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Comment by VoidWarranty | Hacker News Reader

So uh, I'm the first person in my family to break the cycle of poverty. I have nobody I trust to follow advise with money. I do all the 'standard' boring investment strategies (401, index funds, roth, etc). I don't bother with crypto (scams). What does one do if stagflation is coming? Float more cash? Buy real estate?

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The 10 year breakeven inflation rate as of today is 2.38%.

Deciding that stagflation is coming and changing you asset allocation based on a solicitation of opinions from random people is probably a bad idea.

If nothing else you should look for academic papers on ways to estimate expected inflation instead of asking for opinions here.

All I can suggest is to read Buffett's classic article from 1977:

https://fortune.com/article/buffett-how-inflation-swindles-t...

He goes completely off the rails in the very first sentence: It is no longer a secret that stocks, like bonds, do poorly in an inflationary environment.

Does it get better?

Why do you think that sentence is wrong?

Hint: What time period do you think he's talking about?

He's talking about a time period when the stock market was in the doldrums and inflation was high. Right now inflation is considered high (even though it isn't really, historically) and the stock market is berserk.

And why wouldn't the stock market be considered a valid investment in the presence of inflation? Where else are you supposed to park your cash if you want to outperform TIPS? Remember that in the 1970s there basically was no retail stock market compared to what we have now, where everyone and their dog has a 401(k) and trading is basically free.

Even if valid, his point doesn't seem relevant. It is going to be hard to apply any lessons from the 1970s to what we're facing now, when incompetent and erratic policymakers are driving the US economic picture rather than external influences like OPEC and Viet Nam. (And if we thought OPEC was a malevolent cartel, just wait'll the rest of the world starts forging its own trade agreements without inviting us to participate.)

You acknowledge inflation isn't high by historical standards yet went on to argue he's wrong because stocks went up when inflation wasn't high by historical standards?

The last time we had sudden unexpected high inflation was 2022 and stocks crashed did they not?

https://fred.stlouisfed.org/series/FPCPITOTLZGUSA

I have no opinion on whether the article is relevant I was only responding to the sentence you quoted which didn't seem obviously incorrect.

Hmm. What else was going on around that time that might confound any conclusions?

Also, a 'crash' that recovers in 90 days isn't much of a 'crash', but the fact that people consider it a 'crash' is admittedly kind of scary.

Not sure where you got 90 days from. Turns out there's a Wikipedia article:

https://en.m.wikipedia.org/wiki/2022_stock_market_decline

Perhaps you would have preferred if I said "bear market" rather than crash.

At any rate the first sentence of that Buffet article you hated didn't deserve your ire.

Bear market, temporary downturn, whatever. It was not a "crash" by any sane definition of the word, and it had little or nothing to do with inflation. Otherwise we'd see the same correlation at other times when inflation has spiked.

U.S. dollar loses value, property depreciates (no one can afford payments) and equities have their P/E ratios slammed (and we are at all-time historic highs...)

So the solution historically has been stable goods. Gold is the historic standard, but probably Bitcoin now as well. Possibly foreign stocks/currencies. But since everything is so interlinked now with pensions and 401ks that the financial world is far different place than the 70s. If you really want a safe bet, it's that there will be a fair bit of volatility and every asset class will have more risk with spikes up and down. All of this depends heavily on how the U.S. responds along the way.

Basically anything but hold cash, at least until interest rates are forcibly pushed to the moon to try to break out of stagflation. Assuming you can avoid selling whatever you've bought until the other side.

[EDIT] If you think we're in for a long period (decades) in which nobody will do what's needed to break out of stagflation and we're going to head the way of various inflationary South American economies over the past century, I guess look at Europe? IDK, it'll be bad everywhere if that happens.

This time won’t be like the last. The point of such episodes is to destroy capital. A rational response would be to de-lever before everyone else. Focus on the meaningful and the productive in the near-term, disregard promises about the future.

If you’re aggressive, issue long-term, fixed rate debt and buy whatever you think everyone else will view as personally meaningful or currently-productive, provided someone didn’t beat you to it.

Arguably we’re 40 years into the “cash is trash” trade so everyone is in a little bit of suspense what happens next.

Bogleheads [1] gives better financial advice than HN. Every time I peruse some threads there, I learn something new about personal finance I didn't know about.

[1] www.bogleheads.org/forum

Gold, make sure your debts are low, trim expenses now. Start thinking long term, what things will you need 5-10 years from now that will only be much more expensive or hard to get.

