Disclaimer – this is not financial advice; I am not a financial advisor.
Let’s get right down to it. Inflation is here. Mainstream media is just starting to report on it, which means it’s already here. What does this mean for you? It means your purchasing power of your currency is about to be reduced. The amount you spend on groceries each week is going to buy you less and less as inflation ramps up. One can argue that it can’t/won’t happen here in the U.S. Let me assure you that there is no reason it can’t. The U.S. dollar is not backed by gold anymore, it’s only backed by citizens confidence. Confidence is a fragile thing and once it’s gone, it’s gone. What can you do to protect your purchasing power?
Debt
In the land of inflation, the man with the most debt wins. There’s no reason to rush out and pay off your debts. Now to refinance at a lower rate, that is a good strategy. If you can refinance your existing mortgage, auto, credit card debt obligations to a lower FIXED rate or longer term, do so. Why? The lower monthly payment you can get on your debt obligations, the less real purchasing power you’ll be using to meet those obligations. Example: say your car payment is $300 a month. $300 a month is also the amount of your weekly grocery bill, and it buys you 7 days’ worth of food. As inflation increased, that $300 grocery bill is only going to buy you 6 days of food, then 5 days, then 4 days, and so on. You may end up spending $1,200 a week on groceries soon. However, that same $300 is going to continue to pay your auto loan even as all your other expenses rise relatively. Your fixed obligations are actually hedges against rising inflation. Lower those monthly payments, even if it means extending the term. Borrowing rates also tend to climb with inflation. So if you lock in a low rate now, for as long as possible, when other people are paying higher interest for their loans, you will be sitting pretty in your historically low interest rate and low payment.
Cryptocurrency
Unless you’ve been living under a rock, you’ve heard of Bitcoin. Maybe Litecoin, Ethereum, Dogecoin. There are thousands of crypto currencies. Many will be useless as we consolidate into the ones with real use cases and staying power. Many people are skeptical of these for their own personal reasons or biases. The fact is they are here to stay. Central banks are already calling for their own “crypto” currencies which will be 100% digital. China is already rolling theirs out. Don’t be ignorant, a paradigm shift is coming. Even if they are worthless in your opinion, they are going up in price. That’s right, even if you can’t stomach crypto “appreciating” in value as a proactive, speculative investment, they are still going to go up in dollar terms. Why? Because they dollar is going to lose value. That means it’s going to take more dollars to buy crypto. So even if you can’t imagine “investing” in crypto, you should still consider “hedging” your purchasing power with it. Crypto in its youth as an emerging asset class, so it is in fact likely that it will appreciate exponentially against the dollar, not just hedge. Oh, and if you think you’re late to crypto and don’t want to buy the top, if you’re reading this in 2021 let me assure you; you’re early. A good strategy to get in is #1: get off zero. Get some amount of crypto from the Coinbase app, Abra app, Gemini or Kraken app. These are all easy-to-use apps with simple user interfaces. #2: dollar cost average in. If you don’t want to get hung up on your dollar entry cost so you obsess about if you’re “up or down” on your investment, just buy a fixed dollar amount at regular intervals (example $500 a week) no matter what the price may be. The long-term trend is up, don’t fret about short term action. Beware that because the market is so young, volatility is EXTREME as the market is still in price discovery mode. There are also rich people who are able to manipulate the market so they can accumulate more.
Precious Metals
Gold, silver, platinum, palladium, etc. have had perceived and industrial value for centuries. They are a “safe haven” investment that many legacy investors are going to flock into when inflation gets really ugly. Precious metals are characteristic more of preserving purchasing power rather than appreciating in relative purchasing power. The historic comparison is that 1 ounce of gold has always bought a fine men’s suit. That’s still true today and will continue to be true. Its role is not to buy 2 or 3 fine men’s suits, just 1. So, where cryptocurrencies will preserve purchasing power as well as appreciate in relative terms, precious metal’s main role is just to preserve purchasing power. The different is the maturity of the market. Crypto is in its infancy so true value in dollar terms hasn’t been discovered yet.
Now, there is also a wild card scenario where precious metals could breakout to the upside wildly and we could find out that the price of physical metals has been suppressed for a long time by big banks. Big banks sell “paper” precious metals called derivatives which aren’t physical units. What that does is increase the theoretical “supply” of metals which, economics 101, drives the price downward. Look up how many times JPMorgan has been hit with fines for rigging the metals prices. They get hit with a fine, then recoup that expense exponentially by continuing to do it. So if you want to hold a wild card lottery ticket, grab some physical metal, as it may break out of this suppression in the future. Actually, if you’re buying precious metals at all, get the physical metals. If this wildcard scenario plays out and metals prices correct, you don’t want to be holding on to worthless paper, you want the physical asset. Plus, as more physical is bought up and taken off the market, the closer we get to breaking the suppression.
