Inflation has been a major talking point in the investing community as of late. Between the shaky economy, all the big names pulling out of major positions, and people like Ray Dalio and Charlie Munger openly warning everyone about inflation, I believe that it’s finally time for a blog on the subject.
Hello everyone, and welcome back to Investing with Antoaneta. In today’s blog, we’ll talk about the inflation that might be coming up and the way to mitigate its consequences.
Before we begin, I just want to give everyone a quick reminder to like, share, and comment on the blog to help the platform grow. I really appreciate it! Check out my other blogs such as, “10 Mistakes You Should Not Make With Investing In Stocks“.
Now, of course, inflation is always present. Year after year, purchasing power goes down, and prices go up. It’s just not … major. Prices go up in small enough increments that you would need to look at a historical chart to really notice it, especially if you are not worried about day-to-day expenses.
Usually, the inflation rate hovers around 2%. We haven’t had to worry about big inflation for a very long time, and I am willing to bet that most of you, who are reading this blog, wasn’t around the last time this happened.
However, we’ve got a lot of statistics that point to inflation possibly becoming a major problem in the not-so-distant future. Or, as Ray Dalio puts it, when the “economy is rebounding, inflation pressures are rebuilding.”
So, is it time to panic?
Of course not!
Here’s the thing about inflation
It’s just a situation like any other. Of course, it’s not optimal. It’s challenging to deal with. It’s going to make a lot of people lose a lot of money. But, like with any other situation, smart planning can allow you to come out largely unscathed. Or, in some cases, even profit from it, as long as you know how to prepare.
You need to:
- Understand the causes
- Keep an eye out for the warning signals
- Know how to prepare
First of all, there’s the aging population issue. Basically, there are fewer working-age people compared to retirees.
The fewer working age (young) people there are, the lower the supply of goods. Meaning that businesses can produce less. The price for labor goes up. Businesses who hire this labor are going to price their products and services, depending on the cost of labor. So, goods and services go up in price. And, so, you’ve got inflation.
- Fewer working-age people
- Lower production
- The price of labor goes up
- The price of products and services goes up
In the 1970s, the US had more than twice the amount of young people compared to retirees. Today, both categories are nearly the same.
The UK is faced with a similar situation. Back in 1970, there were more young people than retired people. In 2019, the situation was reversed. Today, there are more retired people in the UK than there are young people.
But that’s not exactly a new issue. People who keep a close eye on statistics have been talking about this for many years now. However, when you add this to all of the recent events, this is starting to look worrisome.
The consequences of “free money”
Okay, now, let’s take a quick glance at what’s been happening with the economy lately:
- We had a major health crisis
- Businesses shut down
- People needed money
- The government had to react
- The Fed provided the necessary money, and the government gave it away.
And I’m not just talking about individuals in unfortunate financial situations, of course. If it was just that, the economy wasn’t going to get hit nearly as hard. But, businesses also struggled with money during the crisis. And big businesses need big money. I’m talking about trillions of dollars that went to companies struggling with loans, emergencies, etc.
And how did the US government get a hold of all this money? The Fed pulled it out of thin air, that’s how. They just printed out a bunch of “free money” and shoved it right into the economy. Now, don’t get me wrong, I’m not trying to say that it didn’t “patch up” the immediate situation because it did.
But “patching up” and “Band-Aids” can only work for so long. They didn’t really solve the problems, they just put them off for a bit.
Printing trillions of dollars have consequences.
It causes inflation!
- People get “free money”
- They want to buy stuff (demand goes up)
- The more stuff they buy (prices go up)
All the while, the value of the dollar goes down.
Or, as Charlie Munger says:
“At the end, if you print out too much money, you end up with something like Venezuela”
And, yes, I know that if you look at it from an individual’s point of view, free money isn’t exactly “bad”. But the bigger picture says otherwise. Injecting money into the economy like that only ends up hurting everyone in the long run. It’s not the “natural” way for this to happen. We talked about this in a recent blog, and I’ll leave the link down in the description for those of you who missed it.
The last time people saw high inflation was in the 80s. So, naturally, most people on the Stock Market today don’t know how to invest during a period of high inflation.
- The dollar goes down in value.
- Bonds get destroyed.
