> Is it possible to hedge your investments against different levels of inflation? This is the question we ask in today's episode, as we run through a variety of different investment approaches and commodities. While the answer may not come as a huge surprise, it is definitely worth the walk-through and getting to grips with what the literature can tell us in each scenario. After rounding up some news and a few reviews relevant to our usual subject matter, we dive straight into this topic, tackling the performance of stocks and bonds, gold, international stocks, value stocks, and more! We also share some general thoughts and questions to ask during periods where inflation is high, before positing our view that there is no single successful hedge against inflation, but rather our usual position of an adjusted and diversified portfolio will serve you as well in this regard as in others. We finish off this episode with a few of our usual quick cards, and this week's disturbing bad advice! So tune in to hear all about what you should know about expected and unexpected inflation and a whole lot more!
* https://rationalreminder.ca/podcast/150
Stocks generally bounce back, them going down isn't a big deal given the idea of 'buying low'.
I've made judicious purchases in sealed Magic: The Gathering product. In just under 3 years, my initial 6-digit investment is up over 200%. Some purchases are wildly up and nothing so far has been a losing bet.
Other areas in collectibles I am also doing really well, like statues, classic cars, etc. Obviously a limiting factor is storage space.
I've lucked out due to some black swan type events but I can't see anywhere else where my investments are performing nearly as well.
It's been known that trying to pick individual stocks is generally a sucker's bet since (at least) 1973, but people still try to do it:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
You will never get really rich (100M+) without stock picking but you’re going to be better off in the average case by sticking to the index.
Similar to working for a startup vs working for a large corporation - working at a startup is like stock picking:)
Otherwise, monopolies still seem strong for now with pricing power. Areas the government will print money to fund also seem like a decent bet: defense, climate, …? And you can try to maintain purchasing power with gold or crypto or real estate (in non-bubble areas). But we may be entering some challenging times for those with assets.
1. https://www.wiley.com/en-us/The+Asset+Economy-p-978150954345...
For me the obvious answer is, if the fed actions means it's more expensive to borrow now, then lend your money. The question is how and where. Bonds? Which bonds? TIPS don't seem to have a rate that would protect me from inflation.
Gold? There's enough volatility there to lose more than 2 years worth of inflation with a badly timed entry, and I if I have to time my entry I'm trading, and I'm not a trader so I don't like it.
I know mentioning cryptos is sometimes taboo on HN, but if I lived in the US/EU I would convert a some portion of my savings into stablecoins and spread them out into some interest accounts to try to minimize counterparty risk. Their APY is running along inflation for the time being. At least until the dust settles and it's clear where to put your money.
The TIP yield is a real yield. It's indexed to CPI-U, same as Series I bonds. (TIPs adjust monthly; Series I bonds semiannually.)
> would convert a some portion of my savings into stablecoins
This is probably the worst choice one can make. It's accepting a 0% nominal yield against an unregulated counterparty. A Bank of America savings account is literally a better choice.
Unfortunately, not that high:
You may be able to cash in qualified U.S. savings bonds without having to include in your income some or all of the interest earned on the bonds if you meet the following conditions.
- You pay qualified education expenses for yourself, your spouse, or a dependent.
- Your MAGI is less than $98,200 ($154,800 if married filing jointly).
- Your filing status isn't married filing separately.
> This is probably the worst choice one can make. It's accepting a 0% nominal yield against an unregulated counterparty. A Bank of America savings account is literally a better choice.
you clipped out half the sentence:
> I would convert a some portion of my savings into stablecoins and spread them out into some interest accounts to try to minimize counterparty risk.
interest accounts. i.e. non-0% nominal yields.
i'm not taking any stance on the risk v yield profile. i was just bothered by JumpCrisscross's mischaracterization of the earlier comment & wanted to correct that.
With demurrage currencies, everything works like TIPS. Yields may be negative but they are free from inflation and deflation.
