Author Topic: How should households hedge against inflation?  (Read 7154 times)

DarinC

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How should households hedge against inflation?
« on: January 17, 2015, 01:01:51 PM »
Given that most people already own tangible assets like homes/vehicles, what other hedges against inflation make sense? I'm assuming they already have a well diversified investment portfolio.

MDM

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Re: How should households hedge against inflation?
« Reply #1 on: January 17, 2015, 01:57:59 PM »
Given that most people already own tangible assets like homes/vehicles, what other hedges against inflation make sense? I'm assuming they already have a well diversified investment portfolio.

Appears the answer (bolded above) is in your question.

waltworks

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Re: How should households hedge against inflation?
« Reply #2 on: January 17, 2015, 02:05:52 PM »
Almost everything but cash is an inflation hedge to one extent or another.

-W

2Birds1Stone

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Re: How should households hedge against inflation?
« Reply #3 on: January 17, 2015, 02:06:45 PM »
At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick. 

DarinC

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Re: How should households hedge against inflation?
« Reply #4 on: January 17, 2015, 10:55:34 PM »
Given that most people already own tangible assets like homes/vehicles, what other hedges against inflation make sense? I'm assuming they already have a well diversified investment portfolio.
Appears the answer (bolded above) is in your question.
I don't think that's always the case. Hopefully it is, but there have been decade long periods where there have been substantial drops in stock values that didn't result in proportionally higher bond or treasury returns in the face of high levels of inflation.

http://i62.tinypic.com/4j4zkn.jpg

During those periods, inflation was high, and a well diversified portfolio would have lost out.

MDM

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Re: How should households hedge against inflation?
« Reply #5 on: January 17, 2015, 11:19:44 PM »
I don't think that's always the case. Hopefully it is, but there have been decade long periods where there have been substantial drops in stock values that didn't result in proportionally higher bond or treasury returns in the face of high levels of inflation.

http://i62.tinypic.com/4j4zkn.jpg

During those periods, inflation was high, and a well diversified portfolio would have lost out.

Always?  It's never always. ;)

Other than TIPS, what do you have in mind?

hodedofome

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Re: How should households hedge against inflation?
« Reply #6 on: January 17, 2015, 11:49:22 PM »

At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick.

Deflation may be a risk however the examples you provided both suffer from the same fate - decreasing population. I think that's probably the biggest reason for persistent deflation. At least the U.S. Is not there yet for a while.

Allen

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Re: How should households hedge against inflation?
« Reply #7 on: January 18, 2015, 12:06:43 AM »
I don't understand why deflation would be bad for someone who was debt free with investments.

steveo

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Re: How should households hedge against inflation?
« Reply #8 on: January 18, 2015, 01:56:24 AM »
I don't understand why deflation would be bad for someone who was debt free with investments.

It would be good unless you had too much in the stock market and it continually went down. The returns in a deflationary environment on the stock market could be poor.

RapmasterD

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Re: How should households hedge against inflation?
« Reply #9 on: January 18, 2015, 02:13:56 AM »
At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick.

+1

I don't see how this is debatable right about now. Plus...read your history books.

This is very well stated.

2Birds1Stone

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Re: How should households hedge against inflation?
« Reply #10 on: January 18, 2015, 05:26:23 AM »
I don't understand why deflation would be bad for someone who was debt free with investments.
Everything you own besides currency devalues, property, equities,  hard assets, etc. In this environment Cash is king. The federal reserve, IMF, ECB, China, India, are trying to stave deflation with monetary policy, printing money out of thin air to increase inflation, in a deflationary environment nations can't afford to pay Debts resulting in defaults. Inflation cheapens Debt enabling the cogs to turn.

DarinC

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Re: How should households hedge against inflation?
« Reply #11 on: January 18, 2015, 09:17:33 AM »
I don't think that's always the case. Hopefully it is, but there have been decade long periods where there have been substantial drops in stock values that didn't result in proportionally higher bond or treasury returns in the face of high levels of inflation.

http://i62.tinypic.com/4j4zkn.jpg

During those periods, inflation was high, and a well diversified portfolio would have lost out.

Always?  It's never always. ;)

Other than TIPS, what do you have in mind?
Haha, true!

I can't think of anything besides TIPs (Assuming your central bank is in the driver's seat) and a home/other non-depreciating assets, but I'm still wondering if I'm missing something.