- A lot of stocks get destroyed.
- Most asset classes get hurt badly.
So, how can investors go through a high inflation period without losing too much money?
Or can they even profit from it?
The “obvious” solution
The first and most obvious “solution” is something that we’ve all heard of before.
Yup, I’m talking about good old gold.
Gold is a very solid asset class … As long as you manage to buy before the price goes sky-high. Because, believe me, it will. Even if inflation does not reach the levels that the experts are worried about, a lot of people are going to try turning their cash and other assets into gold.
When there’s big inflation on the horizon, investors hate the idea of holding on to cash. So what’s an asset class that has limited supply, holds its value, and can not be watered down?
And, history shows us just how true that is. Every time there’s big inflation, investors flock to gold, and its price skyrockets. For the 1970-1980 period (the last big inflation), gold went up from $250 to more than $2 000.
Real estate is another very most popular way for smart investors to profit from inflation. Even people who usually don’t care about investing outside of these types of scenarios are going to gravitate towards the real estate market as soon as they catch onto what’s going on.
- Inflation eats into debt
- Property values go up
- Rental payments go up
Let me explain:
For many investors, one of the safest options would be real estate. Now, real estate is obviously pricey. So, they’re going to go into debt. However, debt is not nearly as bad during high inflation that it is normally. Because when inflation eats away at the value of the dollar, it also eats away at the debt.
For many, that’s a big upside of going heavy into real estate (since they can use debt to purchase assets and then leverage the inflation to eat away a portion of their debt).
Then, there’s also the part where inflation makes everything go up in price. Including real estate. So, the price of the assets (acquired with the debt that is getting decrease by inflation) would go up.
Finally, rental income will also increase with inflation (since rent goes up).
For those who do not have enough resources to directly purchase real estate (and would rather not go heavy into debt), REITs (Real Estate Investment Trusts) are always an option.
And, what do Real Estate Investment Trusts do? Well, they … invest in real estate. They’re much easier to get into and can still bring in a lot of solid profit, all the while protecting your wealth during periods of high inflation. And, of course, these will also take off along with gold.
As I mentioned above, most companies (and their stocks) are going to take a big hit. The Stock Market as a whole will take a big hit. Luckily, “most companies” doesn’t mean “all companies”. Some businesses can survive and even thrive during hyperinflation.
Warren Buffett has talked a lot about stocks and high inflation in the past. During periods of high inflation, smart investors focus on companies that have the ability to:
- Increase prices easily along with inflation.
- Generate cash rather than consume it.
- Accommodate large dollar volume increases in business with only minor additional investments of capital
Coca-Cola is an example of one such stock. They’re a well-established business that can afford to increase their prices as inflation goes up and they generate a solid cash flow.
Now, crypto hasn’t had the chance to prove itself “historically” like gold and real estate have. But, there is a lot of promise here because inflation devalues currency by watering it down (aka the Fed printing free money). Crypto, and specifically Bitcoin, on the other hand, has the added benefit of limited supply, which makes it “immune” to watering down. A lot of experts speculate that Bitcoin could take off in a big way if we really hit hyperinflation.
Thanks to all of the historical data that we’ve got available (and the Internet), there’s a good chance that many smart investors will come out of the next big inflation period wealthier. Or, in the words of Michael Burry, “history is not useless”.
In closing, I’d just like to remind you that I didn’t make this blog to scare people or to convince them to invest in a specific asset class. I’m just sharing things that I personally find very interesting and potentially very helpful in the long run.
Now, if you really want to bring your investing career to the next level and stay on top of the latest developments, you should definitely check out our Private Investing Group. We’ve got in-depth blogs, detailed discussions, and a live chat where you can ask all of your questions in real-time.
I hope that you liked this blog regarding inflation and you found it useful. If you did, please don’t forget to let me know by giving it a thumbs up and sharing it with your friends!
Thank you for reading, and until next time!
Recommended for further reading:
- Business Adventures: Twelve Classic Tales from the World of Wall Street
- The Snowball: Warren Buffett and the Business of Life
- The Simple Path to Wealth: Your road map to financial independence and a rich
- The Business Book: Big Ideas Simply Explained
- The Lean Startup: How Constant Innovation Creates Radically Successful Businesses