Author Topic: Inflation on the horizon? How to prepare  (Read 1803 times)

YTProphet

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Inflation on the horizon? How to prepare
« on: March 31, 2020, 07:34:12 AM »
It sure seems like all this money printing in the US is going to push us into an inflationary environment. I don't want to commit fully to preparing for inflation but want to weight my investing more heavily that way.

What are the best ways to do that?

With low interest rates, it seems like borrowing cheaply and levering up on some cash flowing real estate would be a good idea. However, I am going to be paying off my house shortly and don't have much cash. I'll have the house, a little cash and $150k (used to be $200k a month ago) in 401k. I really don't want to take out a loan on my house to buy financed property. Any tips?

My main thought at this point is to try to save up quickly for a downpayment to buy a big piece of investment real estate with a partner that is on a non-recourse note. Best of both worlds.

RWD

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Re: Inflation on the horizon? How to prepare
« Reply #1 on: March 31, 2020, 08:14:25 AM »
International stock market index fund, maybe?

ChpBstrd

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Re: Inflation on the horizon? How to prepare
« Reply #2 on: April 05, 2020, 09:36:18 PM »
Why would accelerated money printing lead to higher inflation? This has been occurring in the US for 40 years, and inflation has been steadily falling. A person arguing that accelerated money printing and national debt REDUCES inflation would at least have evidence on the side of their theory!

Japan has been battling with deflation rather than inflation, and last I checked their national debt was over 200% GDP with a yield of almost nothing. I'm more inclined to think we are heading their direction, given the trend line and demographics.

Real estate investments should be evaluated on their merits and risks per the sticky thread in the RE section of this forum. Hedging inflation is NOT a good reason to buy RE with a low cap rate or other issues affecting profitability. If you want to do that, buy TIPS or commodities.

That said, if you've found a good deal, really weigh the benefits of using your home equity vs. a new business loan. Your down payment and interest rates would be lower if you do a cash-out refi of your current home*, but the tax deduction on interest is probably gone in that scenario.

*Your interest rate for an investment property will be about 1% higher than a home loan. Also, for the investment property you'll generally have to put down 25%, but with your home loan you can go down to 20% equity.


Cranky

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Re: Inflation on the horizon? How to prepare
« Reply #3 on: April 06, 2020, 05:04:53 PM »
Make sure that you can keep your expenses low.

Schaefer Light

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Re: Inflation on the horizon? How to prepare
« Reply #4 on: April 06, 2020, 05:26:27 PM »
The inflation we've experienced recently as a result of money-printing has come in the form of inflated stock prices, so my strategy would be to buy more shares of VTSAX.

rudged

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Re: Inflation on the horizon? How to prepare
« Reply #5 on: April 07, 2020, 04:54:51 AM »
Why would accelerated money printing lead to higher inflation?

If the economy is flooded with money at a time when inventories of many goods are diminishing (because so many people who produced them cannot work), prices will rise to reflect not only the increased amount of money in the economy, but also the scarcity of these commodities.

FIRE 20/20

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Re: Inflation on the horizon? How to prepare
« Reply #6 on: April 07, 2020, 03:55:49 PM »
This is a sincere question; I don't follow this stuff all that closely so I really don't remember.  Weren't people worried about inflation about a decade ago with quantitative easing?  I seem to recall that the Fed (and other countries' equivalent organizations) cut interest rates to around zero and bought a whole lot of something or other during the great recession, and people were very worked up about inflation.  Instead of runaway inflation, we've had very low inflation since then. 

Also, the few articles I've seen seem more worried about deflation from the covid-19 situation.  Here's one, but I've seen others:
https://www.washingtonpost.com/opinions/here-comes-the-great-deflation-threat/2020/04/05/27ca18ce-75fc-11ea-87da-77a8136c1a6d_story.html

It might be behind a paywall, but here's a small quote:
"You’ll recall the context. The coronavirus has turned into a job-killing machine. Businesses have closed by the thousands as firms lost customers and governments invoked lockdowns. Jobs, profits and the stock market have dropped dramatically. The next big worry may be deflation, a general fall of prices."

I'm not arguing either way, but what I've read leads me to suspect that more economists are worried about deflation rather than inflation. 

ChpBstrd

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Re: Inflation on the horizon? How to prepare
« Reply #7 on: April 07, 2020, 08:26:21 PM »
Why would accelerated money printing lead to higher inflation?

If the economy is flooded with money at a time when inventories of many goods are diminishing (because so many people who produced them cannot work), prices will rise to reflect not only the increased amount of money in the economy, but also the scarcity of these commodities.

That may be true of toilet paper, but the vast majority of the American household budget is discretionary. When people lose their jobs, see others losing their jobs, or think they might lose their jobs, they tend to stop buying Ram Quad Cab 4x4 commuter pickups, McMansions, RVs, boats, cosmetic surgeries, tattoos, restaurant meals, energy drinks, and collectible basketball shoes (that list covers about 60% of the economy where I live).

Of course, the people who actually lose their jobs end up spending less simply because they no longer have money. When people lose their jobs, their time goes unused just like inventory piling up in a warehouse. The only way to clear the glut is to cut prices, so workers lower their salary expectations and businesses cut their prices. As unemployment rises, there are too many businesses open competing for the same demand. In the last 4 years, 5 restaurants opened in my neighborhood. Now they are all competing for the demand that could sustain 2. They do so by cutting prices.

