Ask HN: How are you hedging against inflation?
Inflation seems to becoming a real treat: https://www.youtube.com/watch?v=1HmGLV46L60. What does HN think is the best way to protect yourself against inflation? Crypto? Buying gold? It seems to be hard to find a solid discussion about this Gold has this mythical reputation of stability, but if you look at the data, that's not true. It can swing by a factor of 2x one way, then swing all the way back, within ten years: https://www.xe.com/currencycharts/?from=XAU&to=USD&view=10Y It's a speculative asset like anything else. It might make sense as part of a portfolio, but don't expect it to perform miracles. I use an investment company that invests for me in a mix of ethical stocks, bonds, and yes, unfortunately, some gold. None of this will do me any good if the current stock market highs turn out to be a bubble. Honestly, don't get your economic advice from youtube. Almost any introductory econ textbook will be more educative. Almost zero actual economists think inflation is coming to the US. It's only the (conservative) pundits that produce these unfounded fears. Expanding the money in circulation alone is not enough to trigger inflation (see 2008+). To be more precise, there will be a short term spike in inflation in 2021 and 2022, it will be short term precisely because the source of the excessive demand will also result in more supply over the long term and therefore prices will fall over the long term again averaging to less than 2% inflation. If the inflation rate ends up staying up over the long term then the Fed gets to play the hero, which is something it was waiting for since 2008 and perhaps since the dotcom bubble. Expanding the money in circulation may not increase the inflation rate, but I would believe that it does trigger inflation in other asset classes such as stocks and real estate. I'd be happy to be disproven with data, but my anecdotal experience since 2008 is that while my purchasing power hasn't budged much (for things like electronics, travel, food...), my ability to purchase a house from my wages has decreased and will only continue to do so (despite my wage nominally increasing during that time period). CPI includes housing, though. Obviously it's fair to say that inflation may be measured more in some prices than others, but you're sort of muddying the waters by referring to housing as both an asset class and a cost-of-living, right? Perversely, if inflation primarily affects "assets" (i.e. of the investment/speculation type), the premise of the original question here is sort of flawed: if increasing the money supply increases the price of assets, those with savings get richer—exactly the opposite of the ordinary understanding of "inflation!" When you buy stocks there is someone on the other side selling stocks, the question is, if that person has fiat now, why isn't he spending it? If he isn't spending it (as can be seen with low inflation), why would he sell the stock in the first place? Since companies' credit rating rises with the value of their stock, they can afford to borrow more and grow their company. Why isn't this happening? Why is Apple sitting on USD abroad and borrowing domestically? Figuratively speaking: Why is the seller of the stock happy with lending to the company whose stock he sold? By putting his money in his bank account he increases his savings which get handed to corporations through borrowing. Or rather, he escapes from negative interest rates by buying government bonds. None of this makes sense. What is happening with all the new money that is entering the economy? Is there really someone with a Scrooge McDuck vault out there? Of course, if inflation picks up that vault has no reason to exist anymore and the stimulus checks raised inflation as intended. Increasing money supply without a commensurate increase in CPI is consistent with a rise in asset prices, especially speculative assets. (Maybe this is what you're saying as well?) If the Fed prints $1,200 for every adult making less than whatever it was, and prices of everyday goods and services don't go up, and instead those adults all turn around and spend their $1,200 on Gamestop and NFTs... ...it all kinda makes sense. https://nymag.com/intelligencer/2021/04/nft-future-of-money.... Perhaps more explicitly: purely quantitative attempts to understand the economy (as with monetarist explanations) fail to account for the social component. Maybe people are bored 'cause of the pandemic, and as a result, they spent more of that $1,200 on gambling as a form of entertainment, instead of on restaurants or new clothing. Animal spirits. > asset classes such as stocks and real estate. Which is not inflation, but asset appreciation (i.e. the goal of investment). Inflation measures the price level of consumables. Stock and real estate is not consumed. One person's "asset appreciation" on real estate is another person's inflation of housing costs. Housing is part of the CPI https://www.bls.gov/cpi/factsheets/ Yes. That was my point: House owners' assets "appreciate" by inflating non-owners' prices. What about Michael Burry ? I assume you mean his liking to the Weimar Republic hyperinflation on Twitter? IMO