It's kind of weird that people are choosing the money illusion over a negative yield/interest rate. I would rather have no inflation and see that the yield is negative than unpredictable inflation where the yield could be absolutely anything and I simply won't know.
No systemic measure is free from inflation or deflation in a dynamic market.
Prices move, sometimes in a correlated fashion, and credit waxes and wanes organically. Long-run inflation may be theoretically zero in some systems (constant money supply and magically constant velocity), but in reality, we have never observed this. (Even under commodity money systems with relatively constant money supply.)
Not at all true of historical demurrage currencies, with are subject to inflation/deflation as normal but also have reduced nominal value over holding time.
ISTR the term has been resurrected for crypto products, but I can't find any details of how any crypto demurrage currencies work that would confirm or deny that they are somehow insulated from inflation/deflation and only change buying power by the demurrage charge, though I can't see it being likely to work in practice.
In theory, you could have what is basically a “stablecoin” managed against a price index like the CPI-U instead of an actual fiat currency and then add a demurrage charge on top of that (which could provide stabilization resources, so it's not completely irrelevant to function).
I honestly have the same questions as you though, I feel like if I was 100% sure of big inflation coming, all I'd know I want to do is get out of cash, but I don't know where to put my money. Part of me says Walmart, Dollar stores, and other inelastic merchants, but idk. Physical gold seems ok, but you're right in that if you overpay, you're overpaying for an asset that doesn't return anything.
Don't make the mistake of increasing your risk appetite to chase perceive erosion of value from inflation. Inflation happen regardless, everyone wishes they could find a 8% risk free investment, they do not exist. If you're not a trader stick to an allocation you're comfortable with. The worst outcome is you try to trade in a bearish market and end up down, while inflation is still going.
The bond market doesn't seem to believe it. The managing director of the IMF just publicly stated that the central banks screwed up and act like "8 year olds playing soccer" who don't anticipate the 2nd order effects of their actions.
20% of shipping is tied up in traffic jams. We're in a economic war with a major commodity producer. It is daft to believe inflation is peaking. Even if that assumption is right, we will end up with inflation well above the fed target rate, so instead of 8%(CP 'lie' bullshit inflation) we get 5% persistent inflation.
There's not (yet) been a market crash ... If you look back a month or a year, it's been mostly sideways too.
It may be the beginning of a horrible market crash ... But it may not ;). Trying to time the market, you're just as likely to lose as to win. Diversifying is always good; the stock market has usually provided the most growth long term. Unless you need the money soon, close your eyes and keep your money in the market.
You think this is a crash?!
Maybe look into interest protected bonds? https://www.treasurydirect.gov/indiv/products/prod_ibonds_gl...
Personally I have been just spending what I make assuming saving is moot right now (besides 401k and espp)
I fear we're gonna move to an Australian-style real estate market. Never-ending boom, impossibly high prices for first-time buyers. People have predicted its collapse for 40 years or so, to no avail.
Weird timeframe to claim nothing happened. They collapsed twice since then: 35 years ago and 13 years ago.
Some markets will likely see a bear market. Real estate is local. Location matters.
The future is very uncertain right now. I could see a scenario where China moves on Taiwan and we suddenly have 5+ million people looking for asylum. I guess it's one way to get TSMC to setup a plant here.
you can only tell a bubble after it pops.
Eg both houses and land purchases (something i'm trying to do) are quite a difficult market due to cash offers being consistently present. Ie a new family won't have 500k in cash and their loan offer isn't as good as a cash offer. It happened to me several times when i was buying my home ~6 years ago, 250k cash offers, 300k cash offers, etc. And ironically it just happened to me 2 weeks ago on a land offer. A 310k land offer (loan) beaten out by a higher value and pure cash offer.
So my question is if prices will really dip that much when seemingly so much of the house and land market are propped up by cash rich buyers. Hypothetically they don't care about high interest rates right?
Perhaps high interest rates will mean the cash rich people can offer less due to less competition, but if cash rich people are also competing against other cash rich people then.. i'm not so sure.
Thoughts?