Villanelle

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Re: Inflation on the horizon? How to prepare
« Reply #8 on: April 07, 2020, 08:52:36 PM »
I don't think this is any better an idea than any other market timing.  But perhaps TIPS, if you are determined.

rudged

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Re: Inflation on the horizon? How to prepare
« Reply #9 on: April 08, 2020, 04:24:18 AM »
Why would accelerated money printing lead to higher inflation?

If the economy is flooded with money at a time when inventories of many goods are diminishing (because so many people who produced them cannot work), prices will rise to reflect not only the increased amount of money in the economy, but also the scarcity of these commodities.

That may be true of toilet paper, but the vast majority of the American household budget is discretionary. When people lose their jobs, see others losing their jobs, or think they might lose their jobs, they tend to stop buying Ram Quad Cab 4x4 commuter pickups, McMansions, RVs, boats, cosmetic surgeries, tattoos, restaurant meals, energy drinks, and collectible basketball shoes (that list covers about 60% of the economy where I live).

Of course, the people who actually lose their jobs end up spending less simply because they no longer have money. When people lose their jobs, their time goes unused just like inventory piling up in a warehouse. The only way to clear the glut is to cut prices, so workers lower their salary expectations and businesses cut their prices. As unemployment rises, there are too many businesses open competing for the same demand. In the last 4 years, 5 restaurants opened in my neighborhood. Now they are all competing for the demand that could sustain 2. They do so by cutting prices.

Thanks for your thoughtful reply. I agree if the social distancing rules currently in place persist. The discussions I've read regarding inflation as a problem seem to be focused on the aftermath of the corona virus pandemic, i.e. when people can go back to the discretionary spending they have been cutting back on. Pent up demand may lead to a sharp rise in prices, and a very strong job market for service jobs, such as restaurant work. A lot depends upon how long the social distancing rules that discourage social distancing stay in place. 

slappy

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Re: Inflation on the horizon? How to prepare
« Reply #10 on: April 08, 2020, 08:19:36 AM »
Why would accelerated money printing lead to higher inflation?

If the economy is flooded with money at a time when inventories of many goods are diminishing (because so many people who produced them cannot work), prices will rise to reflect not only the increased amount of money in the economy, but also the scarcity of these commodities.

That may be true of toilet paper, but the vast majority of the American household budget is discretionary. When people lose their jobs, see others losing their jobs, or think they might lose their jobs, they tend to stop buying Ram Quad Cab 4x4 commuter pickups, McMansions, RVs, boats, cosmetic surgeries, tattoos, restaurant meals, energy drinks, and collectible basketball shoes (that list covers about 60% of the economy where I live).

Of course, the people who actually lose their jobs end up spending less simply because they no longer have money. When people lose their jobs, their time goes unused just like inventory piling up in a warehouse. The only way to clear the glut is to cut prices, so workers lower their salary expectations and businesses cut their prices. As unemployment rises, there are too many businesses open competing for the same demand. In the last 4 years, 5 restaurants opened in my neighborhood. Now they are all competing for the demand that could sustain 2. They do so by cutting prices.

Thanks for your thoughtful reply. I agree if the social distancing rules currently in place persist. The discussions I've read regarding inflation as a problem seem to be focused on the aftermath of the corona virus pandemic, i.e. when people can go back to the discretionary spending they have been cutting back on. Pent up demand may lead to a sharp rise in prices, and a very strong job market for service jobs, such as restaurant work. A lot depends upon how long the social distancing rules that discourage social distancing stay in place.

I'm not an economist by any means, but I'm not sure that pent up demand will work like that. Hence the concerns about a prolonged recession and the governments stimulus in an attempt to keep us out of depression.  Especially since it seems like a lot of the reduced spending is from people actually being unemployed. I think you are right, so much depends on how long the shut downs last. If they last for very much long, I imagine that when people become employed again, they will be trying to catch up on past bills and only spending on necessities.

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Laura33

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Re: Inflation on the horizon? How to prepare
« Reply #12 on: April 09, 2020, 07:54:55 AM »
I don't think this is any better an idea than any other market timing.  But perhaps TIPS, if you are determined.

This.

The reality is that our modern economy has never faced this kind of massive inter- and intra-national threat.  As a result, literally no one knows what is going to happen; you can find highly-trained, highly-experienced experts who get paid a lot of money to make these kinds of prognostications for a living, who completely disagree with each other.  And no matter which version of the story you believe, you will be competing for those investments with a lot of other highly-trained experts who get paid a shit-ton of money to identify those opportunities faster than anyone else.  Oh, and then you'll also need to figure out when the economy is going to shift the other way, so that you can get out of your current investments and into something more appropriate for whatever the next crisis or raging bull market may bring. 

So you have two choices:

1.  You can assume that you have a better ability to evaluate the current situation, predict the market's ultimate response, and act more quickly than all those experts and throw your money into some sort of inflation hedge -- commodities, TIPs, consumer staples, etc.; or

2.  You can develop a well-balanced portfolio that provides reasonable upside if what you think will happen happens, together with reasonable downside protection in the event you're wrong, and then leave it the fuck alone.

Your call.