Investing For Inflation

Hey everyone and welcome to another recap post on Investing For Inflation.  Things have been crazy with work, lockdowns and kids at home.  So it’s been a while since I wrote one of these and felt inspired to write one today!

But first, my disclaimer: this post contains affiliate links from my most popular financial wealth building tools where the blog may receive a small commission on any sales from Silver Gold Bull, EQ Bank, Questrade and Tangerine.

Inflation Scare

Investors have been freaking out in the last 2 weeks over inflation.  The US Fed chair Jerome Powell has repeatedly warned that we would see some big numbers in the coming months. Powell believes they will be “transitory” in nature and are the result of the economy being shut down last year.  But that didn’t stop Warren Buffett from sounding the alarm at the Berkshire Hathaway annual meeting that was held on May 3rd.  Now we’re faced with the prospect of seeing high inflation for the first time since the 1970s.

Why Inflation is a Problem   

Some of you may ask: why all the fuss about inflation?  Well, inflation destroys our purchasing power and in some extreme cases countries have experienced hyperinflation.  History has shown that once inflation breaks out it can be very difficult to contain and rein in.  In the 1970s inflation was rising rapidly and there were shortages everywhere and the cost of goods kept rising.  Paul Volcker finally tamed inflation when he raised interest rates to nearly 20% in 1980. 

While stocks can be a good inflation hedge when there’s small incremental inflation, in periods of high inflation stocks perform poorly.  From about 1968 to 1982 stocks did nothing and it was a lost decade and investors were lucky if they didn’t lose any purchasing power, never mind actually building real wealth.

Central Banks are Backed into a Corner

The real danger in inflation is that central banks are not in a position to raise interest rates to fight the inflation.  When interest rates rise, asset prices fall.  And that’s not good when we’re sitting on the mother of all bubbles thanks to cheap credit.  So, if they try to fight inflation, they will cause markets to crash. 

If they do nothing, then currencies (ie. Our money-cash-dollars) will lose their purchasing power and we will have a declining standard of living.  Put another way, if you eat steak for dinner you’ll eat hamburger; if you buy designer clothes you’ll shop at the Gap. Check out this Global News article on how to protect yourself from inflation.   

Don’t get me wrong here, central banks want some inflation to help inflate away the debt, but they do not want to see a period where we get consistently high inflation (ie. Above 2%) over the long term.  So inflation is a pretty big problem to have if you’re a central banker.  The big question over the coming months will be whether or not inflation is here to stay or transitory like the Fed says it is.   

Reflating Bubbles versus An Economic Recovery

In these risky economic times, language matters a lot.  Notice how people speak of the “reflation” trade versus the “recovery” trade. 

The first refers to central bank actions to reflate the massive bubbles it created during the last financial market in 2008. 

The second refers to the recovery of the real economy.  How will the economy fare once the stimulus checks and generous unemployment benefits are removed?

What about all the small business that folded up shop?  What about the so-called zombie companies that make up 20% of the S&P 500?

Central Banks Wonder If They’re Creating Wealth Inequality

In the midst of all this chaos, the Bank of Canada and the US Fed have decided to research whether or not their policies have exacerbated wealth inequality.  My first reaction to this was that they must be stupid because the short answer to that question is: OF COURSE!!!  Their policies of record low interest rates have pushed up the prices of assets across the board so much so that we’re in record bubble territory!  Now who owns these assets like stocks and real estate….the top 20%. 

These central bankers are supposed to be the smartest economic minds around and if they seriously need to study whether or not their policies have widened the wealth gap then we’re all screwed.  I mean what are we to think????  They clearly know the answer or else they think we’re all stupid.

Each year that goes by is reminding me more and more the movie Idiocracy.  We have serious global issues affecting our country and the powers that be choose to keep their heads in the sand. 

Whatever happened to informed public debate on important policies?  Instead we get non stop BS where we’re just randomly told things one day and the complete opposite the next.  It doesn’t even really matter which party holds power anymore.  They all equally deceive us about everything. 

I think at this point we would all be better served if politicians would just level with us about the issues instead of regurgitating talking points and propaganda.  The sad thing is I don’t think anyone really cares anymore.  How is it that democracies die again…?  Better go dust off those old history books. 

Anyway, enough of my rant and on to money.    