Maybe if one person in a household/couple owned their own business? There're more in the way of tangible assets there, and they can simply price their goods/services in line with deflation, unlike a larger corporation which could have more debt that wouldn't deflate, and see the workforce as a way to trim costs (eg the other person in the couple is laid off).

DarinC

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Re: How should households hedge against inflation?
« Reply #12 on: January 18, 2015, 09:30:08 AM »
At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick.
I think it's already here, but the question is whether or not it will be negative or positive in the states.

http://www.bloomberg.com/news/2014-10-26/u-s-gains-from-good-deflation-as-europe-faces-the-bad-and-ugly.html

Some have speculated that in the EU it's just the fallout from the ECB being too conservative because of Germany's worries over inflation.

http://www.thefiscaltimes.com/Columns/2014/12/01/Deflation-Looms-It-s-Europe-s-Moment-Truth

P.S. I didn't post this thread because I assumed we would see inflation instead of deflation, I'm just curious about that specific situation.
« Last Edit: January 18, 2015, 09:32:15 AM by DarinC »

Cheddar Stacker

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Re: How should households hedge against inflation?
« Reply #13 on: January 18, 2015, 09:44:46 AM »
A 30 year fixed rate mortgage.

TomTX

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Re: How should households hedge against inflation?
« Reply #14 on: January 19, 2015, 05:10:05 AM »
A 30 year fixed rate mortgage.

This is an excellent hedge against inflation. Exposes you more to deflation risk.

electriceagle

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Re: How should households hedge against inflation?
« Reply #15 on: January 19, 2015, 06:32:21 AM »
At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick.

The EU is in a bind because the needs of its strongest countries (Germany) are so different from the needs of its weakest (Greece, Spain).

I'm fairly confident that the US will turn the printing presses back on if deflation starts to appear. I welcome our QE35 wielding overlords. The national debt has to be inflated away at some point anyhow.

capital

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Re: How should households hedge against inflation?
« Reply #16 on: January 19, 2015, 07:14:10 AM »
I don't understand why deflation would be bad for someone who was debt free with investments.

Indexer

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Re: How should households hedge against inflation?
« Reply #17 on: January 19, 2015, 08:04:30 AM »
The best hedge against inflation has normally been stocks.  Prices rise, companies charge more, earnings increase, stock goes up in price.  Pretty simple logic.

As stated if you already have a well diversified portfolio of stocks/bonds you are hedged against inflation.


Hedging against (bad)deflation.  Well not having debt is the biggest hedge.  It also makes cash/bonds look more attractive.  Stocks can actually do poorly.  Its just the stock hedge against inflation working in reverse.  Prices fall, companies charge less, earnings decrease, stocks go down in price. 

So I'll say the best hedge against both is a well diversified portfolio! 

James

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Re: How should households hedge against inflation?
« Reply #18 on: January 19, 2015, 08:26:40 AM »
I think the key is not to try and time either inflation or deflation, altering your investment portfolio is likely to hurt as much as help given the lack of predictive ability for either scenario. If we turn into Japan then maybe after a while alternative investments would become clear, but I'm not going to plan on deflation or inflation and make changes ahead of time that will likely hurt me if the "normal" continues.

DavidAnnArbor

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Re: How should households hedge against inflation?
« Reply #19 on: January 19, 2015, 08:49:29 AM »
Inflation Bonds are sold directly at treasurydirect.gov
With these bonds you will get at least the inflation rate, but historically there has been an additional fixed rate percentage of interest in addition to the inflation rate.

SeanTankarian

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Re: How should households hedge against inflation?
« Reply #20 on: January 19, 2015, 09:07:32 AM »
Hey Darin if you're not going to devote a ton of time to your holdings, I would just approach it very simply to protect against inflation.  This is just a general guideline: ~25% real estate investment (not a home; your home is a consumer item), 25% dividend paying stocks (always get paid), 25% precious metals (gold/silver), and 25% cash/bonds (to use for buying opportunities).  Look to rebalance these holdings to the 25% holding amount and as you have more time and gain more expertise, you can go on to more advanced strategies.  Just be careful of putting too much into things like a 401(k) or 457 plan as the author of this article points out: http://457planinfo.com/attack-of-the-457-plan-tax-zombies-part-1-of-2/ since you don't know what your future tax bill will be, and taxes can be quite inflationary!

johnny_b123

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Re: How should households hedge against inflation?
« Reply #21 on: January 19, 2015, 11:37:12 AM »
At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick.

