E5: On Inflation

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In the fifth episode of Insider Investing, we explore Inflation - how increasing price levels impact our lives and portfolios. Our Co-Founders Sandeep Jethwani and Vaibhav Porwal discuss different aspects of Inflation- what is causing it, how it's affecting consumer behaviour, what to expect next and how we can make our portfolios inflation-proof.

Tune in to listen to interesting anecdotes like how Vaibhav's grandma kept a tab on increasing prices, Walmart's increase in retail prices of clothing after more than a decade, how is inflation affecting long distance relationships, why Elon Musk stopped having Avocado toasts, and many more insights!

Key insights:-

1. The recent buzz around Inflation
2. Why is inflation making a comeback
3. How this is affecting investing in asset classes like Real Estate
4. Wealth Effect : You tend to spend more if you "feel" more wealthy
5. Lifestyle inflation and shift in consumer behaviour, easy availability in credit
6. What modern investors & influencers like Jack Dorsey, Cathie Wood and Elon Musk think about the direction of prices
7. Inflation in short term: Transitory increase in demand coming out of Covid & central banks printing money
8. Trends that may cause Disinflation in the long run : falling birth rates, rise in technology & productivity and efficiency
9. Increasing wealth disparity and concentrated asset ownership, easy access to cheap credit and BNPL schemes
10. Too much gamification & the need for wealth-tech firms to be more responsible towards the end users
11. How is dezerv. tailoring it's portfolio offerings to deal with these trends: hedging against inflation through diversified asset allocation, perioding rebalancing and watching out for recency bias

Episode Transcript


Vaibhav it's great to have you on the show. This has been a long time in the making.


Thanks for inviting me. I've seen what you've done so far and the podcast and I'm really excited to be here.


And, it's been interesting so far. We've had some very exciting guests, mostly entrepreneurs and people who've created a new niche for themselves. And I think for us this time around though, the focus was more about, there is one area which is really bothering most people. This is bothering not only consumers, but also investors.

And that's this whole talk about inflation, right? Suddenly after a very long time. And it's almost like we had forgotten about this term. It seems to be rearing its head back. I'm actually very curious to understand why suddenly there is this talk about it. What is indicating the fact that inflation is back or, you know, things are getting more expensive again.


See two, three things before I jump into the numbers. Very interesting conversation I had with my grandma and I asked her, how would she measure the impact of inflection in their life? And she said that the measure for them was the price of 10 grams of gold was equal to the monthly expenses. So whatever increase was there in the price of the gold was inflation for them.

And it was an interesting way to measure inflation because at that time there was no scientific measure of that. But having said that the reason for which inflation is making noise is because in the last 30 years I've been structural, a disinflation wild over inflation, consumer inflation in particular is something that we have completely forgotten about.

But, now it's making a comeback. You have data points to substantiate that we are seeing consumer inflation, which is at multi-decade high. China is seeing a producer's price inflation, which is again at multi-decade. And they're seeing significant increase in base metal prices, word over the raw material prices have gone through the roof.

So, all of it put together is creating an interesting environment where we are seeing inflation coming back after 30 years in a meaningful way.


That's interesting. You know, actually anecdotally, we are beginning to see early signs of that. I was talking to somebody who's very large in textiles and he was telling me that for the first time in 15 years, Walmart has increased the prices of clothing that they offer in retail (channels).

And that's very interesting because in the U S markets, this concept of price increasing on retail products is almost unheard of. At least in the cotton generation of the new spenders, the gen Z, they have never seen this. So it's a very once in a lifetime event, that's happening for them as well. Right.

And, you know, let's talk also about some of this asset inflation that we have discussed. And when we've designed that investment strategy, we are beginning to see that as well.  real estate is getting expensive for the first time in many years. 


No. So it's very interesting. Sandeep, after 2008, GFC people kind of ignored real estate as an asset class because real estate was central to that crisis.

But, because of the low cost of borrowing and significant increase in wealth world over, which is what we call wealth effect, led by money supply is making people invest in real estate again. And it's also getting supported by the fact that people believe that inflation will eventually help realistic prices.

