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Let's Get Real

Let's Get Real

April 25, 2022
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The phrase let’s get real has been used for decades. According to the Cambridge Dictionary it is an informal phrase used for telling someone they should try to understand the true facts of a situation and not hope for what is impossible.

The Urban Dictionary notes that when someone wants you to get real, they want you to have a reality check, and to stop behaving as though you are living in a fantasy world. It is a way to tell someone to stop having an unrealistic view or outlook.

In economics, the term REAL means inflation adjusted. It is the rate of return you get after subtracting your gross, or nominal, rate of return from inflation. With inflation rising to the highest level in more than 40 years, this has become top of mind for many Americans these days.

A number of economic measures are reported in both nominal and real, minus inflation, terms. I will give you a couple of examples. First of all, according to the Bureau of Economic Analysis (BEA), current dollar GDP increased by 10.0% or $2.1 trillion in calendar your 2021. This puts the size of the US economy at $22.99 trillion. However, real GDP increased 5.7% after subtracting 3.9% inflation, which was up from just 1.2% the previous year. 

Hitting closer to home, the same BEA report shows that for the fourth quarter’21 disposable personal income increased by 14. 1 billion or .3%. However, real disposable income decreased 5.8%. It is important to remember that real numbers move inversely with persistent and rising inflation. This is causing pain in the wallets of consumers.

Source: FRED 

Having less disposable income will eventually hurt consumer spending which makes up approximately 70% of the US GDP. This is something we are going to have to watch closely moving forward as we look for clues on the timing of the next recession.

It is also important to look at history to see what happens to the growth of various asset classes on a real basis during times of inflation. From 1980 to 1984 inflation rose by more than 30%. Let’s take a look at what happened to both stocks and cash during this time.

Source:  Bryan Rich at Billionaire's Portfolio

As you can see in the chart above, the value of $100 invested in stocks increased your actual purchasing power by more than 30% over the timeline measured, giving you a hedge against inflation. However, by the same token, leaving your money in cash destroyed your purchasing power by more than 33% in just four years. This means that your money would buy 1/3 fewer bags of groceries and gallons of gasoline. 

As always, the past is not a guarantee of what will happen in the future, but it is a useful guidepost to keep in mind. We will continue to use our Way Back machines (shout out to Sherman and Ms. Peabody) to study past periods of economic and investment history to help inform our decision-making. We feel it is very important to make smart decisions as we continue “Moving Life Forward”.

The views stated are not necessarily the opinion of Cetera and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein.  Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.  Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.