Non-perishable Goods
Not a big need for explanation here. Buy non-perishable goods while your dollar buys more. Canned goods, toilet paper, paper towels, ammo, alcohol, general supplies, anything. Anything you use regularly that you can stock up on and store will keep you from spending more money on it later. One might compare this to prepping. That’s exactly what it is. You should’ve been doing this all along and the best time to start was yesterday. If you haven’t started stockpiling, start now. You saw the toilet paper crisis of 2020, don’t be the one unprepared.
Stocks
The stock market will continue to rise with inflation. Not because companies are doing well or worth more, but because it will take more devalued dollars to buy those stocks. You’ve seen it happen already but may not have realized it. Our economy SHUT DOWN during the pandemic and yet stock prices of most companies went UP. Does that make any sense? Companies aren’t doing better; they are doing worse. Yet stocks climbed. Why? It’s taking more dollars to buy those stocks. We saw DOW 30,000 and we’ll see DOW 40,000 and up. Just be aware that although you may become a millionaire on paper in your 401k, realize that your “millions” aren’t actually going to buy you more than the “thousands” you had before. Commodity stocks and inflation resistant stocks will likely do better than other stocks of say luxury companies who will see decreased demand as consumers get crushed. Be smart out there and if you’re going to stay in stocks, stay in the companies whose products will always be needed even in a collapsing economy.
Interest Earning Investments
Interest rates will likely rise in an inflationary scenario in an attempt to combat it. That doesn’t mean you should stay with your bank. Your bank pays you a tiny percentage compared to what’s out there. There are crypto exchanges out there that will pay you 10.50% APY (at the time of this writing) just for holding a crypto that is pegged to the US dollar and is 100% liquid. That’s almost zero risk (except counterparty risk of the exchange failing) for an exponentially higher return. Further, Decentralized Finance (Defi) is in its infancy and some cryptos are paying 90+% APY, some even much higher than that. If you’re interested, get busy on the internet learning about it. Returns are out there for crypto Staking, Liquidity Mining, Lending, and it’s all in infancy. Be first, not last, because this isn’t going to last forever. Of course, you can always stay with Treasury Inflation Protected Securities (TIPS) if you trust them, but they will be much lower and are also a lagging interest product because they rely on prior inflation statistics and not “free market” current data. Keep in mind too that you need to consider your interest rate versus the rate of inflation. Even treasury securities at the time of this writing are paying interest but that interest is less than the “real” rate of inflation. Point being, if you’re holding government debt securities long term, yes you’re earning money but you’re losing money to inflation faster than you re earning it back.
Cash
Hold some physical cash just in case supply chains or banking gets interrupted. That’s a no-brainer. Everyone needs that emergency fund. However, also hold some liquid cash for investments that may pop up in a collapsing economy. Those who are unprepared may be forced to start “fire-selling” assets to survive. This may include goods, cars, homes, businesses, land, firearms, etc. Have cash on hand to take advantage of these scenarios. It’s a harsh reality but it’s reality nonetheless. In full collapse it’s entirely possible to come out doing well.
Real Estate
Real estate will rise with inflation and has always been seen as an appreciating asset and good investment. This doesn’t change in an inflationary environment. We’re seeing large investment firms buy up homes left and right with the intent of renting these homes back to people. Firms like Blackrock are currently paying 20% more than market for all these homes when the market is already selling at a premium. Normally one should proceed with caution buying homes in the current “housing bubble” to avoid buying a top and facing potential correction to lower values. However, based on what these companies are doing, one has to assume they know more than we do and are considering the current bubble to be good entry prices. This is complete speculation though as we’ve not really experienced this before. These firms are buying entire housing communities. Make of that what you will, but home ownership for many could be on the decline. Speaking of potentially declining home ownership, rent payments are going to increase too. So if you’re a renter keep that in mind. Real Estate Investment Trusts (REIT’s) are a common way to get exposure to real estate without ponying up hundreds of thousands of dollars to buy a single piece of property. These will adjust nicely with inflation and keep you hedged as home values and rents increase.
Income
We cannot be sure if private or government employers will provide cost-of-living raises as inflation ramps up. If they do, we can conservatively speculate that the raises will be based on recent inflation statistics and thus be lagging behind real-time inflation. Underlying point: we cannot assume our income will remain adequate. What can be done? Think about and realize if your profession is inflation proof or not. If you work in an unnecessary job like high-end fashion, interior design, home cleaning, etc., your income may be the first to go as people cut back on goods they can no longer afford and are not a necessity. If you want to inflation-proof your income you need to have skills that are mandatory at all times. Think nursing, building/home contractor, mechanic, veterinarian, farmer, production, utilities. Another strategy would be to keep your current “non-inflation-proof” current job and work on a useful side hustle that is more inflation-proof so you can fall back on it if need be within your local community. Think homesteading/gardening, home repair, hunting/butchering, teaching/tutoring, caring for children/elders. In short, develop skills that are needed at all times. It’s getting late in the game already, but you should be saving all you can at this point even if it’s denominated in dollars.
Protection
Get a firearm, train with it. Things could get ugly out there. It’s just the reality of the situation.