A short primer to understand inflation (and how to protect your savings from being eaten by it):
“Inflation is taxation without legislation” - Milton Friedman
“Inflation is taxation without legislation” - Milton Friedman
Inflation is ultimately really simple.
You have a fraction:
(All the actual goods and services ) ———————————————
(the number of $$$ in circulation)
If the top goes up faster, we all get richer. (Real growth)
If the bottom goes up faster, we all get poorer. (Inflation)
You have a fraction:
(All the actual goods and services ) ———————————————
(the number of $$$ in circulation)
If the top goes up faster, we all get richer. (Real growth)
If the bottom goes up faster, we all get poorer. (Inflation)
The government can print dollars for free.
When it runs a large deficit, it has a tendency to print a lot of them.
Every new dollar printed means every existing one is worth a little less.
That is the invisible tax.
When it runs a large deficit, it has a tendency to print a lot of them.
Every new dollar printed means every existing one is worth a little less.
That is the invisible tax.
Because it is an invisible tax, the government has a large incentive to understate inflation.
They like to overweight on goods like TVs that get better and cheaper with technical progress.
They underweight on real assets like houses and cars.
They like to overweight on goods like TVs that get better and cheaper with technical progress.
They underweight on real assets like houses and cars.
The official inflation rate is 6.2%. That’s already scary.
However:
House prices are up 16.5%.
Used car prices are up 49%.
Gas prices are up 33%.
Stock prices are up 26%.
What if there was some way to know the real rate?
Sometimes the simplest answer is the clearest:
However:
House prices are up 16.5%.
Used car prices are up 49%.
Gas prices are up 33%.
Stock prices are up 26%.
What if there was some way to know the real rate?
Sometimes the simplest answer is the clearest:
https://twitter.com/jsblokland/status/1348725412818526212
A lot more money chasing the same number of goods and services.
Two of the businesses that my firm owns have raised prices 50% this year just to keep the same margins, so it is hitting the “real” economy fast.
So what can you do?
Two of the businesses that my firm owns have raised prices 50% this year just to keep the same margins, so it is hitting the “real” economy fast.
So what can you do?
Strategies for fighting inflation:
Worst to Best:
1. Hold cash
2. Fixed income bonds/CDs
3. Scarce assets with no utility (Gold, Bitcoin)
4. Scarce assets with utility (real estate)
5. Scarce, appreciating assets financed with fixed rate debt.
6. Own cash flowing businesses.
Worst to Best:
1. Hold cash
2. Fixed income bonds/CDs
3. Scarce assets with no utility (Gold, Bitcoin)
4. Scarce assets with utility (real estate)
5. Scarce, appreciating assets financed with fixed rate debt.
6. Own cash flowing businesses.
Starting with the best:
Cash flowing businesses can change their prices to keep up with inflation.
They can also grow above and beyond inflation if managed well.
You can buy them on the stock market ($BRK.B), start them, or buy small ones privately.
Cash flowing businesses can change their prices to keep up with inflation.
They can also grow above and beyond inflation if managed well.
You can buy them on the stock market ($BRK.B), start them, or buy small ones privately.
Real estate, financed with fixed rate debt is an amazing hedge against inflation.
If inflation remains 6% and you have a 3.5% interest rate mortgage fixed for 30 years, then inflation is “paying” you 2.5% every year for free. (In home equity)
If inflation remains 6% and you have a 3.5% interest rate mortgage fixed for 30 years, then inflation is “paying” you 2.5% every year for free. (In home equity)
Real estate without fixed rate financing is much riskier.
ARM loans and balloon payment structures look attractive, but wait until you have to refinance at 16% interest like in 1981. You can lose everything.
Do whatever you can to lock in a long term fixed rate.
ARM loans and balloon payment structures look attractive, but wait until you have to refinance at 16% interest like in 1981. You can lose everything.
Do whatever you can to lock in a long term fixed rate.
The problem with assets with no/low utility like Bitcoin and gold is that their value is speculative only.
If you hold 1 pound of gold for 100 years, you still have a 1 pound of gold. Same with 1 Bitcoin.
Use 5-10% of your portfolio max to speculate on things like this.
If you hold 1 pound of gold for 100 years, you still have a 1 pound of gold. Same with 1 Bitcoin.
Use 5-10% of your portfolio max to speculate on things like this.
Bonds/CDs: The 5 year CD rate is 0.25%. High grade corporate bonds are priced at 2.59%.
“Safe” investments like these are actually negative return if inflation stays over 2.5%.
If you hold fixed yield debt, you are on the wrong side of the inflation trade.
“Safe” investments like these are actually negative return if inflation stays over 2.5%.
If you hold fixed yield debt, you are on the wrong side of the inflation trade.
Holding cash may actually be better than bonds because at least you have liquidity.
But inflation destroys cash value faster than anything.
Hold enough cash in reserve to sleep well at night. 6-12 months of expenses if you can. Invest the rest.
But inflation destroys cash value faster than anything.
Hold enough cash in reserve to sleep well at night. 6-12 months of expenses if you can. Invest the rest.
Many people around the world have underestimated the speed that inflation can render your savings worthless.
While we may not see Zimbabwe-style hyperinflation in the USA, we have enough signs that everyone should be paying attention and not waiting to act.
While we may not see Zimbabwe-style hyperinflation in the USA, we have enough signs that everyone should be paying attention and not waiting to act.
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