Learn how to recognize a possible inflation, what causes it and what to invest to inflation-proof your portfolio and have inflation make you richer.
You’ve heard of the stories about hyperinflation in Germany after the first World War. Having to pay for the war, the government turned to printing money for social programs and to devalue its way out of debt. But the runaway inflation destroyed the country. A loaf of bread that cost 160 Marks in 1922 ended up costing 200 BILLION by 1923, that’s billion with a capital B! So the biq question is, how do you inflation-proof your portfolio?
We're building a huge community on YouTube to beat your debt, make more money and start making money work for you. Click over to join us on the channel and start creating the financial future you deserve!
Join the Let's Talk Money community on YouTube!
People hauled their money around in wheel barrows and had to be paid twice a day because by the end of the day, it would be worthless. By the end, it was worth more as wallpaper than to spend on anything useful.
But it can’t happen now, right? Especially not here in the United States?
That’s the song, anyway. The tune the government keeps whistling while the Federal Reserve pumps over $4 trillion into the system and while the federal government prints another $10 trillion to force feed into the economy.
Inflation in the U.S. peaked at 14.6% in 1981 but had been raging for more than a decade. In the end, the median home price of $26,941 in 1972 had surged to $62,000 over the decade. In just ten years, the price of everything from milk to homes had more than doubled. It led to three stock market crashes and the worst recessions in history.
In this video, I’ll explain what inflation is, what causes it and why we could be set for the kind of price destruction we haven’t seen in decades. I’ll show you how inflation affects your investments and which stocks get hit hardest. Towards the end of the video, I’ll also be revealing four investments to inflation-proof your portfolio, four ways to let inflation make you richer.
FREE Report! See the 5 Biggest Stock Positions in My Portfolio! Five stocks I'm investing in for the biggest trends of the next decade! Don't Miss this Free Report – Click Here!
What Inflation Is and How it Affects the Stock Market
Nation, inflation and what it means for stocks could be THE news of the year. The government has pumped more than $10 trillion in cash into the system and wants to cover its ears and say inflation won’t happen. Despite the business owners and investors like Warren Buffett and Ray Dalio giving evidence that inflation is going to be a huge problem.
Buffett, who helps run businesses in just about ever sector, is seeing very substantial inflation and is raising prices. Appliance maker Whirlpool has said it’s going to be raising prices by as much as 12% to cover increased costs.
Oh yeah, inflation is coming.
Let’s get to what’s causing this runaway inflation, why it might already be here and those four investments to inflation-proof your portfolio but first, I want to get your input on this. Which of the four do you think will protect your money best? After you’ve heard the case for each, scroll down and let me know in the comments, which is the best inflation protection for your situation?
To really understand what’s going on, we have to start with the basics and What is Inflation?
I’m going to set everything up here with the causes, why inflation can be bad for stocks and the very real potential for hyperinflation before those investments but I’ll leave a skippable link in the video description if you want to jump ahead.
Inflation happens when prices rise and cause your dollar to buy less, that seemingly constant increase in the price of everything. And it’s not just the price but getting less for the same amount is still inflation because the price per unit is still going up.
What Causes Inflation?
And now the economists have all kinds of reasons for inflation but the biggest cause, is just the government pushing out more money trying to jumpstart the economy.
To lower interest rates and get people to borrow more, the Federal Reserve, the government’s central bank, has pushed $4 trillion out into the economy. For its part, the government has forced over $40 trillion into the system over the last four quarters…more than all of 2008 and 2009 combined!
And it’s not over. The government is planning on spending another $4.5 trillion between infrastructure and social programs and the Fed is buying pushing another $120 billion into the economy each and every month!
Just to give you a comparison here and we’ll move on to why inflation is bad for stocks. In the last year alone, the amount of money in the system has jumped 26%…that’s the largest annual increase since 1943, even more than in the inflation era of the 70s. In the ten years after the 2008 crash, the money supply only increased by 5.8% a year…so last year’s increase was more than four years in one! And I wish I could show you a graph of how bad it got but the Fed conveniently stopped updating this chart…earlier this year.
So if inflation is coming, is it really that bad? You bet your ass it’s bad!
First, it wrecks the savings of anyone living on a fixed income like the elderly because that income doesn’t adjust as fast with inflation. Inflation has some real economic consequences from surging interest rates to the point where people can’t afford home loans.
And inflation is going to affect the stock market and your investments in a couple of different ways…most of them not good!
How Inflation Affects Investments and the Stock Market
First is that while some companies will be able to pass on the higher materials costs to consumers through higher prices, they usually don’t pass on all those costs. Companies want to stay competitive so it becomes something of a Mexican standoff on which competitors raise prices the most to cover those costs.
That means companies will end up eating some of their own higher costs and profitability decreases taking earnings and the share price along with it.
Investors also have less money to invest because they’re spending more of it on paying for the necessities. With the boom in retail investors last year, if they pull their money out of the market to pay the rent, that could make any inflation selloff even worse than in the past.
The biggest shock to stocks from inflation though is through interest rates. As inflation accelerates, interest rates jump and that has a bigger effect on some stocks.
Like we saw in February, an increase of just 0.7% in the rate on the 10-year Treasury bond forced shares of growth stocks like Tesla to crash 30% and more. Higher interest rates hurt these growth stocks because of how stocks are valued. The value of a stock is all the future cash flows expected, but discounted by an interest rate to find the present day dollar-value. If that interest rate is higher, those future cash flows are discounted to a lower present value…a lower stock value.
