Investing in 2023

While filing my tax return on Thursday and claiming a sizeable refund (the effect of amending the Polski Ład reform in 2H2022 which retroactively decreased the PIT rate in the first bracket from 17% to 12%) I thought how to make the best use of money, other than spending it.

The current year does not seem to be easy for holders of pecuniary assets, since preserving purchasing power of money has become a challenge. Let’s look at the most popular alternatives at hand.

With the current real interest rate of -10% in Poland, bank deposits (whose quotations fell recently) still offer a solid alternative to putting money in a drawer, but even with expected disinflation, a real return in a few months is very likely to be negative anyway.

Poles are generally wary of fancy investments and therefore those who possess sizeable surpluses often turn them into tangible assets, i.e. residential properties. Between October 2021 and October 2022 mortgage instalments rose by around 100% and repayment capacities shrunk, hence the number of new mortgages granted was falling by nearly 70% year-on-year in 3Q2022. Property transaction prices only nudge up these days, but with inflation of over 17% (the January 2023 reading), value-wise they have produced a real negative return of 15% over the recent year. If prices stabilise in nominal terms over the next quarters, in real terms they will begin to be getting cheaper and cheaper. My forecast for this asset class (I dislike the term, since I believe properties should meet people’s housing needs rather than constitute a haven for their money) is not optimistic. With factors driving their prices potentially up and down in the near future, I believe the rent yield and price appreciation might be at the level of bank deposits, with higher risk and lower liquidity.

The equity market reached its low in Poland and on most markets in early October 2022. It seems at that time stock prices already discounted all negative scenarios on the horizon, especially pertaining to problems with energy supply during the winter. I believe stocks might be a good, but if you purchase them on a temporary low. My strategy would be to wait for a correction and get some exposure to equities and if the correction gets deeper, buy more to bring down the average purchase price.

Government bonds seem to be a safe choice credit-wise, since most governments benefit from the inflation, as the real value of their debt shrinks. With the anticipated decrease in interest rates, fixed-coupon bonds might be a good mid-term investment, but mostly in terms of price appreciation, not the interest income. The yields on Polish 10Y gilts were quite volatile in recent weeks. Even in recent days the yield increased from 5.9% to 6.3%, which given the 10Y tenor must have resulted in a substantial loss in value.

For some foreign currencies are an alternative. Here it seems that Polish zloty is already weak against major currencies and little room for depreciation is imaginable. In practice the negative real interest, disturbingly low for a civilised world, might send the Polish currency even lower.

I have no idea about alternative investments, since I do not track them, but definitely must advise you not to jump into a train which has already departed. Chasing missed opportunities is one of major mistakes investors make. Stocks? You should have bought them in October 2022. Polish gilts – too. Inflation-linked bonds – you should have purchased them in 2021 at the latest. As a proud (of my skills) holder of those securities I do not believe they will continue to fetch extraordinarily good returns for more than a few quarters ahead. Or actually with the governor of the central bank who does not fulfil his duty to shield purchasing power of Zloty, those bonds might outperform bank deposits for 2 or 3 years.

Off for late-winter holiday next weekend. A coverage due on 12 March 2023.

Historical shop receipts

While cleaning up the hard disk of my computer I have come across a spreadsheet dated 4Q2015 in which I recorded prices of basic goods in shops at that time, to estimate the costs of living after I move out from my parents. Over 7 years later, after a few quarters of rampant inflation, I possess a quaint material for price comparisons. The list is rather modest and contains household goods, food and beverages, so the main stuff which lands in a shopping bag.

A few basic articles whose prices have gone up significantly since 4Q2015:
- lavatory paper – bygone cost PLN 3.59 per 8 rolls, today – around PLN 10 for the same quantity,
- bath sponge – then PLN 0.63, these days PLN 1.29 at Lidl,
- milk (3.2%) – then below PLN 2.00 per litre, today usually above PLN 3.50,
- 10 eggs – then for less than PLN 4.00, today twice as much,
- a loaf of bread – then around PLN 2.00, today usually no less than PLN 3.00 (in a supermarket, in a bakery it is more expensive),
- flour (1 kg) – then around PLN 1.30, today at least two times more,
- sugar (1 kg) – then close to PLN 2.30, today I believe PLN 5.00 (I buy it once in a blue moon).

But to my surprise, I have found goods, whose price has not gone up significantly (if at all) over that time:
- glass cleaner – then PLN 6.00 per litre, today you might find it at such price at bargain sales,
- Domestos (1 litre) – then PLN 7.00, today you can find 750 ml for PLN 6.00,
- instant tea (100 bags) – then PLN 6.00, today no problem to find Earl Grey from Lidl at such price,
- oranges – then for around PLN 4.00 – PLN 5.00 per kg, recently I saw ones for PLN 3.49 in Lidl.

The above are just exceptions which prove the rule. The costs of living have gone up in recent months by more than the official inflation, with prices of nutrients and dwelling upkeep eating up only bigger parts of households’ budgets, which bears out inflation hits the poorest most. In December 2022 the average salary in Poland reached PLN 7,330 before tax, up by 10.3% year-on-year, while the CPI rate stood at 16.6%, which means real wages declined by 5.4% year-on-year. For the first time since many years Poles have been impoverished and the trend is likely to continue at least for a few months.

