How To Preserve Your Assets During 1970’s Style Inflation?

So times have changed, but inflation is back. In the 1970’s prices went up 10% year over year due to a few things – in my opinion OPEC and the departure from the gold standard were the biggest reasons. During that time period you would have made out quite well if you kept all your cash in energy stocks and real estate investments. You’d also make out like a bandit holding gold and silver.

During this period I think the same is true, however there’s a few differences.

  1. Energy stocks now should include “Green Energy” companies and not just comprise of typical fossil fuel producers/ refiners.
  2. I’d focus more on residential real estate instead of commercial real estate especially if the commercial REITS are heavily invested in traditional office buildings and property in large metropolises.
  3. Gold and silver now have competition – cryptocurrencies led by bitcoin and etherium. Altcoins offer large APY yields to those who risk holding them and “staking” them or participating in defi programs. Bank interest rates are still abhorrently low, and at the time of writing this the best interest you can get on a savings is basically 0.5% with Ally unless you are using some promotion or something that requires you go through hoops. Defi can easily get you closer to 20%.
  4. One sector I’m willing to keep cash in is food producing companies and food sellers. That means Lamb Weston, Conagra, Archer-Daniels Midlands for the food producers and Albertsons and Walmart for the retailers. These companies make money off of an inelastic good, and for those who took economics that means that people can’t really stop buying regardless of the price. When it comes to low level luxury goods price elasticity means that demand goes down when price goes up, and for some goods this effect is stronger than others.
  5. Another sector that sells goods that are partially inelastic is energy, that means energy companies and I’d throw in green energy companies into this mix. Fuel is needed for heating during the winter and essential transportation year round.
  6. One winner of inflation that wasn’t around during the 1970’s could be the internet and internet based businesses. As people are too poor to go out, pay for fuel, and dine out they may turn to internet based entertainment such as we saw during Covid in mid 2020.
  7. Regarding real-estate, we did see a huge surge in price in the past few years as people moved around the country with the ability to work from home and the newfound realization that their life is finite due to the pandemic – we may see real estate prices keep up with inflation or slow down a bit, I think a slowdown is more likely as homeowners feel the strain of inflation and sell-offs start to happen. This will benefit people and corporations who have the means to buy up these properties and rent them out.

What not to do:

  1. Nothing – don’t do nothing. Take action to preserve your value that you’ve worked hard to build.
  2. Bank CD – if you lock your money into these low yield fixed rate certificates of deposits you are effectively throwing your money away.
  3. Keep all your money in Consumer Discretionary and related businesses stock. That means Footlocker, Texas Roadhouse, etc.

Is inflation “transitory”

  • I don’t think so, I think it will slow down in the future but what you can buy for the dollar now will never buy you more in the future. I see inflation going up 5 to 10% for the next few years, and that is on the optimistic side.

Switching To YouTube for Awhile

While it’s been a blast writing these articles, the analytics shows that videos just get more views and are a more viable way to communicate to the audience of the internet. I’ll keep this blog open, but if you’re looking for new updates please check out my YouTube channel.

 

One Percentage Point Cut in Benchmark Rate, Now at 0% – 0.25%

What Happened?

Today the Federal Reserve announced it will cut the benchmark rate to between 0% and 0.25%. On top of this, the Federal Reserve has said it will proceed with $700 billion in asset purchases (quantitative easing)

This is an important milestone in that the only additional tools the Federal Reserve now has to curb further depression in the stock market and slowing of the economy due to Coronavirus is to either:

  1. Push the benchmark rate into negative territory
  2. Introduce additional quantitative easing

Focusing in on this change only, and not the other stimulus the Federal government is pursuing, indicates that there is a large amount of fear about the economy.

What should you do now based on these changes?

Refinance

If you have an existing home loan chances are very high at this point you will be able to refinance your loan for a lower interest rate (more than 1% of your current rate) which would make it financially worth the closing costs.

Figure out to do with your cash

0% benchmark rates and increased government spending through stimulus measures means your cash is at risk of devaluation.

Commodities

Consider investing in alternative forms of wealth including gold, silver, platinum, palladium, rhodium, and consider diversifying with some cryptocurrencies such as bitcoin or etherium. Last time quantitative easing was introduced and implemented gold prices more than doubled from $800/oz in 2009 to over $1800/oz in 2011. Today gold stands at $1544/oz. Gold isn’t so much a way to make huge returns rather a way to store value, but a tool nonetheless. Silver went from $10/oz to over $45/oz in 2011. Same concept applies except silver is more volatile, less expensive, and more abundant. Also silver oxidizes, unlike gold.

