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.

20 Years Since US Government Ran a Surplus

“The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale” -Thomas Jefferson

“Government debt is a system, not only ruinous while it lasts, but one that must soon fail and leave us destitute” – Abraham Lincoln

If you’ve graduated from university in the past 20 years most likely you’ve been taught that deficit spending is good for an economy, you’re also most likely aware that for the past 20 years that we’ve had consistent government deficit spending. The last time the government ran a surplus was between 1998 to 2001. Going back further the last surplus before 1998 was in 1969 when Nixon took office. The period between including the 70’s and 80’s the US experienced high inflation but on paper PPP per capita GDP also went up. If you look at the chart below the Federal Debt was still less than 60% of GDP throughout the 70’s and 80’s but as of the latest data reported at the end of 2020 we are currently at 127% Debt/GDP.

Federal Debt as % of GDP

The last time the US has ever had this much Federal Debt was back in 1945, when the US had not only spend a lot of money on Roosevelt’s New Deal to get out of the Depression but also we had spent an enormous amount of money on bringing an end to WWII.

US Public Debt Historical

 

The US has disastrously mismanaged the COVD-19 crises and unfortunately had to pay a lot of money because of it. How many rounds of stimulus will be enough, or will this become the new normal? A major beneficiary of this stimulus has been the stock market and real estate has been buoyed by historically low interest rates. However I think our consumption economy may have rough seas ahead unless it can tackle a few issues:

  1. Tax Evasion by Mega-Corporations – Without getting too much into specifics large corporations have ways to avoid taxes, a luxury not available to smaller businesses. This is a double edged thorn because not only does it stifle competition but also it further contributes to a growing national debt. Add lobbyists to the equation and the little guy has his work cut out for him. Ironically for us the investor class it means we should “go with the flow” and make sure we are at least riding the wave of blue chips and the Silicon six to retirement.
  2. Boosting manufacturing – the US needs to produce goods especially high tech manufacturing so it does not become eclipsed by other countries. It needs to make sure it can make medicines and vaccines domestically as well as cutting edge semiconductors, batteries, and circuit printing. Even though Intel is I would say one generation behind other companies I think the US needs to focus on getting it and other manufacturers caught up with, for example, Taiwan and South Korea.
  3. Repair infrastructure that was built in the 60’s. A lot of the US, especially the power grid and train systems, are woefully out of date. Rather than just giving money away, expanding the idea of UBI, the US should emphasize infrastructure from roads, electricity, trains, hydroelectric, and nuclear energy. Solar panel construction should only be done after evaluating the carbon cost of production and disposal, as well as impact on local environments.
  4. The Suburbs. The Suburbs as a concept were well-intentioned, but common sense and other towns across the world show that it really makes more sense for people to live closer if not walking distance from where they work. Strictly regulated commercial vs residential zoning should be re-evaluated so that people don’t need to travel by car or by train for that matter for everyday life. I think this will become essential as populations grow and in the US as the dollar starts to lose its status as the reserve currency.

So in conclusion, the US has some time left to fix a few things before the Federal Debt becomes an issue too hard to handle. It needs to use the time it has leverage as the world’s reserve currency to put the value of the currency to good use to put us on solid ground going into the future. Other countries have been keeping our standard of living up by creating cheap goods and accepting US dollars for them even though they know we can create dollars out of thin air. The Federal Reserve should keep it’s interest rates low while this transition takes place so the Government Debt doesn’t spiral up to 200% of GDP. Banks should be vigilant as they dole out mortgages with low interest rates to avoid another massive real estate bubble.

Is this going to happen? Probably not. Another large scale event like Covid, such as a new war would really cause issues with our government debt and most likely also crash the stock market. Stagflation may be the new buzzword and everyone will be wishing they were holding gold or bitcoin instead of stocks.

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.

Buying Lasting Presents Which Appreciate in Value

Buying Gifts that Retain or Increase in Value

If you’ve ever watched the 1964 rendition of Rudolf the Red Nosed Reindeer you’ll know who Yukon Cornelius is. He’s the most famous prospector in the north, searching for silver and gold. That being said, he never finds any.

Don’t be like Yukon, buy your relatives gifts that appreciate in value! Silver coins are a nice gift because they are affordable and have a decent upside potential – and look nice!

Legos hold their value well if you don’t open the box! Video games depreciate fairly quickly, and clothes are basically worthless after they are used. Gift cards are worse than cash in that they usually have an expiration and can get lost or forgotten about. Stocks are not easy to buy for kids these days because you have to open accounts and deal with a lot of overhead in getting started. Bonds are boring.

So next time your considering buying present buy a fancy silver coin! There are a variety of designs to choose from, including Star Wars designs, battleships, pirates, and dinosaurs for the young ones.

Coins can be cool!

Recommended Websites

1.  Modern Coin Mart

https://www.moderncoinmart.com/

I like Modern Coin Mart because they have a wide variety of coins to choose from. These range from historical to modern (like the dinosaur coin), and hail from a variety of countries. You can buy directly from their website (link above) or go through eBay and buy from their eBay store. If you buy from the eBay store they are usually quick to give positive ratings to buyers – if you don’t care about ratings it may make more sense to buy directly from their website.