Thanks 2Birds1Stone. The falling oil price is crushing the Canadian oil sands business which is not profitable at these oil prices. That oil sands business was a large economic driver for all of Canada's small economy over the last few years. The fallout is already beginning to spread to Alberta house prices:

http://globalnews.ca/news/1757580/oils-collapse-sends-shiver-across-albertas-real-estate-market/
"Sales are down 7.5 per cent versus a year ago, while new listings have gushed 42 per cent higher – a sign homeowners are racing to sell before market conditions deteriorate."

Would you care to speculate as to what would be the silver lining that could sway the deflationary cloud?

2Birds1Stone

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Re: How should households hedge against inflation?
« Reply #22 on: January 19, 2015, 07:23:53 PM »
At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick.

Thanks 2Birds1Stone. The falling oil price is crushing the Canadian oil sands business which is not profitable at these oil prices. That oil sands business was a large economic driver for all of Canada's small economy over the last few years. The fallout is already beginning to spread to Alberta house prices:

http://globalnews.ca/news/1757580/oils-collapse-sends-shiver-across-albertas-real-estate-market/
"Sales are down 7.5 per cent versus a year ago, while new listings have gushed 42 per cent higher – a sign homeowners are racing to sell before market conditions deteriorate."

Would you care to speculate as to what would be the silver lining that could sway the deflationary cloud?

This is a tough one to swallow for many, now bear in mind that global monetary policy is trying their hardest to inject money into the system and create artificial inflation. That is a bandaid to the whole cause and not a permanent fix. This is a post I am quoting from another message board I am on. Greg Davis is a VERY smart poster who does a pretty good job of explaining things as they are today. Take it with a grain of salt but understand this is something that will not simply just "go away".


?Silver prices will fall next year to mid single digits as a result of powerful overwhelming global forces.

Global deflationary depression is unavoidable and has been, and will continue to occur. Despite trillions of dollars of global monetary stimulus we have seen falling commodities prices for more than a year now and they are going to continue to fall to unexpected levels as deflationary expectations become mentally entrenched in consumers creating a deflationary spiral where everyone waits to buy in the future as things will be cheaper then.

Fossil fuel deflation is the most recent and prominent example of even the most powerful and wealthy global cartel’s inability to stem deflation. Nothing can stop it. Why? There are several reasons: Un-repayable debt, global economic contraction, and wage pressures.

Because the planet has aggregate debt (personal, business, and governmental) exceeding $230 Trillion and only has Official GDP of approximately $73 Trillion. (Real GDP is closer to $58 Trillion when the gimmicks are removed.) For example, Italy (8th largest economy in the world) just decided to include estimates for illegal drug sales and prostitution in their GDP as they experience their 14th consecutive quarter of GDP contraction.

The bottom line is the debt can never be repaid and will be repudiated. At the personal and business levels that looks like bankruptcy where debt is discharged and at the sovereign level that looks like “restructuring”, where bondholders are offered pennies on the dollar like the Greeks just did.

When debt is repudiated, money supply contracts usually by 10 times the amount repudiated. When money supply contracts, prices fall. It’s just that simple.

Global economic cycles will run their course and have been “postponed” by incessant monetary manipulation, which will make the snapback commensurately faster and deeper as it does occur. Aging populations, reduced family formations, declining birthrates, "one child Policies", technological innovations including robotics all contribute to the declining employment in the world and its associated economic activity. Central Bank money creation will not stop deflation either as Japan has proven. Under Abe, Japan's monetary base doubled in the last year and still they fight deflation. Monetary velocity has slowed dramatically as aging populations spend less, more than offsetting the increase in monetary supply.

Global population is now 7.3 Billion and half of all those people live on less than $2.50 per day. 80% of all humans live on less than $10 per day. The US makes up less than 5% of the world’s population and we live in a massive wage bubble blown out of all semblance of proportion or relativity by unions and government mandate financed with massive un-repayable debt. When interest rates see free markets again they will snap higher and the US will not be able to pay its interest and will not have new debt available to it any more and will have to compete in global labor markets forcing wages to drop dramatically furthering deflation.

