In this time of uncertainty and inflation, here are some economics ideas on investing and hedging against inflation.
- Long term bond yields generally signal inflation or bond yields may move higher with inflation.
- Inflation creates lower bond prices or values.
- Corporate ETF bond yields may have more price resilient in the 21st century compared to any government bonds.
- Neither equities nor bonds perform well in real terms during inflationary regimes.
- Treasury Inflation-Protected Securities (TIPS) are solid and strong when inflation rises,
- Traded commodities performed best during high and rising inflation.
- Residential real estate holds its value during inflationary times.
- Much like the economist, Paul Zane Pilzer's analysis years ago, inflation is only as relevant as the substitutes available to the high-cost commodities. E.g., if somebody creates cheap substitute for copper or cotton, then, commodity prices change quickly.
- CPI Consumer Price Index, for instance, is based on a fixed-weight basket of goods which is adversely affected by energy costs.
- Now that the USA has become more energy independent, inflation is directly related to the White House's executive orders that affect energy prices and forecasted production.
- There are several areas where inflation seems to have a greater impact including: Health Care, Tobacco, Water, Sewerage, Beverages, Fruits & Veggies, Restaurants and Fast Food, Medical Products, Meats Fish Eggs Poultry, and Transport. See Dr. Harvey
- Of course, interest rates affect most middle-class families in the form of higher costs of monthly debt in the form of: Mortgages, Car Loans, Student Loans, and Credit Cards. Thus, the Federal Reserve could raise rates, but this may create more artificial inflation.
- Further, energy costs directly affect most the CPI Consumer Price Index - basket of goods.
- From 1926 to 2020, some sectors have performed better or (had less losses) in inflationary periods including: Energy, Health Care, Utilities, Industrials/Chemicals, Commodities, Consumer Non-Durables and Durables. Further, banks and financials can do well in inflationary periods where the interest rates are normalized or raised by the Fed.
- There may be ways to buy ETFs that are focused on TIPS, Energy, Healthcare or there are inflation rate hedging funds.
- When analyzing commodities, these holdings seem to over perform during inflationary periods: Energy, Silver, Precious Metals, Gold, and coffee/sugar etc.
- It appears that international funds and emerging market funds are having inflows of funds during this timeframe in the stock market.
- While residential real estate prices tend to be sustained during inflation, interest rate hikes can artificially lower the cost of existing housing but raise the cost of building. Moreover, inflation affects the costs of lumber, copper, steel etc and also boosts the costs of new building.
- This week’s Barron’s magazine implies that high yield bonds, BDCs Business Development Companies, CEFs — Closed End Funds, and REITS can be useful to beat inflation.
- Some analysts say that strategic preferred stocks with high yield can be a good hedge against inflation.
- Investing 101 — How do you keep your cash from losing value and the answer is investments, but in contrast there is: Correction 101 — where: “CASH IS KING” !
In sum, there is no perfect way to hedge against inflation. Some would say to own investments that yield more than the inflation rate while others may say to own growth related assets that grow during inflation.
If you are betting on a major correction, there are now leveraged BEARISH ETFs that can make a lot of money in a correction, but can also lose money during a stable and channeling stock market.
George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award-winning author and advisory board member to several companies around the world in education, charities, and FinTech Companies.
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