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Preparing Your Portfolio for Inflation

edited March 2021 in Other Investing
I read somewhere that wage inflation is the inflationary trigger (indicator) to watch. It will be interesting to see where wages are once we get back to full employment. Today's low interest rates have already triggered real estate price inflation.

Here's Larry Summer's Take on Impeding Higher Inflation:



  • Some Investment Ideas with Inflation in Mind:
  • edited March 2021
    Just as a point of reference - seasonally adjusted jobs peaked in December 2019 at 151,919,000. There are currently only 143,148,000 SA jobs. Hold on while I check unadjusted.
    Unadjusted jobs peaked at 153,095,000 they are currently 141,926,000. So, in my opinion, a long way to go to return to full employment.
  • bee said:

    I read somewhere that wage inflation is the inflationary trigger (indicator) to watch. It will be interesting to see where wages are once we get back to full employment. Today's low interest rates have already triggered real estate price inflation.

    That's what they talked about in the seventies. These days "they" sometime talk about money supply, or too much money chasing too few goods. Which is more in line with what my grandfather learned -- a long, long, time ago. Of course, most of what "they" say is that neither will become a problem. When it does become a problem, I have no doubt that workers will be blamed.

    The return on T-Bills, in the second article you linked to, reminds me of the rate on the passbook savings account I held at the old local bank -- that has since become part of Bank of America.

    I learned today that some banks still offer such a product.
  • Even with the loss of over 500,000 lives from the pandemic, some jobs are eliminated permanently. Small service type such as restaurants are closed for good while the larger chains may survive by cutting back on the work force.
  • edited March 2021
    Less than a year ago you (or your commodities / real assets fund manager) could have purchased a futures contract for oil selling at below $0. Much better to have had that kind of foresight / act in a timely manner than to be piling into oil and other commodities after huge one-year run-ups. Not to say they won’t continue to surge. Just saying ...

    Generally, I think the best way to stay ahead of inflation is to be a good investor. Lots of good investors here. “Steady as she goes.” Grow the portfolio.

    Re commodities - I’ve always kept around 10% in commodities, precious metals and real estate funds for diversification as well as an inflation hedge. Actually pulled back a bit recently after nice run-up.

    @bee - Thanks for the question. Worth discussing.

    Referenced Story (April 2020)

    US oil prices turned negative for the first time on record on Monday. ... The price of US crude oil crashed from $18 a barrel to -$38 in a matter of hours, as rising stockpiles of crude threatened to overwhelm storage facilities and forcedoil producers to pay buyers to take the barrels they could not store ... On Tuesday prices rebounded above above zero, with the US benchmark West Texas Intermediate for May changing hands at $1.10 a barrel after closing at -$37.63 in New York on Monday.”

    For reference - Oil today is priced in the $65-$70 range.
  • edited March 2021
    Yes, wage inflation is something of a prerequisite for for increased inflation risk (and why I consider it to be over-hyped at this point).

    Also, not all inflation is created equal. That is, different investments do well/poorly at different inflation levels.

  • edited March 2021
    Let’s reword @bee’s question a little ...

    “Which mutual funds stand to do well during periods of high inflation?”

    Two I own that are designed to benefit from high inflation: PRAFX, BRCAX.

    The first one invests in companies that produce or sell inflation sensitive products (ie: lumber). It is up 46% over the past year.

    The second takes a more direct approach by investing in the commodities markets through derivatives. It is up 42% over the past year.

    Not recommending these. Just sharing them ...

  • From above post:
    The first one invests in companies that produce or sell inflation sensitive products (ie: lumber). It is up 46% over the past year.
    If inflation takes off , will the building of new homes continue as it's doing now ?

    Stay Safe, Derf
  • Chiming in with Janet Yellen on Inflation risks:
  • Along these lines...inflation talk...anyone want to surmise a guess what I Bonds will reset to come May 1st? Do you think combined rate will be over 2% (at 1.68% now)...over 2.5%?? I think this will be the best investment going forward maybe for the next 10 years...I Bonds...maybe?