So these factors are very interesting on the other points. The last 30 years have been all about an increase in productivity and because of that cost of raw material has come down world over and which has led to prices remaining fairly stable. But now we are seeing the significance of wealth creation, which is happening, and that is translating into significant increase in.

Which is putting a lot of pressure on raw material prices. And as you said, Walmart has increased the prices of clothing for the first time in multiple decades. It's nothing but a reflection of increased demand, which has come because of significant wealth increase. 


Yeah. So let's explain this concept of wealth effect to everyone, right?

It's very interesting. It comes from behavioral finance. Where if people feel wealthy and this just feels wealthy, they may not actually be wealthy if the perception is that today I'm richer than I was. Last year, you tended to spend more than you would have otherwise done. And that's essentially the core of, wealth effect.

We've actually looked at our housing data and for the very first time we're seeing a big bump up. the numbers that you were sharing with me was about 18% growth in real estate prices in the US just in the last one. And that's probably the highest it's been, what three decades. 


It's not just limited to us, even in India.

So a city like Bombay, where we have completely forgotten about this concept of prices, is increasingly realistic, and you and I had multiple discussions on whether to buy or rent. First time you're seeing that people are moving out and saying that they are, we should own a house. Two, three triggers, the cost of boarding, significantly.

So, people are far more comfortable paying those EMI. And secondly, as you say, there's an artificial sense of high confidence in homes, ability to create wealth and which is coming from the way I said, prices have gone up over the last two, three years. 


It's interesting. You know, the other data point was the question about whether.

Things are really getting, people are actually getting wealthier and there we are now beginning to see data about the price of  assets. So the value of assets relative to the global GDP. Talk a little bit about that,  because you know, you feel that you're getting, but what we don't realize is a lot of people are getting wealthy right now.


So, if you look at the way, wealth has increased over the last 20 years. So in 2000 multiple of wealth, global wealth to global GDP was 13 times today. It is 20 times. So, which is a 50% increase in the amount of wealth creation, which has happened over and over and GDP, and income levels have not gone up at the same pace, which is quite surprising.

Your income has remained current. But your wealth  has gone up. So which is giving you a feeling that you are wealthy, but you're wealthy relative to what you were yesterday, not relative to where the world is.


Do you think that? And especially even in India, people spend more money when they have, when they feel wealthier.

Is it a universal emotion? Because you know, sometimes you talk to the older generation, especially, which had this whole savings mentality. And there, we didn't see lifestyles change you. And I discussed it in our own context the other day that we are not spending much more than we were five, seven years ago, so is it universally true? 


It's universally true and it's a big shift that human behavior and convenient access to credit is a big driver of that. So in our time and days, we never had access to very, very simple, credit, products. Today we have all sorts of credit products, right from BNPl to, pay my later or, use your credit card limits.

All of these products were not available along with that. The confidence and consumer confidence as one indicator, which is used world over as an indication of our people. Thinking about spending, I think, it's at a very high level. And the reason for which that indicator is important is because that shows people's confidence to advance their purchases.

So typically people behave in two fashions, either they will postpone their purchases or they will advance their purchases. High consumer confidence is always an indicator of advancement of purchases. 


This high consumer confidence is now captured in a very interesting term YOLO. Which is you only live once, so why not live the life that you do?

Yeah. And the other, like, you know, the one thing is about when you talk about inflation, there is this whole debate, which is now beginning to happen. We saw Jack Dorsey talk about the fact that hyperinflation is here to which Kathy would hit back and say that, look, this is not going to last. It is long-term. It is disinflationary. On the other hand, you see Elon Musk talk about. How things are getting more expensive for him. And there's this whole joke that, you know, he, he's now not having avocado toast because things are expensive. So,  why are, why is this whole debate going on between experts?

Because if it's true, it's true for everyone. Why is it becoming a viewpoint now?


