Inflation Is an Opportunity – Use These 5 Inflation Hedges to Take Advantage of It.
Every situation represents an opportunity for those who take the right view.
High inflation will not be transitory. It's official!
How do we know? Janet Yellen herself just admitted that she was wrong in predicting this for months. It is quite rare to see Janet Yellen admit a mistake, but it must be said that in front of the obvious numbers, it could not be otherwise.
Inflation was still above 8% in April 2022. Some people think that the peak has been reached, or are hoping for it. Others think that this inflationary context will continue for months and months. This is notably the case with Larry Fink, the CEO of Blackrock.
For consumers, inflation means higher prices for goods and services. It also means the risk of a loss of purchasing power, since wages will not necessarily increase by as much to compensate for this persistent high inflation. Employers are often afraid to increase wages too quickly, at the risk of entering the wage-price infernal loop.
The new generations have never experienced such an inflationary context. Inflation has indeed fluctuated throughout history. During the 1970s and 1980s, prices were rising by 10 to 15% per year. But since then, things have calmed down. In the 2000s, inflation fluctuated between 2 and 5%. In the 2010s, inflation was between 0 and 2%, to the point that some central bankers thought that printing money fiat out of thin air had become inconsequential.
The return to Earth is therefore more than difficult. Not for the central bankers of course, who are part of the ultra-rich, but rather for the common man like you and me.
3 types of inflation
First, you should know that there are three different types of inflation:
Demand-pull inflation: this occurs when demand exceeds production capacity. Put another way, there is more demand for goods than the current supply can meet. This increases prices.
Cost-push inflation: this occurs when production costs rise, and it becomes more expensive for companies to produce goods. As a result, market prices rise to reflect the rising cost of inputs.
Built-in inflation: This occurs when workers demand higher wages to combat the rising cost of living. This type of inflation can be perverse because it causes a feedback effect in which companies must continuously raise prices to meet the rising cost of labor.
Currently, we are in a situation of demand-pull inflation, with supply and value chains suffering from the COVID-19 pandemic with multiple lock-ins, as well as the war in Ukraine where grain harvests are blocked, raising the risk of a huge global food crisis for example.
But this may end up becoming built-in inflation. Indeed, wage earners will demand higher wages to fight against the consequences of the high inflation that has persisted for months.
Central bankers are therefore facing complex challenges, which they have helped to create by printing more than 15,000 billion dollars of fiat money out of thin air in the eighteen months following the COVID-19 pandemic.
Inflation has advantages and disadvantages
Inflation is a dirty word these days, but you need to take the time to understand the pros and cons associated with this concept.
Low and stable inflation is often an indicator of a growing, and therefore healthy, economy. This benefits holders of fixed-rate debt, such as mortgages. It also encourages consumption today rather than tomorrow.
On the other hand, too-high inflation will reduce the purchasing power of citizens since the US dollar allows them to buy fewer goods. Consumption suffers, as consumers refocus on what is necessary, eliminating all purchases for comfort and pleasure. This also jeopardizes retirees living on fixed incomes. Finally, it pushes the Fed to intervene more in monetary policy, which makes the financial markets more and more nervous and volatile.
With this high inflation, you need to protect yourself. This is where you have to switch from being a consumer to being an investor. Because from an investor's perspective, inflation is an opportunity. Here's how to profit from inflation through 5 inflation hedges that you should study carefully.
1. Real Estate
Real estate is always an excellent hedge against inflation. You bought a property to live in or to rent. To take advantage of the leverage, you made a fixed-rate loan. With the low rates we have seen for several years, as well as the flood of liquidity in the market, banks were open to this type of project.
Your property will increase in value due to inflation. Then, your wages will eventually rise due to inflation, provided that it lasts long enough and leaves companies no choice but to act on it. With a fixed-rate loan, you'll have more salary but still, have the same monthly payments. You'll be a winner.
Even better, if you rent the property, the rents will increase, and you will have more money to pay back your loan whose amount will not change. Real estate is still an excellent hedge against inflation. However, it is necessary to take care to well select the good that you are going to buy.
2. Value stocks
Past research shows that value stocks tend to perform better than growth stocks during periods of high inflation. Value stocks are companies that have strong earnings relative to their current share price. They are also known to have robust cash flows, which investors typically value when prices are rising.
The banking and insurance industries will benefit greatly from persistent inflation and rising interest rates in the months ahead. The energy sector will also benefit from this inflation with the uncertainty related to the war in Ukraine.
For the more adventurous investor, there are also opportunities in the tech world, which has suffered a major crash since the beginning of 2022. Some companies have lost more than 50% of their value on the stock market. Not all of these companies are equal, and some of them represent great opportunities at this price level, provided you are clear-sighted and patient.
Focus on companies that have pricing power on their side. These companies will be able to pass on price increases to their customers without them abandoning them.
3. Gold, Commodities, Bitcoin
Gold, commodities, and Bitcoin will benefit from persistently high inflation. Yes, yes, you read Bitcoin correctly. Many still have a hard time seeing this for Bitcoin, but some like Bill Miller don't hesitate to call Bitcoin an insurance policy against financial catastrophe. It is no coincidence that a multi-billionaire thinks this and buys Bitcoin for more than 50% of his portfolio.
BTC units are units of wealth, not units of debt like the US dollar and other fiat currencies. When you own Bitcoin, you are independent of the control of central bankers and governments. It's the same with gold and commodities.
For some, the war in Ukraine with Western sanctions that saw Russian assets in US dollars blocked by America will lead to the emergence of a Bretton Woods III backed by outside money. Gold, commodities, and Bitcoin will benefit greatly in the coming years.
4. TIPS
Treasury Inflation-Protected Securities (TIPS) are marketable U.S. Treasury Securities designed to combat the erosion of purchasing power. TIPS has the advantage of periodic inflation adjustments, a characteristic that standard fixed-rate bonds lack.
Investors seeking capital preservation and purchasing power stability should be aware of TIPS and see if it can meet their expectations for protection against persistent high inflation.
This is not something I would personally go for, but you need to know about it to make up your mind. Note that TIPS are backed by the full faith and credit of the U.S. government. So it is not necessarily an asset that will suit everyone.
5. I-Bonds
Periods of high inflation usually make U.S. savings bonds attractive again. You can't buy them for more than $10K a year. In addition, they are considered non-marketable securities. I-Bonds promise to keep pace with inflation. Like TIPS, I-Bonds offer you a nearly guaranteed return of principal.
Like TIPS, I-Bonds are not for everyone. But it's worth knowing all your options. Some people use them to preserve the purchasing power of part of their portfolio, arguing that it is better than cash, whose value is mechanically eroded by inflation.
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