    I think the largest inflation we are going to experience going forward will be two fold: tax inflation up the ying yang and shrinkage inflation...have you bought a box of cereal lately...lordy, lordy, Tather Murphy's turning seems the jumbo box has turned into a single serve packet overnight!

    Gas over 3 bucks a gallon...we're just getting started with inflation...any thoughts on the ETF INFL??


    Baseball Fan
  • I sold a home this year for over asking (price inflation). I plan on doing the same for a collectible car I own (we will see what it sells for).

    I suppose equities will continue to inflate as well, but when interests rates rise and demand dries up things get complicated.

    Forming a list of investments that rise with inflation might be helpful:
    -Floating Rate Securities
    -Consumer Staples
  • edited March 2021
    Other to consider:
    Energy, REIT, utilities, consumer discretionary, and short term high yield bonds.
  • edited March 2021
    A worry for retirees: Inflation forecasts hit 8-year high

    *The investment returns from their bonds and cash fell way behind.


    Inflation expectations have risen over the last couple of months

    Inflation is heating up, and retirees are worried.

    That’s because they are heavily invested in bonds, which suffer when inflation causes interest rates to rise. Just since the beginning of the year, for example, the Vanguard Intermediate-Term Treasury Index Fund has lost 2.2% and the Vanguard Long-Term Treasury Index Fund has lost 10.8%. Those losses exceed the full-year gains those funds have produced in some recent years.*

    Think many retired folks may have adjust portfolio to get higher risks/achieve the returns they desired like others mentioned. Some say may need to worry, others say everything may balance out
    energy, agriculture, lower rated bonds/HY, stocks / energy maybe in big plays

  • Bitcoin as a hedge against monetary inflation...
    Billionaire investor Mike Novogratz says bitcoin will be like a report card that measures how the government is handling citizens' finances
    Novogratz indicated that bitcoin is an inflationary hedge and a digital store of value, rather than regular money, which is why institutions, money managers, and retail investors are piling into the digital asset. If people in the US believe Fed Chair Jerome Powell and Treasury Secretary Janet Yellen can facilitate full employment for the economy while avoiding inflation, they will stop buying bitcoin, he said.
  • FWIIW, @bee, auction results on the collectible/exotic car auction site, Bring a Trailer, are giving off a strong whiff of inflation. I’m not in the market, but my sense after lurking there for a few years is that car nuts are throwing a lot of cash around. For mundane examples of price rises, organic coffee at Aldi just went up 10% and beer went from $5.99 to $6.99, while molasses at Kroger just got jacked up 50 cents.
  • This from ADS Analytics at SeekingAlpha for those interested:

    Avoid These Bad Ideas For Hedging Inflation And Rising Rates
  • @BenWP I’m with you but I’m on that site looking for 280Z and Audi TT and Porsche... values are up... you are right. But so are gas prices?!?! What happened? Why are gas prices so high?
  • edited March 2021
  • edited March 2021
    Hi @BenWP and @JonGaltIII et al
    As with most items deemed collectible; one finds scarcity, condition and a willing collector base, as critical measures, to achieve and maintain a forward motion in pricing (inflation offset). Auto auctions provide a view into a narrow area of collectibles.
    I have watched most of the Mecum Auctions on tv over the years and find that many of the cars that have been loved and properly maintained over many years by the "boomers" are finding their way to the market place. This is not an unexpected event. You (Ben) are likely well aware of the numerous collectible cars that are parked away in garages, in Michigan, over winter months and find their way to the roads come springtime. However, the boomers are, well; fading away. Generally, the family prefers the money of a sale and not the car.
    Several Mecum auctions in 2019 and more so, in 2020 found very large single collections being sold....i.e., 200 cars of every type. Realized prices for Mecum auctions may be found at their web site. One has to create an account and login. I don't know how much information they need for an account formation.
    What I see is a few cars do and have maintained pricing power for the few wealthy collectors still in place; but a large base of desirable cars are no longer finding the pricing the sellers were expecting.
    A humble observation from someone would has a decent knowledge of the 1962-1970 cluster of "muscle cars". I had a young man's fancy and pleasure of cruising Woodward Ave., Detroit, Mi, in the way back days, on a warm Saturday night. Kinda a silly thing to many, but I met many interesting folks along the way; as with engineers from the big 3 auto who had designed and built only 2 performance transmissions (Chrysler) that needed to be tested in the real world, or from GM engineers who designed and aluminum cast high performance intake manifolds.....oh, yes; that is correct, these are the only two at this time. Numerous summer, night time real world testing took place on the good and straight back roads between Detroit and Flint, Michigan. AKA, illegal drag racing.
    Thanks for letting me ramble a short story about some auto history.
    Take care,
  • edited March 2021
    Thx catch22s for the experiences

