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In every crisis there is danger and opportunity. So while I've droned on and on regarding the evils of inflation and tried to scare you, I have to be fair and balanced. In an age of faux news, it's my responsibility to share with you the opportunities that inflation can bring you.
Simplistically speaking, inflation is caused by more money than goods or services. If we print money, as the Federal Reserve has been known to do occasionally, then there's more money today than yesterday. If the production of goods and services doesn't keep up, they are worth more as measured by the currency. To quote a great investor named Ray Dalio, "Cash is trash." Okay, but what assets or strategies will benefit from inflation?
Here's a list of likely candidates. This is not an exhaustive list nor does it constitute advice for you to follow. But it's worth discussing the mechanisms of inflation and how it fleshes out in the real world. Here's the list with a brief rationale:
- Equity markets (with a major caveat)
- Commodities (oil, gas and raw materials like timber)
- Precious metals (gold and shiny things from the ground)
- Certain types of real estate
- A brand new 30 year fixed interest mortgage
Equity markets will benefit from inflation because stocks are prices in dollars. Seems like a no-brainer. However, certain sectors of the economy can benefit from rising prices. Higher profits can be good for shareholders. Furthermore, dividend paying stocks in the appropriate sectors of the economy can produce an income while you watch the stock rise. Those dividends can also go up. So inflation isn’t necessarily a death knell for stocks. One caveat: inflation will eventually be met with rising interest rates. Once safe long term debt like a 10 year treasury produces a healthy yield, investors will no longer see the risk of equities as worthwhile. The move to higher interest paying bonds can be the beginning of the end for equity bull markets.
Commodities go through cycles of bull and bear markets just like everything else. The bulls are typically associated with inflation. It's no fun to pay more for gas at the pump. However, if you own an oil well in Texas, life is pretty good. The same is true of precious metals. Your mobile phone is a treasure trove of precious metals and rare earth minerals. As prices go up, people who own them have big smiles on their faces. In conversations with hundreds of people a year, I'm amazed at how many people also own gold and silver, both physically and in securities as a hedge on inflation.
If you own your home, you've noticed the price going up. Low-interest rates and easy lending practices as well as low inventory have helped. However, if you're a landlord inflation is a good thing. Every so often the landlord of your home, office or yacht slip will raise your rent. She's keeping up with inflation. Landlords have this built in depending on the type of real estate. The faster they can raise their rent, the better. Apartments are typically yearly and hotels are typically nightly. Keep that in mind.
As inflation hits, owning a 10 year bond that pays 1% would seem like a bad idea. But what if you could create your own 30 year bond at 4%. Well you can by using your primary residence as collateral. It's called a mortgage. Now I'm not a mortgage broker, but I'd say it's safe to assume that interest rates will rise in the future. If so, locking in that low interest rate now will seem like a wise decision. Don't buy bonds in a rising rate environment, issue them on yourself. That's what a mortgage is, in essence.
With each of these asset types and strategies there are landmines and pitfalls if you're not careful. Furthermore, each person's situation is unique. Would it be a terrible idea to discuss how they apply to you?