TIPS for Labor Day

We hope everyone had a great long weekend. Labor Day was established in 1882 to show respect and appreciation for the workers that historically have been at the foundation of U.S. Economy. However, looking at the economy today, we note a twist of irony to two facts. First, we should be proud that the U.S. unemployment rate, at 5.2%, is close to a historic low. The twist is that such a low rate is arguably what could make U.S. economic growth vulnerable to inflation. (See Investopedia article titled “What happens when inflation and unemployment are positively correlated” see section on the Philips Curve). Second, inflation is the enemy of most fixed income portfolios.

Look for ETF Solutions

There are 13 obvious Inflation-Protection ETF solutions with varying degrees of duration, but of course, this is not the only answer. Two other solutions that embrace the volatility expected in the fixed income market that could come from inflation include:

The degree of risk and volatility varies across all these ETF solutions, which is why the ETF Think Tank is positioned to add value to its membership. Most index-based portfolios do not have exposure to inflation protection because inflation has been benign for so many years. Financial advisors who are not addressing this issue openly are in turn ignoring the risk – especially if they are modeling portfolios after a classic 60/40 portfolio. Put differently, the active vs passive debate, when it comes to inflation, should be over. Since we are on the cusp of this risk, all financial advisors need to focus on the wrapper, and either own the decision-making process as an active and/or tactical decision or outsource the role to an active manager.

Will Inflation Forecast as Measured by CPI Prove Accurate?

We all know that there are high expectations for the Fed to manage inflation. Wishful thinking? Think through the question about the person who just received a raise or incentive to be hired. In a good economy, that person will be demanding, given their value has a higher price tag. In a bad economy, this same person will be less confident, and the employer will be in more control. This why CEOS who build moat-like businesses with great business cultures will shine. If you are looking at the duration of your TIPS portfolio, you should consider how confident you are in the accuracy of the below forecast.

Unemployment Rates

Living through Covid, readers know that the unemployment rate peaked in April 2020 at about 14.8%, and GDP collapsed by 32.9% in 2020[i]. To be honest, the rebound of economic prosperity feels awesome – maybe too good. Markets have not seen a correction of 5% in over 10 months. We also say “too good” because the benefits of the free-Fed-money safety net has made it difficult to hire people, made some employees feel overly entitled, and put the power back into the power of the labor force. Happy Labor Day! Maybe not for everyone, though.


US Unemployment Rates by Year

The ​U.S. Bureau of Labor Statistics has measured unemployment since the stock market crash of 1929. The following table shows how it has changed by year and why:


Congratulations if you, as an employee, have enjoyed the benefits of wage inflation. However, if you are an investor and or employer, watch out. Those benefits will not necessarily transfer to you. If you are an investor or financial advisor, there are things you can do to hedge against this risk. Be active in your decision-making process; this decision will come with volatility in the fixed income markets.


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ETF Industry KPI -9/07/2021

ETF Industry KPI -9/07/2021

Week of August 31, 2021 KPI Summary This week, the industry experienced no new

ETF Industry KPI – 9/13/2022

ETF Industry KPI – 9/13/2022

Week of September 6, 2021 KPI Summary This week, the industry experienced 13 new

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