    Anyone bought German luger ww1 ww2 or Japanese luger for collections? Luger&s=f

    Colleagues at work sat may gain 9 10% annually and hedges well off inflation?!
    Pristine good conditions maybe worth much more
  • @BenWP .. I just sent you a message with updates.
  • better to keep them for personal use for the apocalypse
  • edited March 2021
    for anyone interested in econ policy, here is krugman twitter thread today

    There's been a fair bit of econotwittering about this J.W. Mason post on the American Rescue Plan and what it says about economic theory. I agree with a lot although not all of it, and in any case think some might be interested in my take.

    The ARPA definitely marks a big break with the austerity/debt obsession that crippled recovery after the 2008 crisis. That's a very big deal. And even the debate over the bill was very different from what went before.

    One thing people should realize, however, is that policy orthodoxy in, say, 2011 did NOT reflect macroeconomic orthodoxy in the sense of what the standard models said. In crucial areas it was in flat defiance of what Macroeconomics 101 would have recommended.

    It was actually quite weird: there was a lot of innovative, creative economic analysis — all of which turned out to be dead wrong — being deployed FOR austerity, which conventional macro rightly said was a really bad idea.

    No, austerity isn't expansionary; no, there isn't a growth cliff at a debt ratio of 90 percent. Nothing in standard macro suggested either of these things should be true. All that supported them was bad statistical analysis and the political will to believe.

    So part of what's happening is simply that the Biden team is actually listening to the economic consensus, rather than grabbing dubious doctrines that fit rightwing preconceptions. But it's also true that there have been some changes in theory.
  • edited March 2021

    Concerns about debt did loom larger in economic analysis than they should have — partly, I think, because people didn't grasp the implications of r < g, partly out of partially unconscious deference to political fashion.

    The truth is that if we'd taken our own models seriously we would have adopted an attitude much closer to Abba Lerner's functional finance:

    Someone will bring up MMT. After all this time, I still don't know what it is beyond functional finance — every time you try, you're told that you don't get it, and at this point I think it's mainly a marketing ploy. So never mind.

    Anyway, the whole debate over ARPA was in effect conducted in terms of functional finance — not whether it cost too much, but whether it was inflationary. But that's not so much new theory as taking our own models seriously.

    The other big change — and this does mark a change in theory — is that the NAIRU has largely dropped out of discussion — basically because nothing that's happened since 1985 supports an "accelerationist" view of inflation.

    Low unemployment and a hot economy do seem to yield somewhat higher inflation; but there has been no sign that this quickly or easily translates into an ever-rising inflation rate. Maybe it's anchored expectations, maybe it's downward wage rigidity, but it's just not there.

    This doesn't mean that inflation is never a concern. But it does mean that the stability of inflation over time does NOT mean that the economy was on average at full employment. Instead, there's now a good case that we've been persistently underemployed.

    That is a pretty big deal, and feeds directly into policy: Biden and co's relaxed attitude toward debt is matched by a relaxed attitude toward inflation.