They care, because when interest rates go up, rich savers buy the dip.
That's one of the biggest ironies when it comes to people shouting that low interest rates make housing expensive. Yeah they make it expensive for those who already have enough money to buy a house outright. The amount of money you are paying on your mortgage in an area with a housing shortage is determined by your salary, not the interest rate.
In fact you can see this hedging as a reason for the inflation in the first place. Even things like target date funds that need to have 10%(or some other number) bonds have this same issue. When the interest rate rises, the value of bonds gets wiped out. But target date funds need to have a set percentage, so all of these indexes rush INTO bonds at this moment. The more stocks are up in this moment, the more these passive investments are selling stocks and buying bonds.
You can imagine that as stocks go up, the more stocks go up, wealthy money managers buy more and more homes in the exact same way they buy bonds. When they see that we might be about to hit an inflection point with stocks anticipated to go down, they should be selling stocks and buying whatever does better. In 2008, housing did better, so they'll probably do it even more with history on their side. Now that houses are up 30%, maybe they look for another investment. There it is, used cars. There it is, lumber, steel, oil. There it is, commodities futures. All with unprecedented demand, not from common folk, but the wealthy.
Hedging against a stock market crash causes inflation, and inflation causes interest rate rises, which is a positive feedback loop that causes more hedging, which causes more rate rises until the common folk can not handle it, in which case the economy falls over. At the end of the day we get a recession, massive job loss, and the Fed resets the interest rate back to zero and they start selling their assets and re-buying stocks. Cycle starts again anew.
Inflation can only be produced if the demands for goods and services cannot be met and the price rises as a result.
Asset price increases are not inflation. A house's price going up is not inflation. Rent going up is. A house's rent is only indirectly related to the price of the house - there's a lot more that directly affect rents such as population growth or movement of people, changing preferences (some people might used to have house mates, but now prefer to live alone due to covid etc).
Bill is in it for the short-term capital holding. He's going to do what he can to make as much money as he can, but if he thinks this is just a short-term flip, no need to build a full company around this, it's not worth it. He'll rent out what he can rent, find some sub-contractors to do what they can, and the harder to rent stuff just sits there.
That's the problem here. He's one man, with many responsibilities, hoarding over what might be 4000 different lots worth $250k. He just doesn't have the attention to deal with that. So while normal farmland owners will use everything they have, now we have a bunch of land empty, and that empty land is pushing the supply demand curve of all farmland over. And that's just one man doing a one percent hedge.
This same exact issue is happening in housing, and its happening at a scale much larger than a single billionaire. I bet there are thousands upon thousands of used cars just sitting in a field somewhere. There are legitimate business that need to ensure that they can get oil or steel or lumber or whatever else they need, and the futures markets are all insane because these investors know that the recession will hit before they need to buy, and everything else will drop in proportion to these commodities.
But yes, you're absolutely right that cash buyers should have way fewer concerns about interest rates.
Houses are thought to be worth X. One house is available and one labor-rich renter buys it for 2X. This is now the market price of a comparable house. Two houses are available and their owners swap. This is a cash transaction at the same 2X price.
at 2x the price, you'd imagine supply would grow to meet the demand. And yet, something (that i do not know) is causing the supply to not grow as expected.
And rent is nearing 1900 nationwide. How is that even reality?
If people just started killing landlords and investors I personally wouldn’t give a fuck (I’m kidding, not advocating this, but that’s how bad actors these animals are).
Inflation is always and everywhere a monetary phenomenon.
Unless you are a day trader (or r/WallStreetBets trader) this should not be a long-term concern.
>Time in the market beats timing the market.
I have my assets in an S&P500 ETF and some Danish funds and stocks. Owning a good home in a first-world country is also a good long-term investment.
Better to hold cash up until the point that the discount rate has mostly priced it in, then buy assets
The value would only grow _if_ the inflationary environment is worse than expectations, and people sacrifice even more discretionary spending to buy consumer staples. if the inflationary environment isn't as bad as expectations, then these companies would be out-performed by other, higher growth, discretionary goods companies.
