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An Investment Management Company
Tutorial - Dealing with Inflation
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If you remember the inflation of 1973 through 1980, (inflation peaked at 14.76% in
March, 1980) you may recall its devastating impact. Inflation may be caused by a
number of factors, but the result is always the same. A dollar does not purchase as
much stuff as it used to. You become poorer. The purchasing power of your savings
account decreases each month.
Inflation is most devastating on those in retirement, those with a fixed income, and the
poor. If you are retired, living off your nest egg, the income your portfolio produces will
buy less and less.
Inflation rears its ugly head from time to time in our economy - and when it does it
requires the wise investor to take dramatic action to protect their portfolio from its
devastating consequences. In truth, there is a silver lining. If you learn to recognize
the dark clouds of inflation before they begin to rain down on you - you have the
opportunity to make some significant wealth by moving your investments into the right
assets. In an inflationary period there are some unique investments that will do
phenomenally well.
As I write this section (July 2009) I recognize those dark clouds approaching and have
taken action by dramatically changing the assets in the investment portfolios I manage.
Although inflation has not yet arrived, it is virtually on top of us. What are the signs of
impending inflation?
One would argue that it is impossible to have inflation when housing is in a dramatic
deflation and jobs are disappearing at a fast clip. These are deflationary signs indeed.
However, given the five items listed above, it's a different world this time around and the
signs of impending inflation are overwhelming.
So what should we do? The simple answer is - get rid of dollar bills. Purchase
commodities and those businesses which produce commodities. Invest in businesses
which can pass on the cost of inflation to the customer. Their net income will rise with
inflation. Avoid long-term bonds. Buy inflation-adjusted bonds (TIPS).
There is no doubt that moving investments into commodities and those businesses
which produce commodities is fraught with risk. Commodities can be fickle. But history
is clear - in an inflationary environment, commodities do exceptionally well. Traditional
defensive stocks and bonds get hammered.
March, 1980) you may recall its devastating impact. Inflation may be caused by a
number of factors, but the result is always the same. A dollar does not purchase as
much stuff as it used to. You become poorer. The purchasing power of your savings
account decreases each month.
Inflation is most devastating on those in retirement, those with a fixed income, and the
poor. If you are retired, living off your nest egg, the income your portfolio produces will
buy less and less.
Inflation rears its ugly head from time to time in our economy - and when it does it
requires the wise investor to take dramatic action to protect their portfolio from its
devastating consequences. In truth, there is a silver lining. If you learn to recognize
the dark clouds of inflation before they begin to rain down on you - you have the
opportunity to make some significant wealth by moving your investments into the right
assets. In an inflationary period there are some unique investments that will do
phenomenally well.
As I write this section (July 2009) I recognize those dark clouds approaching and have
taken action by dramatically changing the assets in the investment portfolios I manage.
Although inflation has not yet arrived, it is virtually on top of us. What are the signs of
impending inflation?
- The world is running out of cheap oil, as well as a dozen critical metals. Have you
noticed, while in a deep recession, the price of oil has gone up from a low of $38
per barrel just a few months ago to $60+ per barrel? How can that be?
Shouldn't the price of oil go down as we use less of it as our economy slows? It
always has declined in past recessions. But the earth's energy resources are
finite, and we're finding they are more difficult to find and more expensive to
extract. And the cost of our energy makes everything, from food to plastic bags
to nails - more expensive. The cost of everything gets inflated as the cost of
energy increases. - The two billion, increasingly-affluent people of India, China, and other Eastern
and Middle Eastern nations are now competing with us for the commodities
needed to support their middle-class lifestyle. The United States no longer dwarfs
the world economy. These growing economies are competing with us for oil,
steel, and food. And whereas the U.S. economy has stalled, these other
economies continue to grow at a fast clip, using more and more resources -
which drives up prices for the world's commodities - and gives us inflation. - Our dollar is no longer backed by gold. Nixon took care of that in 1971. Now it is
backed by the "good faith and credit of the United States". We can print as much
money as we want - and we have been doing so at an unbelievable clip starting
in September 2008. The percentage increase in our monetary base is the
largest in the past 50 years and is so far outside the realm of our prior
experience that it's difficult to estimate the magnitude of the impending inflation. - We're not even close to being done printing money yet. The president has
already floated a trial balloon of another stimulus package. The administration
and congress are pushing for global warming legislation, health care, and other
costly programs. The only way to pay for these expensive programs is through
taxes and the hidden tax (inflation - by printing more money). - We have states which are in deep trouble. California is printing IOUs as their
budget only took them to the 9th month of the 12 month fiscal year. The Federal
government will bail them out just like they did Wall Street. They will do so by
printing yet more money. This will cause inflation - massive quantities of
additional dollar bills being exchanged for the same limited number of items.
One would argue that it is impossible to have inflation when housing is in a dramatic
deflation and jobs are disappearing at a fast clip. These are deflationary signs indeed.
However, given the five items listed above, it's a different world this time around and the
signs of impending inflation are overwhelming.
So what should we do? The simple answer is - get rid of dollar bills. Purchase
commodities and those businesses which produce commodities. Invest in businesses
which can pass on the cost of inflation to the customer. Their net income will rise with
inflation. Avoid long-term bonds. Buy inflation-adjusted bonds (TIPS).
There is no doubt that moving investments into commodities and those businesses
which produce commodities is fraught with risk. Commodities can be fickle. But history
is clear - in an inflationary environment, commodities do exceptionally well. Traditional
defensive stocks and bonds get hammered.
| Investing Wisely |
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| The advice contained within this website is general in nature, only for the use of FI Investments clients, and should not be relied upon without first consulting with FI Investments. |