The dreaded inflation print is out. Earlier this week, the US Labor department reported that Consumer Price Inflation for October was 6.1%, the highest in 30yrs. Over the past few months, we have featured pieces about how much of this is demand driven as opposed to the broken global supply chain and hence how much of this is transient as opposed to sticky. But this piece is about how to invest when inflation is high i.e, how do various asset classes perform during high periods of inflation. Nick Magguilli is at his data digging best, slicing and dicing it in ways to show us what picture history paints. Besides showing gold as a poor hedge against inflation, he concludes:
“…that equities, REITs, and real estate tend to preserve their purchasing power, even during higher periods of inflation. Logically this idea makes sense given that these assets are all based on monetary payments made to businesses or landowners. Therefore, if payments start going up due to inflation, the value of those businesses and land/property should go up with them.
On the other hand, those assets that tend to do poorly during periods of higher inflation are those assets that pay their investors fixed payments over time. As inflation ramps upward, these fixed payments tend to lose their purchasing power, which causes the underlying asset (i.e. the bonds) to decline in value as well.”
…What matters most in this scenario is how bad you think the inflation will get. Because, generally, the more extreme the inflation, the better these strategies will perform.
But don’t just take my word for it, consider what Frederick Taylor wrote in The Downfall of Money when discussing Germany’s hyperinflation: “So, who did well out of the inflation in Germany? Creditors lost almost everything. By contrast, everyone, broadly speaking, who owed money, had their debt liquidated by inflation…Investors in stocks and shares – unlike fixed investments, these increased in price along with the inflation over the years in many cases provided an excellent return”
If you look at the value of the German stock market, in both German marks and USD, during this inflationary time period you can see this quite clearly.
Businesses tend to retain their value during inflationary periods because they can push that inflation (through higher prices) to their customers. While this isn’t true of every business in every circumstance, inflation isn’t as scary for stocks as you might have initially believed.”
On Crypto, whilst he says there isn’t much historical data to see as throughout its existence, inflation has been low only: “The more important question you should ask is: how much value does a particular cryptocurrency provide to its owners? If you think the value is high or increasing quickly (and is currently undervalued), then that cryptocurrency will probably outperform inflation. If not, then it probably won’t. Either way, there’s only one thing that ultimately matters…”
He concludes by saying:
“Regardless of what you believe about stocks, real estate, gold, or crypto, there is one truism that will always protect your assets against inflation—own things that provide value to humans.
If you own things that other people will want, no matter what is happening in the world, then your purchasing power is likely to remain intact. This is true regardless of what measuring stick you use. Remember, currency is just a measure of value.
Therefore, what you should really care about isn’t the measuring stick, but the value that you own and where you own it.”
“…that equities, REITs, and real estate tend to preserve their purchasing power, even during higher periods of inflation. Logically this idea makes sense given that these assets are all based on monetary payments made to businesses or landowners. Therefore, if payments start going up due to inflation, the value of those businesses and land/property should go up with them.
On the other hand, those assets that tend to do poorly during periods of higher inflation are those assets that pay their investors fixed payments over time. As inflation ramps upward, these fixed payments tend to lose their purchasing power, which causes the underlying asset (i.e. the bonds) to decline in value as well.”
…What matters most in this scenario is how bad you think the inflation will get. Because, generally, the more extreme the inflation, the better these strategies will perform.
But don’t just take my word for it, consider what Frederick Taylor wrote in The Downfall of Money when discussing Germany’s hyperinflation: “So, who did well out of the inflation in Germany? Creditors lost almost everything. By contrast, everyone, broadly speaking, who owed money, had their debt liquidated by inflation…Investors in stocks and shares – unlike fixed investments, these increased in price along with the inflation over the years in many cases provided an excellent return”
If you look at the value of the German stock market, in both German marks and USD, during this inflationary time period you can see this quite clearly.
Businesses tend to retain their value during inflationary periods because they can push that inflation (through higher prices) to their customers. While this isn’t true of every business in every circumstance, inflation isn’t as scary for stocks as you might have initially believed.”
On Crypto, whilst he says there isn’t much historical data to see as throughout its existence, inflation has been low only: “The more important question you should ask is: how much value does a particular cryptocurrency provide to its owners? If you think the value is high or increasing quickly (and is currently undervalued), then that cryptocurrency will probably outperform inflation. If not, then it probably won’t. Either way, there’s only one thing that ultimately matters…”
He concludes by saying:
“Regardless of what you believe about stocks, real estate, gold, or crypto, there is one truism that will always protect your assets against inflation—own things that provide value to humans.
If you own things that other people will want, no matter what is happening in the world, then your purchasing power is likely to remain intact. This is true regardless of what measuring stick you use. Remember, currency is just a measure of value.
Therefore, what you should really care about isn’t the measuring stick, but the value that you own and where you own it.”
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