    So there have been important changes in how economists talk about policy, some of which include rethinking of our models. But a lot of what has happened is simply that economists are following their existing models, instead of tweaking them to justify political prejudices.
  • @JonGaltill: I started my 300ZX convertible for the first time this season. What nut has a sports car in MI? This is unpaved road country, ill-suited for those who have chrome under carriages and who like clean cars. If you are in the market, I probably should sell given that my next birthday will make me an “octo” something. Have your people contact my people. My fantasy ride is a Panoz Esperante, but that’s no car that should be covered in pulverized limestone were it to live here.
  • @BenWP: I also live in the land of the pothole. I see these new sporty cars with 20" wheels and rubber the thickness of a rubber band, and I just shake my head. (I drive an ancient M Roadster, but my son is constantly sending helpful suggestions from On the other hand, I bought my Volvo through the OverSeas Delivery program and drove it for 800 miles is Sweden before having it shipped home. Not a pothole to be seen the whole drive.

    On inflation: Many years ago, I went to college. Even paying out-of-state tuition the total first-year cost was $3,000, all-in. Now, what if I had said, "Say, I'll put $3,000 under my mattress, and when I have a grandson he'll be all set for his first year!" Right.
  • pkrug tweets today

    A friend recently reminded me of this classic case of inflationista scare tactics during the Obama years; what we should have been getting ready for was unjustified inflation panic 1/

    (this anent Get Ready for Inflation and Higher Interest Rates: The unprecedented expansion of the money supply could make the '70s look benign.

    For a brief moment after the GOP took over the House, Rs went all in on accusing Ben Bernanke of debasing the dollar, basically because of a surge in commodity prices 2/

    The Fed, however, stood its ground, because there was no surge in core inflation, which is (correctly) considered a much better guide to policy 3/

    While core is usually defined by excluding volatile food and energy prices, the underlying logic is that you're trying to measure inflation inertia, which comes from embedded expectations of future inflation 4/

    This time around it seems quite likely that we'll see a temporary spike in headline inflation — not just from food and energy but from various supply bottlenecks. A container shortage is driving up shipping costs 5/
    Domestic shipping costs are rising, probably part of the same story 6/
    Lumber is also spiking 7/

    The important point is that none of this will indicate a return to 70s-type stagflation. It will all be a blip reflecting an economic surge plus some lingering covid-related disruptions. I'm sure the Fed understands that.
    But be prepared for another inflation panic. 8/
  • A little more Larry Summer's:
    "Fiscally Intransigent"
  • Even an AEI! (also Bloomberg) guy, forget the Romers and Krugman, does not find Summers's take persuasive:

    Will be fun to see how it plays out, also not fun maybe.
  • beebee
    edited March 2021
    Josh Brown Piece:
    On the economic and investment side, the quants at BofA are thinking that... over 60% of the bank’s analysts see rising prices in their respective coverage universe. One of BofA’s top strategists, Michael Hartnett, is talking about 2020 being the secular bottom for rates and inflation.


    ... a whole lot of fiscal stimulus and monetary stimulus, too. But here we are, at the big, fat middle part of an economic expansion with rising prices, capex growth, increasing demand for skilled labor and a massive, generational infrastructure bill on the way.

    Recent Michael Hartnett Pieces:
    The value of U.S. financial assets are now six times the size of gross domestic product. “Wealth gains obscene, but extreme asset bubbles natural end to nihilistic bull markets of past decade,” he said.

    And longer-term drivers of disinflation were poised to wane, too. Fiscal authorities were now more open to increased spending and central banks were now explicitly targeting higher inflation as a goal.

    Hartnett anticipated the coming decade could show similarities to the late 60s and early 70s when inflation and interest rates started to lift off as investors questioned the combination of easy fiscal and monetary policy.

    So what does this all mean?

    First of all, investors will have to get used to a world of lower investment returns, while dealing with an upturn in volatility, said Hartnett.

    And the ravages of inflation could turn negative returns in fixed-income into the norm. Instead, investors should look to take shelter in assets that tend to thrive during period of price pressures such as commodities.

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