it doesn't make sense, as the situation is completely different. Germany lost the first world war and had very high and quite sudden war debts plus suddenly had to pay reparations amounting to about 25% of GDP, denominated in foreign currency - this is important. Germany then printed money (this is similar to today) and bought foreign currency in the FX markets, at essentially any price available (this is not). The money flowed to the war winners, out of the domestic economy. This caused instant and quite strong devaluation of the German currency. What the US does: It invests a comparatively tiny amount of money (~$2 trillion, <4% of GDP) into the local economy, where it will cause actual economic action (people buying things and services), to make up for lack of demand caused by Covid. FX markets are not touched. AFAIK it is aiming to finance at least a part of this through taxation. When the government spends money like that, the hope is that it nets a return in the future and if you can find such an investment, then you can borrow an infinite amount of money, until everyone is employed, after that the cost of labor will go up and it no longer becomes possible to net a higher return with new investments. If there are ways to increase the competitiveness of your economy and you successfully execute your investments this can only be a blessing. I mean think about it, you get to build the most advanced infrastructure for free. As China and others take your jobs you can use the free time of your population to massively improve your own country. If you fail to invest or your investments are a drag, then it can be a curse of course. In just 16 years at 2.6% CPI, money will lose 50% of its purchasing power. Everyone should protect their savings against inflation. Quick check on the arithmetic? With continuous compounding,
1/2 = (1-2.6%)^n = 0.974^n
n = log(1/2) / log(0.974)
= 26.3 y Same answer on a Deci-Lon. With annual compounding, HP-12c gives 27y I said 50% not 100% :) At 2.5% in 16 years $100 is $148.45 Inflation isn't a threat, at least it isn't expected to be outside of YouTube and media scare stories,
https://fred.stlouisfed.org/series/T10YIE Inflation based on the TIPS spread (which is just a market prediction of expected inflation) is basically where its been for years. Secondly, hedging inflation with gold has historically been a bad idea. Unless we see hyperinflation (which doesn't seem likely in the US for a number of reasons) it's far better to put your money in assets which produce value over time like stocks. The problem with gold is that if you're investing in it as a store of value and inflation remains steady at around 2% you're looking at around a 2% annual return which is awful. Crypto could be more promising, not because it's a store of value, but because it's a new asset class currently experiencing mass adoption making it likely to continue growing in value if this trends continue. Personally I'd keep it simple. Invest in stuff you believe in and don't try to be too smart. Predicting inflation before the rest of the market based on things you've heard on YouTube or Reddit then making investment decisions based on that is a good way to make a bad investment decisions. IMO inflation should always be seen as a drag if you're a saver. Any money outside of your reserve fund would probably be better invested somewhere it can appericate in value at a rate above inflation. Too late for gold. You have to look at more than just inflation related data for the asset. Gold tends to be a inversely correlated to the economy because people use it safety asset. So right now, I think the gold prices are already inflated from people moving into it during the crash last year. Silver seems to have suffered a similar fate after the GME thing too. If you are looking at metals, it might be good to look at those positively correlated with the economy. After all, we will only see real inflation if the economy is doing well too. I like platinum, but got into that about 9 months ago. Copper would have been good too. I'm not sure if they still make sense at their current levels, but what do I know. Crypto is not a real inflation hedge in my opinion. If you're hedging, it's not supposed to be highly speculative (on other factors). Crypto is much more likely to experience wild swings unrelated to inflation. Real estate is an option, like raw land or maybe residential rentals. I say maybe for rentals because of all the coronavirus restrictions on collecting rent. I wouldn't be surprised if that sort of sentiment continues or expands in the future. I like raw land, but that depends on the area and other stuff. There's an increasing threat that raw land could be zoned conservation, removing it's potential future value (I won't get into the bigger conversation around that). The mortgage on your own house can be beneficial. I plan to stay with mostly equities. There are a lot of options in there as far as sectors or industries. A materials or induatrials ETF could be good, but it would require more research to see how covid has affected supply/demand. Dollar cost averaging the index in a low cost Vanguard ETF and focusing on my career. ETFs for retirement fund.