So I said for the last 30 years, or you've seen structural or shifting inflationary pressures, you've seen changes in the demographics. People are getting older. So their consumption requirements are reducing. We are seeing significant improvement in productivity because of technology.

central banks have kind of regulated interest rates or they have kept the interest rates on the lower end and not seen significant change in consumer inflation over the last 30 years. But suddenly we are seeing a demand coming back and this whole wealth effect translating into higher demand and also supply of Has gone up significantly. So on one hand, people who say that inflation has more trajectory are talking about the factors like increase in productivity, technology, demographics, and governments' own  interest in keeping the interest rates flow. On the other hand, you have, people who are talking about inflation going up significantly are saying this because they believe that the fiscal policies of governments or monetary policies of the central banks have taken the supply of money to do so, or to an extent where it will start impacting them.

Influencing the prices of consumer products, et cetera. 


But,  you know, personally, I feel that a large part of this may be transitory. It may be because of the fact that you have controlled expenses for the last year and a half. You weren't locked in your house. You didn't feel the need to buy clothes.

You wouldn't feel the need to repair your car or buy a new vehicle. You wouldn't feel the need to buy gasoline or petrol at the local gas station. Now, however, given that we have been all holed up in our homes, so for the last 18, 20 months, there is a natural tendency to go out and spend. I would argue that potentially this will normalize.

Things stabilize because, as reality kicks back in, you bought that extra pair of clothing that you needed. Now you probably don't need it again. So isn't it pent up demand that is causing inflation? No that's 


That's true Sandeep, and that's what proponents of disinflation also believe in that this demand is on a trajectory and it will normalize over the next six to 12 months.

But what is happening is a lot of this money, which was printed by central banks all over it's finding its way into raw materials. Like base metal and other commodities, which are supporting inflation in a significant manner. So in some sense, there has to be a balance between the two and which factor will be more dominant, over the next 12 months is something that is unknown to all of us.

So yesterday we saw a big drop in crude prices, right? So basically the market is nervous about sustenance of demand and which is something more you are also right. 


Yeah. So obviously lately there is now this news of this Omicron or the new version of a covert coming in and therefore potentially oil prices are dropping.

So it seems like two things are converging at the same point, right? One is the fact that there's potentially some pent up demand, which is happening because. People couldn't spend and now they want to live a better life than they had in the last 18 months. The second potentially is this new money which has got printed, which is now finding its way into the hands of people.

and also in asset values. And with all of these converging, potentially near term inflation is likely to come back and Reddit's head. Okay. The question is, is this long. Phenomenon, will long-term the dis-inflationary pressures return and push inflation down. 


So two, three factors, sandeep here's on the path toward human witness, the, full last decade or so productivity has gone up significantly and technology is playing an important role in that.

And I always use this example of communication costs coming in. If go back in time, a decade of 2000, when a meeting an international goal, costed us a bomb, but, now you can simply do a WhatsApp call without spending any money whatsoever. So that's an improvement in productivity and reduction in expenses, cars, fuel efficiency of the cars.

you, you would remember the times where you're your car would give you a mileage off. Six or seven kilometers per liter, which has gone up to 10, 12, 13. So all these are productivity, enhancement, features, which are supporting this phenomenon, low inflation or disinflation. Interestingly, if you go back in time and since we have spoken at length about Spanish, The same behavior played out in the decade of twenties, also 1920s.

So after people were coming out of Spanish flu, they wanted to break the shackles and say, oh, Hey, we have, we have suffered a lot. And it's time to celebrate a bit. And which created this pressure on Inflation. Unfortunately at that time, it sustained for way too long and culminated into the great depression of the thirties.

Hopefully this time around central banks are far more agile and governments are more coordinated in their effort to nullify the impact of inflation.


Yeah. I was joking with my cousin the other day, that long distance relationships have dis-inflated. Because it's easier to talk to your girlfriend or wife when you're not in the same city now, but she was arguing that that does level the playing field for everyone.