Personally, albeit I am faring well financially, I am going to set up a spreadsheet of my personal expenses and divide them into a matrix of four categories: essentials and non-essentials, vs. recurring and non-recurring. I will fill it in based on my bank account statements and jotted down cash payments at the end of each month and after 12 months (otherwise one-off expenses will not count up properly) I will find out how much I need to spend monthly to eke out a living and how much I actually spend. I estimate the former is between PLN 2,000 and PLN 2,500 (including car maintenance) and the latter between PLN 4,500 and PLN 5,000. I pledge revert with a summary in early 2024.

Are we past the trough?

Had I been really good at economic forecasting, I would have been much richer, worked less and probably had more time to indulge in hobbies, including blogging. Sadly, predicting economic variables is, needless to say, subject to a lot of uncertainty. Time permitting, I keep track of what is going on in the real economy and on financial markets and spot some sparkles of optimism.

Stock markets, which usually anticipate economic recoveries, have rebounded recently, with the Warsaw Stock Exchange broad market index being some 20% above its low from early October. Some pundits warn it is just a major correction in the bear market, yet upbeat sentiment has definitely taken over recently.

Natural gas and electricity prices on commodity exchanges, though still volatile, have fallen off peaks from September. With natural gas storage facilities across Europe full, the threat of a severe energy crisis has been somewhat staved off. This also gives relief to entrepreneurs from who energy is an important item in the cost structure, except for those who hedged purchases at peaks.

Commodity prices have also adjusted to lower demand, which means, the demand for them might not necessarily fall. Brent crude oil now costs (in USD) roughly as much as before Russia invaded Ukraine.

The last glimmer of hope are PPI (producer price inflation) readouts, which signify decreasing cost pressure for entrepreneurs, which will with a delay of a few months should translate into lower consumer inflation.

Not all signals from the economy are bright. Profits of companies after 3Q2022 keep falling dramatically, which might hamper their investment plans and necessitate lay-offs.

Consumer confidence in Poland is also record-low, with wallets of ordinary people badly hit by prices of most basic goods rising faster than general inflation (+17.9% in October 2022). With negative real average wage growth (around -4% y/y) the discretionary spending must plummet and so far nothing indicates private consumption could recover soon.

Across Europe a big unknown is the threat of energy shortages during the winter. I lack competencies to assess how real that threat is, but if only the most energy-consuming industries are forced to suspend productions, effects of negative supply shock will spill over the entire economy, send inflation up.

In Poland much depends on the influx of refugees from Ukraine, where the Russian tyrant is trying to destroy the infrastructure to deprive civilians of electricity, heat and water during the winter.

Even if the worst has not come over, I believe it is a matter of a few months. Roll on spring!

On prices rising

Michael has beaten it to me, with a splendid account of what Poles have to face up to these days. The imminent price growth has been a par for the course since pre-pandemic times. Recent outburst of public outrage over prime minister Morawiecki’s purchase of inflation-indexed government bonds has left me unimpressed. I bought such securities for the first time in July 2019; my grasp of economics told me to protect against recklessly loose fiscal and monetary policies. Time has proven me right, while the pandemic and the war in Ukraine have amplified the effects of local policy errors.

Looking back at the autumn 2021, when I visited underprivileged families as a volunteer of Szlachetna Paczka, I remember well people complaining about rising costs of living, especially more expensive food, electricity and heating. I worried this could send millions of people into poverty if prices of essential goods keep rising like that. I also can boast of predicting the threat of stagflation which was in the offing even without warfare on the horizon.

The factors which to some extent will continue to drive prices up are: the pandemic (not really likely to ease off for good), the fight against climate changes (which prompts consumers to change their habits) and the sanctions against Russia. The very latter will sadly hit more those who rightly aim to punish Russia for its cruelty, than the Russians, who for centuries have been accustomed to depravity.

The struggle which looms ahead of Poles now is multi-faceted.

Food prices will not go down due to droughts, shortages of fertilizers and higher energy prices. Climate change and negative supply shocks related to the war in Ukraine will push millions into famine, while residents of the developed countries will need to spend larger parts of their household budgets for nutrition.

Dwelling upkeep costs will not go down as well. They will be kept high by the push for the greener energy and decreased supply of fossil fuels from Russia. This will be painful for several poorer Poles, who will need to save on virtually everything to keep their houses warm during the coming winter. I believe we will all need to give up on some thermal comfort in months ahead and withstand temperatures of +18C in our interiors. Appallingly, some European countries, such as Germany and Austria are about to switch on their once shut down coal-burnt power plants, committing a sin of not restarting their nuclear power plants whose environmental impact is incomparably lower than of burning coal.

Fuel prices have gone up by some 50% vs. February 2022 and they might decline a but, yet given the cost of transport is included in nearly every price, even without direct exposure to petrol stations’ price lists, everyone will be worse off. So far, judging by traffic volumes, few people have given up on motoring in favour of public transport, cycling or walking – does not bode well for the economy, for the climate and for the public health.