If we are heading into a period of high inflation and interest rates, holding debt now is great. High unexpected inflation means that the dollars that you use to pay off the debt are worth less, and you are locked in to a low interest rate.

> and you are locked in to a low interest rate.

Depends on the type of debt, of course. If it's a fixed term loan, and you'll definitely never need to refinance it, sure.

The ideal circumstance would be to take out a loan you can’t really afford immediately before a round of hyperinflation. Bad time to have $100K in a savings account. Great time to owe that bank $2M.

I currently am this person.

What exactly would one do with a 2 million dollar loan? Please don’t say real estate.

Outside of the standard theme park with blackjack and hookers, you could pick up a race horse. Those can start in the low six figures up to tens of millions. Although if you want to race, do not blow the entire amount on just the horse, because the training + food + maintenance is also going to have some hefty bills.

I’ve never been to a theme park with black jack and hookers. I’ll let you sort that out.

Thanks for the help.

That’s all I’ve got. Maybe open a business, I suppose?

I’ll just let it deprecate.

What a mess.

you're making an assumption that your income is going to keep pace with inflation to make it easier to pay off the debt. It very well may not.

/I haven't got a base pay increase in 4 years

True, but at some point you can sell plasma for 4 trillion USD and pay it off all at once.

It's never a bad time to lower your expenses.

Gold, aka Bitcoin for Boomers.

That depends - if you are good at timing the market you would sell your stocks at the peak, put it into cash for a year or two and then buy long term low risk, high interest rates bonds that cannot be called... Too bad I don't know anyone who can time the market. (I'm not confident that stocks will start falling before the bond rate peaks, even though that is my guess).

My guess is that real estate will not do well in general. However there are always exceptions, but I don't know if the exception is in Dallas Texas (random big city), or Chaseley North Dakota (random place not even a town, cannot support even one store)

Real assets like precious metals, commodities, real estate should do well during stagflation. I think crypto (mainstream ones, not fringe) should be doing well too IMHO, despite the skeptics.

Why would real estate do well in a world of double digit interest rates?

You can charge more in rent - not like the tenant is going to be able to buy somewhere to escape the rent trap.

Did rents surge during past times of stagflation?

past times of stagflation didn't have such a tight housing supply.

If people can't afford the rents then they'll just cram more people in. Currently have a "Joey/Chandler" style apartment form friends with 2 people in for $4k/month? Now you get 4. Or 6. Price increases to $6k/month but it's down on a per-person basis.

In some cities you get time-sharing beds. In 2003 I lived (for 3 weeks) in a house in London, I had my own room - the largest in the house. A smaller room had a couple with a baby, the loft had 3 mattresses in it but 4 people living there, time-sharing with the mattresses like you have in a nuclear submarine.

There's plenty of opportunity for landlords to increases costs even if peoples incomes can't support an increase.

Well there is another issue: trust in the dollar is waning, so central banks have been buying gold. If Trump messes too much with the fed's independence, this can only get worse.. One source theorizes that his admin. is doing this not so much to lower interest rates, but to get the fed to reduce interest it pays to banks for money they keep at the fed (a thing that started after the GFC). The idea is that then the banks would buy treasuries instead, which might reduce the debt payment burden on the government.

Anyway... gold is all about wealth preservation, not growth, so I don't know what to tell you. But it is up 44% over the last year.

You might just be in a long epicycle of poverty and not realize it.

Investment returns have been falling across the board. A good guide on how to invest:

https://www.amazon.com/Investing-Amid-Low-Expected-Returns/d...

Well if you were following sound financial advice and understand the economics from an Austrian perspective you'd likely be diversified into several equal buckets with one of those buckets designed to offset the losses. You do this when it doesn't matter because you can never time the market. No one can.

In the case of inflation/stagflation it would be physical assets that increase in value under such circumstances. Gold/Silver meet this, as do many other assets. Under such environments counterparty-risk must be carefully evaluated.

All of your mentioned standard strategies have opaque and significant banking counter-party risk. There are also details such as the YTM loophole where the assets you hold may not have been marked to market (when interest rates go up).

This is particularly true of any bonds, or bond backed securities, and the leverage involved in many such markets is next to impossible to discern, and as a result the average advice of passive investment breaks down towards losses in the near term but not long-term.

None of this is financial advice, just reiterating things people should already know about. The stock market's synthetic share problem coupled with dark pools, and the commodity market's (COMEX) fail to delivers and failure to loadout (physical delivery), are things to know about. Unspecified risk from bad actors.

Its all paper with substantial counter-party risk until you hold it in your hands.

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