You cant even gave you an explanation that I ran out of my money


Now you can get that information. You can still get free wifi at Starbucks. but I agree with this. So there are multiple long-term trends. Yeah, which is potentially causing inflation to go down one, is this a population itself?

and for the first time, it seems like India might slip below the replacement rate. As you get more educated, you have fewer kids, which is probably, I think the number is 2.1. One is the average number of kids we need to have. And I think people are not choosing to have that many kids and therefore potentially in the long term, there'll be lesser demand for resources

The second thing is I could rightly lesser technology. and that is a phenomenal disinflation, who would have thought, whether we are talking today online, at practically no cost, we are distributing this podcast at zero cost, right? The same thing we would not have been able to do. So some of these things are very clear or disinflation.

There's one thing which caused disinflation in the. 15-20 years. And that is one point where the reversal seems to be happening, which is globalization countries are now beginning to look inwards. You want to bring supply chains back into the country. The U S is now spending on its own infrastructure after probably, I don't know, 40-50 years, in a very meaningful way.

the dependence on first Japan, and then. They don't want to have, so do you think this globalization reversing will potentially cause inflation, 


It can impact currencies in multiple ways. So if you look at the period between nineties, 19, nineties, and 2000, most of the emerging countries create  wealth by exporting their.

To have welth, whether you look at China or you look at Taiwan or South Korea, most obese countries export their way to wealth. So if that reverses, that can put a significant  amount of pressure on their domestic currencies, and that is something which can be on big debt and can structurally change the trajectory of inflation.

If you are too reliant on domestic production, your cost of. it's more emotional. You're not looking at optimizing your cost. You're simply playing on the emotion of nationalism and that can, that can have a structural implication on inflation. 


Yeah, it's interesting though. I feel that however, there are other, the other factors of reducing population,and technology will potentially, or out of.

Some of these globalization or dislocations, which are happening. So it seems to us therefore, correct me if I'm wrong, that potentially in the near term inflation is here to stay for some time, but in the medium to long term, it will potentially normalize or even things might start getting cheaper again.


Yeah. I would agree with that hypothesis. If you look at the last 10 years also, and it's not as if money supply did not go up after the 2008 global financial crisis money supply did go up. But most of the money supply that was there and that was released, went into institutional hands and the government  was the biggest buyer of assets.

And they were the biggest beneficiary of asset inflation in the last two, three years because of proliferation of platforms like Robin Hood or Other trading platforms world over every one is benefiting from this asset inflation and that is translating into significant consumption pressure. That is something honestly, it's difficult to predict when a meaningful correction in the market can reverse the trend or, people getting back to their work may reduce the Significantly and nudge appropriately. So these other two changes, which can change the trajectory of Consumer demand.


It's amazing how smart money reallocates. Right. We were talking to a very large developer in Mumbai the other day. and you and I were both a part of their discussion. It seems like, people are now beginning to diversify away from equities.

Especially in this market, the wealthier side is beginning to do so. Because they know that this is potentially not sustainable, but I think there's a very interesting point that you made about this whole weld effect issue. and I think there's a social angle. Also there we are now beginning to see a greater divergence between the haves and have nots,the haves have equity assets, cryptocurrency, et cetera, which is making them wealthier.

On the other hand, they have no. Are being encouraged by corporations to buy now, pay later, and therefore get more and more indebted. It almost seems to me that the corporate debt on the balance sheet is being transferred to personal debt through easy lending. 

Do you also feel that the wealth disparities are increasing?


No. Wealth disparities  are increasing and it's more relevant for a country like India, where asset ownership is concentrated in various ways. And so if you look at you as more than 60% people invest in equity markets, I feel we'll look at the same data for India, less than 5% people invest in equity markets. So all the boom that we witnessed in the stock market, many of the benefits of that were approved only to 5% of the population.

So that does create a significant amount of disparity. And on your lending point, as long as cheap credit is used to increase productivity by investors. It's very positive for the economy, but the moment it gets directed or misdirected towards consumption, which is dependent on the future income, it can have a significantly negative impact.

And because of the convenience of modeling, you can send Bleecker, borrow money within two minutes or three minutes, and the money gets to your bank account. It's become very easy for people to consume a wealth bottle. And as I said, it's an impact of a high consumer conference. you will have a higher confidence about your future wealth effect.