Precious metals markets and all commodities are signaling deflation now. Mid year I see silver approaching $11 as that is its variable cost of production and mid single digits by year end unless a Black Swan event drives the “Safe Haven” trade.

RapmasterD

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Re: How should households hedge against inflation?
« Reply #23 on: January 19, 2015, 08:12:11 PM »
At this point in time, a MUCH greater threat with incredible repercussions is deflation. If you follow global finance and economics you will see that it started with japan, Europe is there, and with falling oil and commodity prices, its coming to our shores quick.

Thanks 2Birds1Stone. The falling oil price is crushing the Canadian oil sands business which is not profitable at these oil prices. That oil sands business was a large economic driver for all of Canada's small economy over the last few years. The fallout is already beginning to spread to Alberta house prices:

http://globalnews.ca/news/1757580/oils-collapse-sends-shiver-across-albertas-real-estate-market/
"Sales are down 7.5 per cent versus a year ago, while new listings have gushed 42 per cent higher – a sign homeowners are racing to sell before market conditions deteriorate."

Would you care to speculate as to what would be the silver lining that could sway the deflationary cloud?

This is a tough one to swallow for many, now bear in mind that global monetary policy is trying their hardest to inject money into the system and create artificial inflation. That is a bandaid to the whole cause and not a permanent fix. This is a post I am quoting from another message board I am on. Greg Davis is a VERY smart poster who does a pretty good job of explaining things as they are today. Take it with a grain of salt but understand this is something that will not simply just "go away".


?Silver prices will fall next year to mid single digits as a result of powerful overwhelming global forces.

Global deflationary depression is unavoidable and has been, and will continue to occur. Despite trillions of dollars of global monetary stimulus we have seen falling commodities prices for more than a year now and they are going to continue to fall to unexpected levels as deflationary expectations become mentally entrenched in consumers creating a deflationary spiral where everyone waits to buy in the future as things will be cheaper then.

Fossil fuel deflation is the most recent and prominent example of even the most powerful and wealthy global cartel’s inability to stem deflation. Nothing can stop it. Why? There are several reasons: Un-repayable debt, global economic contraction, and wage pressures.

Because the planet has aggregate debt (personal, business, and governmental) exceeding $230 Trillion and only has Official GDP of approximately $73 Trillion. (Real GDP is closer to $58 Trillion when the gimmicks are removed.) For example, Italy (8th largest economy in the world) just decided to include estimates for illegal drug sales and prostitution in their GDP as they experience their 14th consecutive quarter of GDP contraction.

The bottom line is the debt can never be repaid and will be repudiated. At the personal and business levels that looks like bankruptcy where debt is discharged and at the sovereign level that looks like “restructuring”, where bondholders are offered pennies on the dollar like the Greeks just did.

When debt is repudiated, money supply contracts usually by 10 times the amount repudiated. When money supply contracts, prices fall. It’s just that simple.

Global economic cycles will run their course and have been “postponed” by incessant monetary manipulation, which will make the snapback commensurately faster and deeper as it does occur. Aging populations, reduced family formations, declining birthrates, "one child Policies", technological innovations including robotics all contribute to the declining employment in the world and its associated economic activity. Central Bank money creation will not stop deflation either as Japan has proven. Under Abe, Japan's monetary base doubled in the last year and still they fight deflation. Monetary velocity has slowed dramatically as aging populations spend less, more than offsetting the increase in monetary supply.

Global population is now 7.3 Billion and half of all those people live on less than $2.50 per day. 80% of all humans live on less than $10 per day. The US makes up less than 5% of the world’s population and we live in a massive wage bubble blown out of all semblance of proportion or relativity by unions and government mandate financed with massive un-repayable debt. When interest rates see free markets again they will snap higher and the US will not be able to pay its interest and will not have new debt available to it any more and will have to compete in global labor markets forcing wages to drop dramatically furthering deflation.

Precious metals markets and all commodities are signaling deflation now. Mid year I see silver approaching $11 as that is its variable cost of production and mid single digits by year end unless a Black Swan event drives the “Safe Haven” trade.

Man, you're a smart mother fucker...seriously! Love the analysis and thinking, even if it resulted in me making a large poopy in my pants out of abject fear.