Equities

Consider investing in companies that can weather a Coronavirus instigated economic adjustment that are on discount after our stock market rout of the past few weeks. Don’t dump all your cash into the market immediately, but start moving money over time and pick up some bargains. Anyone who used this strategy in 2009 would be looking good today. Be careful of companies in high risk industries in the current environment. Casinos, resorts, cruise, and travel companies come to mind as high risk investments. Secondary companies that could share some of that risk include airplane manufacturers, and restaurant franchises that aren’t tuned for home delivery, and theater companies.

The no-brainer at this point is the refinance. Others are optional, and carry risk.

Trade Stocks Commission Free with Robinhood

It used to be 9.95 per trade, then 8, and now 4.95. Commissions can add up and suck the profitability out of your stock portfolio, especially if you want to make multiple trades per year or had in mind to trade in smaller batches of shares.

Robinhood has leveled the playing field with $0 commissions on trades. You can check out Robinhood at https://robinhood.com from your smartphone to sign up. You can also ask someone who already has Robinhood to give you a referral link and you both will receive a free share (usually of a cheap stock).

I personally like using Robinhood the most for option trades, where commissions really eat into my profitability especially if the options only cost under $100. The tools to research are missing from Robinhood so you will have to find some other tool to do your stock research before trading. Regarding the tools I like Fidelity and Charles Schwab better.

Good luck!

Black Friday – Economic Scarcity Reason for Violence

 

 

 

 

 

Black Friday may mean a black eye for some shoppers. Black Friday deals are a recipe for violence in many parts of the US, and while I can’t deny this is unacceptable, I will comment that it is more common around the world than you might think.

Why do large defence contractors, for example Lockheed Martin (NYSE: LMT), make billions of dollars per year? What makes these types of companies fabulous investments? Conflict. Conflict around the world is essentially either fought for dominance of a certain group of people for a certain set of resources. Resources can be land size, energy, food, manpower, etc.

Black Friday is creating mini wars in parts of the United States where resources are scarce, generally speaking those who get involved in brawls really need these black Friday deals as their chance to get a unit of a limited supply of something – PS4, XBox, Flatscreen TV, etc. If you make people have to compete to get the resources, fights will happen.

You Are Forced To Invest in Risky Assets

Mortgage rates history

Bank CD Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Take a good hard look at the charts above. While mortgage and CD rates were over 10% in the mid 1980’s, mortgage rates have dropped to between 3 and 4 % starting in the 2010’s and the bank interest rates have fallen to around 0.1%. The problem with the current investment environment today is that there really is no where to get a great return except for higher risk assets. Stocks and bonds both carry risks, and have been heavily pumped up due to the lack of alternatives such as existed in the past. Central banks have been pushing people with assets to invest in the stock market for quite some time now, as such investments ostensibly drive economic growth and also people’s retirement accounts.

Retirement accounts in the US are not the same as they were  in the past – in 1980 the 401k accounts were started by private companies take take advantage of section 135(a) of the Revenue Act of 1978. This became a trend among companies across the US and is now the standard. Companies would much rather have individuals put money into their 401k than be obligated to support them after retirement. The 401k is a type of defined contribution plan rather than a defined benefit plan. Federal law does not require employers to offer or to continue to offer a plan, but most white collar jobs do come with this benefit.

The IRS dictates that 401k beneficiaries being distributions at a certain age. The rules are a bit different for designated beneficiaries, but they should be closely followed otherwise penalties will be imposed. If an employee decides not to invest in a 401k, he or she does not receive any taxable benefits offered by the 401k which could either be:

  1. Untaxed deferrals to the 401k plan
  2. Untaxed gains for the Roth 401k plan

In short, money that goes into the normal 401k plan is not taxed up front but instead when removed from the account. Money that goes into the Roth 401k is already taxed but doesn’t get taxed when removed. Entire industries are supported on fees and administration costs related to people’s 401k accounts – if you haven’t yet, you should check out how much money you are charged for keeping money invested in each mutual fund, bond, ETF, etc. you are holding. Deciding to put your 401k money in fixed income will yield you close to nothing, but having money invested in international funds generally is more risky.