Along with that, convenience of borrowing money These two combinations make up for a significantly interesting combination, which motivates people to borrow and spend. 


Yeah, I think this whole borrowing is easier borrowing at the point of check out. When you're checking out, an app where you're buying something is probably driving a behavior, which is long-term unsustainable.

You know, we also hear about people who don't need to borrow because they find it just so easy to do that. and then imagine people who should not borrow and, it's easier to borrow potentially it can be devastating for their personal financial situations. And that's where I think that there is a bigger role.

Wealthtech in general, we have written about it in the past that I think there is a fiduciary responsibility that WealthTec has to India, right? because you want to encourage more people to come into financial assets, but at the same time, you don't want to give me a fight and, make it so much fun that it's almost like gambling, which is potentially something that happened during the COVID time?

What do you think actually, that, that played out, especially like in the US we are seeing early signs of that. 


I had a very interesting conversation with an investment advisor, a couple of weeks back, and he made a very neat point. He said most of the people used to own assets for a very long period of time, because it was not very convenient to exit.

And that's why I saw how realistic creating the kind of wealth that desk is. Today. If you were to go out and sell your real estate, it takes a hell lot of effort. But, moving out of your stocks after a reasonable performance has become very convenient. All of us dealt with clients, and hard stories where some old families had certificates of the shares, which they gained 40 years ago.

and because it was such an intense union to sell people sometimes ignored it. And that is becoming a nemesis of investing in some sense . If you want instant gratification and you don't want to delay it yet, or you can't delay the decision because the temptation is way too strong. So that is something that all of us should recognize and constantly educate investors about the impact of impulsivity.


Yeah, actually, that's a, you're not, I was talking to Pura who runs our global assets practice,yesterday. And he told me there's a very interesting concept, which is coming up, in the U S it sort of got me excited, but worried at the same time, there is daily settlement of price, dataon a certain asset but that settlement happens in a Bitcoin,Imagine that you're owning Netflix stock. And if on that day, Netflix stock is up. You get a certain amount of Bitcoin credited to your account. On their days down, it gets debited. It's almost like an instant dopamine hit. So you have gambling, issues coming in.

You have a dopamine hit happening. Thing about long-term investing is somewhere getting lost in this whole picture. But yeah, I think something to be a watchful of, how are you tailoring the portfolios now, given that we have a view that potentially inflation is here near term, but long-term, it may not be around for, for ages to come. 


Long term beneficiary of  low inflation is equity. The raw material prices go down and discounting multiple, in, because radon discounting goes down your multiple increases, but in the short term, it's good to have some Real Assets at, in the portfolio, which will act as natural hedge against any risk of hyperinflation. So we have introduced gold and real estate in our portfolio Which are counter inflationary. So in case inflation gets out of, and we have some hedge in the portfolio, honestly, as we discussed, there is no clear answer to this. Whether inflation is more sustainable or more transitory, it's good to hedge your beds and have some allocation to the asset classes, which will potentially provide you some relief in case of inflation.


Absolutely. And I think, there is no other financial, other than asset allocation, recency 


Recency bias is something which is very strong right now, but we will strongly believe that, over a long period of time, allocating money across different asset classes and rebalancing them scientifically will yield much better returns than trading on the portfolio basis.


Yeah, that's interesting. This recency bias is something that plays up in the minds of investors lately. When we talk about what should be the expected return from the portfolio, I hear investors talking about 20 to 25% almost as if it was the eight, 10%, a few years ago. So yeah, something to be watchful about, but this has been an exciting conversation.

I've learned a lot and I hope our listeners have as well. Inflation is something to watch out for. It can be your friend, if you manage the asset pool carefully, and it can obviously be an enemy if you spend too aggressively. So that's something for us to take away. Thanks Vaibhav. And I think this was one of our more exciting insider investing shows.


Thanks Sandeep, I really enjoyed this conversation. 


Thank you.

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