A higher interest rate will also weigh on dividend paying stocks and those in sectors like Utilities, Real Estate and Consumer Staples. The problem is, most of the return you get from these stocks is in that dividend yield. Well, if interest rates go up and you can now earn more in a safer bond or other interest-bearing investment…then those dividend yields don’t look so attractive anymore and investors start selling.
Is Inflation That Bad?
Inflation is just a bad day all around for stock investors!
Real quick here before I reveal those four inflation-proof investments but I want to show you how to find the inflation numbers and how its measured.
All you out there in the Nation know, I’m not about to just tell you what to invest in or give you a list of stocks. I want to give you the tools to be a better investor, know how to see these trends happening and be able to make better investing decisions.
Sign up on Stockcard for free and make stock-picking easy with the research tool I use! Use promo code: bowtienation for an exclusive discount!
Inflation is reported by the Bureau of Labor Statistics, that’s bls.gov, in two ways each month. First is the producer price index or PPI and this measures the inflation for businesses. This is the inflation the Fed watches and it’s important because it’s a good preview of potential consumer inflation. If businesses are seeing higher costs to make their products, then it’s a good bet they’ll be passing on at least some of those costs to consumers later down the road.
The report that gets more attention is the Consumer Price Index, the CPI. This one shows inflation for consumers in goods and services and the BLS breaks this out into the major categories like food, energy, all items except food and energy, and then inflation for everything combined.
Breaking it out that way just gives you a little more information in where that inflation is coming from, what might be temporary price increases like with gasoline and food or what might be more permanent.
Ol’ Chair Powell and the Fed, remember him. He’s the one churning out that $4 trillion to pump into the system. He wants you to believe that inflation this year will be temporary, that we’ll just get a little inflation.
As the saying goes though, having a little inflation is like being a little pregnant…once inflation gets going, it has a mind of its own and you just don’t have a little inflation!
More companies have explicitly called out higher input costs during earnings reports than any time in the past 10 years and most have explicitly said they will be raising prices to consumers. Whirlpool has even gone as far as to put a number on it with expected price increases of between five to 12% on its appliances.
And for all the people like Powell that think inflation is going to be temporary, if you think those companies that raised prices this year are going to turn around and lower them next year…
Inflation is coming and it could very quickly get OUT OF CONTROL!
So if we know inflation is coming then you better be ready for it and I’ve got four inflation-proof investments.
First, while some stocks will fall apart as inflation heats up, others could hold up well and even get a boost. You’re about to hear a lot more about the reflation trade, the sectors and stocks that typically outperform with high inflation.
3 Sectors That Benefit from Inflation
The reflation trade sectors are Materials, Energy and Financials. Materials are a lot of your miners and others that benefit from high commodity prices. As the price of everything from copper to corn increases, the companies digging it up or growing it benefit.
Stocks of financials companies, especially banks do well with modest inflation of up to three- or four-percent though pretty much everything is going to crash if we see inflation above that. Banks make their money on those long-term loans. As interest rates for mortgages increase but short-term deposit rates stay at zero, banks will make a killing!
The energy sector and all the companies drilling it up do well on the same reasoning as the miners. Since oil is priced in dollars and inflation destroys the value of the dollar, that oil keeps its value so the price per barrel skyrockets. Of course, the oil embargo had a lot to do with it but inflation in the 70s also helped push the price of oil up 500% during the decade.
Those are the three sectors that directly benefit from inflation and again, the ones that could get hit the hardest are Utilities, REITs and those Tech or growth stocks as interest rates rise.
4 Investments to Inflation-Proof Your Portfolio
Now gold is usually the go-to safety asset when inflation rises but it’s not my favorite of the four investments here. Gold was a great inflation hedge in the 70s, rising to nearly $700 an ounce in 1980 after a 1,500% increase over the decade-long inflation. It hasn’t been that great since though, losing value to inflation in the late 80s and with a spotty record since.
The biggest factor against gold right now is the increase in interest rates. Higher inflation means higher rates and holding gold doesn’t produce a return until you sell it. That means interest rates are an opportunity cost for gold investors because they could be earning that money on interest-bearing bonds or other investments. The higher rates go, the more it’s costing to sit on your gold.
Now with really high inflation then the price of gold still does quite well but it’s limited so I think you can find other inflation-proof investments to protect your portfolio.
Bitcoin and other cryptocurrencies are next on our list and while bitcoin won’t be a perfect hedge for inflation, there are reasons to believe it can hold up well against rising prices.
First of all, there’s a limited supply of bitcoin, only 21 million bitcoin can ever be mined compared to dollars, euros and Yuan that can be printed into worthlessness. You’ve also got a growing base of users on the blockchain and investors and just the pervasive sentiment that bitcoin can be an inflation hedge I think will have more people protecting their money in it, creating that demand and becoming something of a self-fulfilling prophecy.
Now I don’t think you should have all your inflation protection in bitcoin. I own BTC and Ethereum as investments and recently did a price analysis for bitcoin and got a target of between $94,000 to $190,000 over the next few years so I’ll link to that in the video description below.
Real estate has always been the ultimate inflation hedge, but more the direct ownership than the real estate investment trusts that trade like stocks.
Property holds its value against inflation because it’s a limited supply asset, like the man said, they just aren’t making any more of it.
Now REITs are a different matter because these are real estate companies. While the property values hold up against inflation, they might have long-term leases where the rents don’t move as fast. The dividend yield on these is also a big part of your return and that yield becomes less attractive when bond rates increase, so the REITs have a tendency to flatline with inflation.
Which inflation-proof stock is your biggest player? Pick your fighter.