And I will likely get downvoted into oblivion like every time I mention crypto on HN, but crypto. It's the only way I've found to hold cash (in stablecoins) and receive above inflation yield. Can you explain the stablecoin thing to me? I've seen them mentioned everywhere (including being bombarded with ads advertising 15%+ returns). How is that possible, and where is the money actually coming from? right, and what im learning now that what youre actually doing is throwing your money at an autonomous smart contract, which for some reason, seems less crazy Inflation fears when interest rates are at 0%? If inflation starts rising, the fed will raise interest rates and inflation will disappear. Yes, rising interest rates will cause pain, but not as much pain as significant inflation, so the fed will not hesitate. These videos sell because they induce fear, so stop watching them. I think the only acceptable resource (that's fear driven) is Real Vision Finance because they regularly bring guys from the other side. If you think there is inflation in the U.S., check the Chicago real-estate market. It has been in a depression in the last decade, more so in the last year. There is an imbalance between US cities which is inflating some cities and depressing some others. Hyper-inflation occurs when, regardless, everything is increasing in price because of monetary debasement. I'll start worrying when Chicago real-estate market start a bull-run without a change in fundamentals. On the other hand, if you are living in a hot city, you are definitively experiencing local inflation. If you are able to move to a lower-cost area, you should definitively do that. Be mindful also, that shortages can cause price spikes but these are not (monetary driven) inflation. If the suez canal is blocked by a ship, you might see prices spike for a while until traffic is back to normal. The pandemic has caused lots of disruption and multiple goods have experienced that effect. My mortgage is fixed rate. The higher inflation gets, the smaller the real value of what I owe. I know people that paid all their mortgage in a short time when inflation rocketed. BUT on the way you lose since fixed income loans are more expensive. real estate; you can buy out right and property value will rise with inflation. Or you can get a fixed mortgage which means you will owe less if inflation kicks in. Alternatively owning regular assets should help; stocks, gold, crypto, art, etc I don't. There is no reliable way to predict inflation accurately, at least for more than a few years into the future. I should be fine with my 100% equities portfolio with a SCV tilt anyway. Stocks, bonds and real estate. Beating inflation is not that hard.
Crypto is way too risky for my tastes. Stocks (Google, Apple, Amazon, Tesla) and cryptocurrency (Bitcoin, Monero, Handshake). ESG funds, crypto, properties. Looking to get into commodities as well, but not sure which to choose considering space mining is coming in a decade or so... I never understood the proposed business model for asteroid mining. Maybe you mean the moon? Either way, getting stuff down is expensive. You would need to mine a lot of expensive stuff for it to be worthwhile. But if you dump a lot of stuff into a market, you might tank the price. (Yes, this is hand-waving. But I think the general points should hold.) Asteroid mining! Does anyone else think immediately of "Elite"? Though I was only ever 'Mostly harmless', playing on a neighbour's BBC Micro until I got a ZX Spectrum 48K :-) Half stocks, half bonds, 3 years or less. Spend it immediately so it dosent lose value. (I’m joking but just saying index ETFs is boring) I focus on owning assets that adjust with inflation and also have a positive expected return. Inflation-linked bonds offer a direct hedge over inflation. Not exactly sure what the downside is, so you’ll have to look that up (or someone else may comment on it). Crypto/gold/real estate are not hedges against inflation. They’re pretty wild bets. If you do this, make sure you diversify... On a side note, inflation is a good thing cause it makes you want to invest your money. Seeking a refuge value is not playing the capitalism game. It’s better for everyone if you invest your money in some active venture (like stocks or bonds) rather than in some sitting asset... Where / how do you find inflation linked bonds? Look for "TIPS" like $VTIP Too bad.... gardening