Unfortunately for the saver of today, the best investments tend to be stocks or real estate. Gone are the days of investing in bank CDs, at least in the US. If you’re looking overseas many countries still have double digit interest rates you can get on savings, but those countries tend to have higher inflation too.  Keep in mind holding a foreign bank account you will need to report your assets with the IRS using the FBAR form.

cd rate

 

 

Strategic De-Vesting

My last post noted how investing during a stock market trough is a wise decision. Many financial advisers will never advise their clients to reduce exposure to the stock market, but given the current price valuations I suggest selling off some stocks to hold gold, silver, or practical real estate. The reason for this is clear – the stock market has had a great ride, but that ride is based on a handicap of low interest rates and valuations which exceed standard price/earning ratios of the past. Amazon has a P/E ratio of 300, Tesla has a P/E ratio of nothing because they don’t even turn a profit! Apple holds a pretty low P/E ratio of around 11 because of doubts on future profitability.

The point is, there is a frothiness to the US stock market which is alarming. In my opinion it would be best to sell of around 30% of your portfolio now and ensure your investments are in stable asset classes. I’ve mentioned investing in water almost almost one year ago, and here are the results (using 1 year return from today):

GE : up 22% (Current price $32.21)

ECL : up 6% ($119.10)

AWK: up 62.95% ($82.76)

WTS: up 21.47% ($61.05)

I would keep these water stocks except for ECL and sell high risk assets such as Tesla, Amazon, etc. to ride out the upcoming correction.

If you check out my post on how investing in the stock market is like a chess game you should note that my recommendation on gold/silver stocks has also paid off.

The particular company I linked in that post has gone up 151% and is now trading at 6.05. I suggest selling this stock at this time to retain the profits.

 

So in summary my suggestion:

Hold on to the water stocks

Cash out and perhaps put money into modest real estate

 

Capitalizing on People’s Fears

The stock market has lost about 10% of it’s value in 2016 so far. Consider this a 10% discount from what it was before 2016, however timing the discount is nearly impossible. One thing’s for certain, buying a stock now would be better than buying that same stock 19 days ago. One way to ensure you’re getting a discount regardless of how low the market goes is to dollar-cost-average. If you’ve already lost a it in the stock market this year, then most likely your instinct is telling you to sell before it reaches 2008 crash levels. If it does recede further this might be a correct strategy, however very few major news organizations will tell you this. The 2008 crash erased about 50% of stock market value between late 2007 and early 2009, so we still have 40% to go if the crash gets that bad.

One commodity that almost always seems to prosper when stock markets crash is gold. Gold and treasuries. One investment that often gets hit after the stock market is real estate. However, real estate value decline isn’t usually permanent unless you’re talking about a city which becomes deserted like Detroit. You can also make money off of real estate by renting it out – assuming there are renters interested in your location. Other alternatives for the timid include putting the money in a CD, which unless you are holding it for 10 years will give you a measly return less than inflation in many cases. Other uses for money include education, donations, or simply burning to keep the house warm.

My suggestion is to dollar cost average a return to the market, and keep an eye out for severely undervalued investments in the next few weeks or months as the market crashes. If you have investments in relatively unharmed stocks, it might not hurt to sell those and use the money and buy the stocks which will recover the most.

Investing in Water

One aspect of investing that some people consider when they decide where they put there money is helping mankind. That could be in the form of a simple donation or investing with companies that help mankind develop. One area that needs investment that will forever be necessary is water transportation and desalination. Water scarcity is one of the largest risks to economies around the world, as populations continue to grow and glaciers and fresh water sources continue to diminish. I visited Lake mead less than two months ago and it currently sits at the lowest level since Hoover dam filled up this artificial lake in the 1930’s, its clear to me that civilizations across the world cannot continue to rely on traditional reservoirs and a certain amount of precipitation to divert emergency. As we have done with oil infrastructure, the same will eventually have to be done with water – desalination and purification of ocean water and pumping that water across lands to irrigate and placate populations.

The biggest players in that type of game can definitely change if the need escalates, but currently we have a list of the following companies who are related to supplying water infrastructure or desalination services:

  • General Electric (GE)
  • Ecolab (ECL)
  • American Water Works (AWK)
  • Watts Water Technologies (WTS)

This is a short list, but in summary General Electric has worked on desalination plants and will definitely be a player to come in this field. Ecolab is involved in water purification technologies. America Water Works is more of a utility company that provides water service and waste water treatment (another vital component of sustainable water infrastructure). Watts Water technology helps provide water quality solutions – in layman’s terms it creates plumbing pieces that help buildings smoothly move water around. Feel free to view each company’s website for more details.

These types of investments can be a form of macro trend investing – investing in technology which is up and coming and required for a sustainable future. As folks have witnessed in recent history investments into coal and dirty energy have proved very unprofitable, and that is based on standards governments have been setting which have resulted in fewer coal powerplants and slower growth in the demand for crude oil as car efficiency goes up and electric car sales increase. Water is a resource that everyone needs – which can be conserved but will need more supply soon!