There's no such thing as a risk free investment.
“Assets” is much broader than, and other categories don't consistently follow, the stock market.
If you want my crank opinion though, at this stage in the economic cycle you should be in commodities. Sure, you're late to the party and they're going to make you ill with their volatility, but generally that's where you want to be now.
Other options are recession plays like consumer staples. Think about the things people will still have to buy or will downgrade to in a recession. I bought $BUD and $TAP because I think people will drink cheap beer. Cigarette companies are good if you have no conscience and can catch them on a downswing(they're already up). My $KHC bet I made 6 months ago is probably the best thing in my portfolio right now. You have to be prepared for days like last Friday when nearly every stock was down. People are fleeing to dollars, so actually having cash right now isn't a bad thing. Your cash already lost value. We may see a dollar squeeze as people flee to safety and the fed drains liquidity from the financial system before the dollar continues its downward slide(late this year?).
Everything depends on the threat of war right now. Not enough people are talking about the supply disruptions happening. 20% of the world's container ships are currently in traffic jams thanks to Chinese COVID paranoia. Russia, a major commodity supplier, is cut out of the Western financial system. Fertilizer and energy are spiking. Recession may have peaked but it will settle into a steady 5+% rate unless the fed grinds the economy to a halt.
War may already be happening behind the scenes. The FBI is now warning(https://www.ic3.gov/Media/News/2022/220420-2.pdf) of attacks on our food infrastructure, possibly connected to the rash of fires occurring at food processing plants(stuxnet being fed back to us?).
Indonesia just suspended palm oil exports. They make something like 60% of the global supply. Countries are becoming protectionist. We are reverting in some ways to a pre-globalist world.
Sweden and Finland are likely joining NATO. The tensions with Russia aren't going away anytime soon. Even though Putin looks to be in poor health, the Russian aggression is not purely a product of Putin but baked into the national identity of Russia's elites. Maybe a good play, despite already taking off, is defense industry stocks(Lockheed, Raytheon, etc). The world is entering a very unstable period.
One thing you should consider doing as well: buy things you'll need over the next year. They're only going to get harder to buy and they're going up in price. Like a certain brand of shampoo? Why not buy a year's worth. Stockpiling is horrible on a national level, but as an individual it will help you cope with some of the price increases while your dollars would otherwise be stagnating or decaying.
Lets hope the bond market is currently wrong, because they seem to be pricing in many more hikes than the fed thinks will need to happen. There is a risk that inflation becomes unhinged and spirals for a while. The West isn't prepared for that sort of financial doom scenario.
Manipulating interest rates works when under otherwise normal condition the government wants to prevent overheating economy or to provide stimulus during a down cycle.
It is not immediately clear if the rate increases is going to help increase production or stabilise supply chains, perhaps just the contrary.
back in the oil crisis of the 70's, the inflation was high because oil embargo made everything that need oil (which was everything) more expensive.
Couldn't you make the same argument back then, that increasing interest rates isn't going to end the embargo and lower inflation? And yet, the then Fed chair did increase interest rate to combat inflation (granted, the inflation back then was much worse than now).
So perhaps this time, it's different - covid supply shocks playing out is not going to get resolved by interest increases. By increasing rates, the only result is to reduce demand, which is just another way of saying those who can't afford it will have to sacrifice, and lower their quality of life.
Citation needed.
Rate hikes were announced mid-march and I don't think you can even find that info on this chart https://finance.yahoo.com/quote/%5EDJI/
If we do see a crash soon I think it will likely be more related to major tech stocks failing to perform as expected. Of the original FAANG, F and N have both had days where there value dropped ~30% in a single day in the last six months, and that has nothing to do with interest rate hikes.
https://files.catbox.moe/cs4gtg.png
https://www.cmegroup.com/trading/interest-rates/countdown-to...
Remember, the fed folks can't insider trade like they used to, so they have no reason to prop up equities anymore. They made their money.