What is being first hit by the inflation is demand for discretionary, non-essential goods. But if are to gain control over the surging prices, we must stop chasing such goods, resist the temptation to flee money. The circulation of money has to be contained, hence lending ought to be curbed and saving should be encouraged.

I have no good news for you. The best times for our civilisation are already past us. We have to brace ourselves for austerity unseen since decades. Many of us will need to watch every zloty before spending it. Our consumer habits will need to be rethought. Wisdom and sustainability will have to take over. Sharing will have to become an alternative to buying.

Besides, I am glad personally I am not impacted badly by the inflation. I put aside less money monthly, but do not have to abandon any expenses for purely financial reasons (I drive even less, but not because I cannot afford to fill up my car). My savings are shielded reasonably well from the inflation. Each day I am thankful for the sense of financial security. I hope this gratitude fends off the evil, albeit the outbreak of war east of Poland, being a tragedy to millions of innocent people, reminds nothing can be taken for granted.

Reasons to worry

Being in a swing of things, I write for posterity, to record my mindset.

Note many reasons for optimism, but I keep hoping the future is brighter than today.

I worry about my country, about how it is ruled.

I worry about the rising inflation, since it impoverishes those already underprivileged. I do not worry about myself. The recent pay rise has offset the higher costs of living and my savings have been parked in inflation-linked government bonds. I know how to take care of myself.

I worry about my compatriots, stupid enough not to get their jab and merrily spreading the virus which takes away more than a thousand lives every three days.

I worry about my girlfriend’s mother, who is pulling through from COVID-19 (also unvaccinated) and possible long-term implications for her health.

I worry about my parents whose access to healthcare has been impeded by the pandemic. I worry about my mother’s cardiac problems which prevent her from having a hip joint surgery. I worry about my father who is facing a diagnosis to confirm or rule out a prostate cancer.

I worry that 5 out of 46 families looked after volunteers from Ursynów area in Szlachetna Paczka have not found their donators, less than a week ahead of the final weekend. More on this on Boxing day.

I do not worry, but have had several stressful moments after a car collision I had over a month ago. More on this in two weeks.

I long for a peace of mind. I long for a restful sleep and waking up later than 5:00 a.m. Fortunately, some of those issues will be sorted out. Others, which cannot be influenced by me, should not worry me excessively. Keeping a healthy distance towards whatever the life brings sounds like a good recipe for not ending up as a bundle of nerves.

Stagflation

Some time ago I believed the term coined in 1970s would become the thing of the past, explored by students of economics and occupying few pages in their textbooks. The stagflation in 1970s arose from a negative supply shock and was successfully combated by tight monetary policy and drawing back on economic liberalism. The price to pay was a rise in unemployment and downfall of inefficient, uncompetitive industries.

Rings a bell? In 1970s real negative interest rates were prevalent in developed economies, as they are today. In 1970s a surge in oil prices contributed to the stagflation; today disrupted supply chains and shortages of several components might produce a similar outcome.

The two comparisons might misguidedly suggest the today’s situation is parallel to what was witnessed over 40 years ago, while it is not.

The COVID-19 pandemic, especially in its early phases, prompted unprecedented government stimulus programmes. As several sectors of economies were brought to a halt to curb the spread of the virus, the governments had to feed mouths of those who were forbidden to work. If the link between the output and the money is broken, it means the supply of money on the market is not counterbalanced by goods or services produced and so prices inevitably rise. This has happened with a delay of a few quarters.

Frail economies of several countries were propped up by ultra-loose monetary policies, giving relief to debtors and inducing those holding cash to spend it. I suppose there are other precisely targeted measures to help out those devoid of stream of revenues. If you earn no money it does not matter much whether the interest rate on your debt is 3% or 0%.

Although the pandemic has been brought under some control in several countries, supply chains continue to be disrupted. Lack of semi-conductors, disruptive for several industries, brings supply of several goods down, which, holding everything else unchanged, pushes their prices up.

Also the climate change and efforts to slow the AGW down begin to have impact on prices of energy and fossil fuels. The time has come to pay the bill for exploitation of the planet. Prices of several goods will need to incorporate the harm done to the planet by the consumers.

As a banker I have industry insights which are out od reach for an ordinary man. I closely see how soaring prices of some raw materials send profitability of some companies up and others down. On some markets where prices increased by a few hundred percent over the recent year, buyers said they’d had enough and would rather cease to manufacture rather than produce with a loss if they are unable to pass the rising cost of raw materials to off-takers. Such phenomena are a clear signal stagflation might be in the offing.

The inflation will always have its beneficiaries, but most economic actors lose on it. Usually those better off are debtors and worse off are their creditors. On top, the poorest suffer the most. Prices of dwelling upkeep and basic food have risen by more than 6% over the recent year, hitting the wallets of the underprivileged.

I am grateful for my wisdom and intuition thanks to which I invested my savings in inflation-linked government bonds which in 2022 will pay me coupons up to 8%, with risk and liquidity profile far superior to a residential property which is considered the main alternative to bank deposits in Poland