2. APMEX

https://www.apmex.com/

APMEX is another great website for starting your coin or bullion collecting journey. I like how their bullion includes hand poured bars (like below).

hand poured 2oz silver bar

Trump Stocks VS Hillary Stocks

At this point it’s safe to say that unless something extraordinary happens either we will get a Donald Trump or Hillary Clinton presidency. While I could spend volumes discussing the economic implications of either win, at this point its more important to figure out what companies will benefit or lose from each presidency so you can take a gamble or get out before its too late.

Coal/Oil

Its safe to say that fossil fuel companies would continue to get hammered under a Clinton presidency. If Clinton is anything like Obama, we should see a few more coal stocks go bankrupt like Peabody Energy (Formerly PBU) and Arch Coal (Formerly ACI). Surviving coal companies include Cloud Peak Energy (NYSE:CLD), Westmoreland Coal Company (NASDAQ:WLB), and Alliance Resource Partners, L.P. (NASDAQ:ARLP). Oil companies face regulatory difficulties under a Clinton presidency, but most should be able to survive as oil maintains current price levels. The coal industry in my opinion is a bad investment at this time due to the very cheap price of steel and the lower demand from China and the United States.

Defense

One area that will most likely benefit from a Trump presidency is the defense manufacturing companies. Companies which would produce items for the military and navy include General Dynamics (NYSE:GD), BAE Systems PLC (LON: BA), and and array of other companies. You can also invest in Mutual Funds iShares Dow Jones US Aerospace & Def (ITA) or Fidelity® Select Defense & Aerospace Portfolio (FSDAX). Over the past year ITA has returned 18% and FSDAX has yielded 14%.

Healthcare

While I’m tempted to say the healthcare industry would continue well under a Democratic president, I can’t say for sure given the very cutthroat price increases which have made them a popular industry to attack from both Democrats and Republicans. If the Democrats end up further building up Obamacare it’s quite likely the pharmaceutical industry will be volatile. The TPP agreement pushed by Obama and Clinton will make people in 3rd world countries have to pay more for medicine, which may end up furthering profits in this sector. Time will tell. I’m not going to put any recommendations here.

Gold / Silver

If you’re a gold or silver investor, then the past year has been very kind to you. Especially if you’re into gold and silver mining stocks. Helca Mining company (NYSE:HL) surged 215% YTD and almost 200% in the past year, from under $2 to $6. Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG), and Silver Wheaton Corp. (NYSE:SLW) are all big players in this market. This is one of my favorite industries to make huge profits from moderate changes in base precious metal prices. It’s hard for me to say which candidate will cause these to go up further, it’s more dependant on the Federal Reserve interest rate policy and inflation. However based on the campaign talk It seems like a Clinton presidency would be better for precious metals. It’s always a good idea to have these as part of your portfolio to some degree.

Real Estate

Donald Trump made most of his money off of real estate – it’s always good to include this in your mix of assets. As the world population expands real estate will most likely continue to climb regardless of who makes president. A recession could certainly hit prices, but only temporarily.

Conclusion

I’d get out of coal, first of all. I’d put money into defense stocks as they should outperform the market under either presidency. I’d allocate some money into precious metal if only for an insurance policy on the dollar. I’d get some cash out of this frothy market and wait for the market to tumble before the election before strategically investing in under-priced high return on equity stocks.

Investing in Silver

Silver is a pretty common metal in the world – it has many industrial uses due to its highly conductive and reflective properties. In fact, silver is the most thermally conductive element!

Silver also has a lustrous quality, until of course it oxidizes – this phenomenon is called tarnishing.

Silver has been used in coinage since at least 700 BC, when the Lydians used a naturally occurring silver-gold alloy to mint these coins. Concurrently, the Chinese also used silver in their coinage.

Today, silver can be invested in directly through the purchase of silver coins or bars which can be classified into bullion, collectibles, and antiques. Bullion is silver stored in a very simple form like a plain bar with a simple seal of the minting company on top. Collectible silver coins can include nationally minted coinage such as the US American Eagle, the Canadian Maple Leaf, or the Chinese Panda. These nationally minted coins are more valuable than bullion because they are easier to recognize and differentiate between genuine and fake products. That being said, the only true way to test silver is to perform an acid test, as today there are very skilled copycats which use lead and other inferior materials to create realistic looking fakes.

If you are going to invest in silver, make sure you are buying from reputable sources – I would not encourage buying from an online store that does not sell large quantities. I would also stay away from vendors on the street anywhere in the world – ensure that your seller has a brick and mortar business if you are going to buy face to face. Also, make sure not to buy silver that is overpriced – Bullion should not be selling for more than 5 percent more than the “strike price”. Strike price means the current world market price. In some countries, however, it’s hard to get around paying a large premium if the government imposes high import taxes on such goods. India, for example, has a huge import tax on gold and silver.

Silver bullion is usually sold in 1, 5, and 10 ounce pieces. This makes future transactions much easier.

If you are interested in buying collectibles, then you are effectively buying an insured piece of history. This is similar to buying collectible coins but for the vast majority of historical coins the silver/gold ones carry a much higher premium. For example, a simple old Roman coin might cost you $50-$100. A silver Roman coin will run you more like $250-$1000. I can’t claim to be an expert on the value of historical coins, but these types of investments can be a lot more risky than investing in simple bullion.

Historically, silver is not a good investment as compared to stocks or bonds. Silver will not pay you interest, it does not work to create earnings, and requires the cost of storage. However, under certain circumstances most recently the stock market crash of 2009 investing in silver or gold until the stocks dipped by 50 percent was a damn good deal.