI people think of themselves as being more sophisticated, which may be true to some degree.  However, these two groups have something in common, and that is to primarily invest in low-cost broad-based index funds.

The problem is that this strategy lacks diversification.  If there is a major crash in stocks while price inflation is still high, the Fed may be limited in its ability to bail out stock investors without risking hyperinflation.  If that is the choice, the Fed will let the stock market and its investors suffer.

I always point to the example of Japan, which is a first-world country.  If you invested in the stock market there in 1989, you would still be down today.

I don’t predict this will happen in the United States, but what if we had something half as bad?  What if we had a prolonged bear market for 10 years?  All of the index fund investors would be severely broken.  Most of their early retirement plans would be shattered into pieces.

This is why I continue to recommend the permanent portfolio, or something similar, for the majority of your financial investments.  It is not glamorous.  It isn’t going to make you ultra wealthy, but it can help you protect and grow the wealth you have accumulated.

The permanent portfolio is insurance first, and growth second.

This is why it is unfair to compare it to the overall stock market, especially in recent times.

If you own an insurance policy on your car and you don’t make a claim for the year, was it a bad investment?  You paid those premiums, and they didn’t return anything.  You just lost your money.

This is what you should think when your stock investing friend is bragging about his 25% return last year.

Even the experts can’t predict where this market is going.  It has been incredibly volatile lately.  This could mean a bear market ahead.  Or maybe it will settle down and we will see new all-time highs later this year.  It is impossible to say.

You don’t have to predict the future to prepare for the future.  I think the permanent portfolio concept offers novices and experts alike the opportunity to prepare for an uncertain future.