What We’re Doing With Our Finances

Financially, we’ve been torn in 2 diametrically opposed directions over the past year.  I’ve written a lot about how the inflation vs. deflation debate has influenced our current money strategy.

We have no control over which way things will go and I don’t think anyone can really say with any certainty how things will look on the other side of this crisis.  Some analysts talk of circumstances similar to the Great Depression, while other point to the Stagflation of the 1970s as the best comparison.  There is strong evidence to back both views.

Regardless of what the future holds, there are concrete things that we have control over that can make a difference to our financial well-being.

For example, we can control our spending, debt-levels and where we invest.

Saving More

We’ve been cutting expenses and saving a lot more money in our EQ Bank Savings Plus Account.  Some of it is forced savings due to restaurants and hotels being closed.  But a lot of it is simply a result of reassessing our priorities.  I think everyone should do a financial check up at least once a year if for no other reason than to see where all your money is going.

Our Debt Still Matters

With our savings, we’ve been building a substantial cash pile with the expectation of paying off our mortgage.  Our debt levels are something that we have direct control over.  And no matter what happens in the broader economy, we will still have a mortgage payment to make.  So this seems like a no brainer thing to do given the huge levels of uncertainty and risk in the economy.

One thing we try to keep in mind is that no matter how low the interest rates are today (or have been since  2008), eventually we will have to repay the principal.  And with average home prices pushing towards the million dollar mark, that’s a whole lot of principal to pay back!

It’s my own personal view that we now live in a great age of speculation with bubbles emerging everywhere.  People are investing like they have nothing to lose.  I’ve never seen anything like this and it scares the crap out of me.

So I think paying off debt and building cash are the safest things people can do. 

Hedging for Inflation

To protect against inflation, investors have always moved money into real assets like real estate, precious metals and commodities.  So, we’ve been investing in commodity stocks, especially energy.  This space was beaten down last year and has had a very nice bounce off the bottom.  So it might be time to take some profits.

We also own physical gold and silver that we purchase through Silver Gold Bull because precious metals are an inflation hedge.

I think that my beloved dividend stocks are extremely over valued today.  Bank stocks have nearly doubled off the lows last year.  This has for sure been one of the fastest stock market recoveries in history!  But I think it’s time to take some money off the table.

Where Might Things Be Going?

Let me look into my crystal ball!  This past year has been truly extraordinary and we’ve seen a remarkable rise in every asset class across the board.  We’re now at a point, I think, where we have massive bubbles in the stock, bond, housing, and crypto markets.  Commodities have come roaring back after the big sell off last year.  Precious metals like gold and silver are at highs that we haven’t seen since 2011. 

The money supply has increased exponentially in the past year alone in nearly every advanced economy.  We have deficits as far out as we can see – not just in Canada but throughout the developed world.  We have interest rates at their lowest levels in the last 500 years and in some places they’ve gone negative.  On top of all of that we have ageing demographics working against us in all developed economies and even in China.

Against this backdrop deflationists are calling for the biggest crash in history, while inflationists believe the way out will be through currency devaluations.  Maybe we’ll see a combination of the two.  Who knows…but for the average person neither outcome will be good.

Imagine the value of homes dropping by 50%.  Anyone who bought in the last 5-7 years would have a mortgage balance higher than the value of their home.  On the flipside, maybe home prices stay a million dollars but the purchasing power of each dollar drops by half. 

I’m curious, how are you going about protecting yourselves?  Leave some comments below.

Save, Invest, Build Wealth and Prosper

In case you’re wondering here’s where I park my money and some financial services that I use:

For our precious metals we use Silver Gold Bull because they price match and offer fast, insured, delivery.

For our Daily banking we use Tangerine because they offer incredible products and no-fee banking.

For our Savings we use the EQ Bank Savings Plus Account because we need to make highest return possible on our cash savings. Never heard of it? Click the link to check out my EQ Bank Savings Plus Account Review.

For investing we use a combination of TD Waterhouse (for legacy investments) and Questrade because it offers incredible value with low cost stock purchases and free ETF purchases.  If you haven’t done so already, check out my Questrade Review to see why it’s the best deal around.  Get $50 in Free Trades when you signup for Questrade through this link.

Cheers and thanks for reading Investing For Inflation