Inflation is coming! We’ll all be rooned!
Go long on wheelbarrows because people are gunna need ’em to carry their cash down to the grocery.
Nah, it probably won’t be that bad. Hyperinflation (1000%+ per year) only occurs under extreme conditions like war or long-term, deliberate overvaluation. Present circumstances are not that bad. US money printing so far is no where near the level of Venezuela or Zimbabwe.
Some of the inflation we’re seeing really does appear to be caused by overreactions to Covid, with borders sealed, cargo crates sitting in the wrong countries and factories closed or unwilling to invest for increased output given that demand will soon return to normal, etc.
Also consider Japan, where monetary policy has been extremely loose for twenty years and the central bank owns 80% of ETFs. Their main problem is battling deflation.
I also can’t let this article pass without a good-natured snark at right-wing commenters like Zman and Michael Malice (luv yez) who complain that the price of a sandwich, soda and bag of chips has gone up. Boo hoo, there’s too much air in the bag and less soda in the bottle! Shrinkflation I tells ya!
Hopefully this purchase was for a children’s birthday party.
It is inflation and it’s a worry but FFS, choose less cringe examples to make your point. Based Chads do not have chips and soda for lunch and the world will not end if we are forced to cut back on corn syrup and trans fats.
Make your own, healthy sandwich and thermos of black coffee. If the price of those ingredients goes up, you’ve got yourself a worthy tweet.
Also lol at the blue checks saying, ‘If you take out food and petrol, there’s no inflation at all!’ Right. Only the things we need to live are becoming more expensive, good to know.
Jokes aside, inflation does seem to be making a comeback. Let’s discuss the smart way and the dumb way to deal with it, and which best suits you.
The Smart Way
Invest in assets that can hedge against inflation such as gold, commodities, REITs and some other, more esoteric tools that I will not discuss here.
None of these are perfect. Here are some things that can go wrong:
- Assets never act in lockstep with our expectations. In an extremely complex system like the economy, random things can happen and an asset we’d expect to do well in an inflationary environment might do poorly.
- You need to know when to sell. No good holding gold until it falls all the way back down again.
- Big players can manipulate these prices just as much as they can manipulate everything else, i.e. by artificially limiting gold prices. You can’t beat Wall Street (in the short term).
- If inflation is not as high as you expect, you’ll likely make a loss on these.
- According to efficient market hypothesis, everyone else can see inflation coming like you can so prices of all of these will have already risen and buying them now is pointless.
Let’s consider Number 5 with an example. Here’s a chart of gold prices over the last two years:
As you can see, the best time to buy gold was in July 2019, not now. Unless you know that the price of gold is about to go up again . . . and everybody else doesn’t know that. Whatever everybody knows has already been priced in.
A layman’s understanding of efficient market hypothesis is, you can only outsmart the market if you’ve figured out something that the market in general hasn’t. This is how the guy in The Big Short made his millions.
Inflation? Too late. Everybody knows. All those things I suggested, you should have already done. Unless they don’t work or inflation is lower than expected, in which case you shouldn’t have done them, unless you’ve already cashed out and profited.
If you did buy gold back in mid-2019, nice work. If you bought back at the perfect time, twenty years ago, I take my hat off to you.
‘But Nikolai, I didn’t do any of those things in time! What should I do, go buy a wheelbarrow before they become unaffordable?’
Chillax. If you weren’t smart enough to do things the Smart Way, instead join me in doing things the other way.
The Dumb Way
- Once you’ve paid off non-mortgage debt and saved an emergency fund, continue to invest in diversified index funds and your own home if you want one. Maybe some bonds if you’re nearing retirement or bit of a bedwetter about stock market volatility.
- Increase your emergency fund. If inflation is 5% for the year, increase it by that much. [Edit: bank interest rates are in the toilet at the moment. Check yours, they may have changed recently. If under 2% for your ‘high interest’ emergency fund account, which it almost certainly will be, consider transferring some of your emergency fund into bonds instead. Perhaps you could keep 3 months worth of living expenses in cash and the rest in bonds. Bond rates are rubbish too but you have to put it somewhere.]
- If you’re worried that inflation will eat away at your long-term retirement savings, save and invest more. Consider reducing your proportion of bonds (if you have any) and increasing your proportion of potentially higher-return shares.
[To clarify: Emergency fund – consider more bonds. Long term investments – consider less bonds.
Reason: average historic returns = shares > bonds > cash. In a time of high inflation and low returns we are forced to move to the left of this progression across the board.]
‘But Nikolai, that’s just common sense and doesn’t help me at all. Don’t you have some magic beans to sell me?’
I do not.
Also, this approach does help you.
If you’d begun investing in index funds back in 2010 when everyone was shrieking about the meltdown of the world economy and how only gold would survive, you’d have plenty of money to help you cope with increased prices today. Shares are themselves a pretty good hedge against inflation and unlike gold, can also perform well when no one’s worried about inflation or other risks.
If you’d bought a house back in 2010, it would probably be worth a lot more now.
If you did these things and there was no inflation, or even some deflation, you’d still be doing okay.
Don’t be jealous of smart people making a few nifty moves and pocketing some easy profits. If you’re too dumb for that, depend instead on your steadfastness. Live within your means and consistently save and invest in diversified, low-fee products.
It’s good enough to get you through.