Sunday, March 10, 2013

How Do I Safely Diversify Against Inflation?

I was asked by a reader to share my thoughts on the following article. Oh yeah, I'll share! ;) How do I safely diversify against inflation?

Don't you just love the title? Really drew me in! The inside was not quite as juicy as the outside appeared though. Bad chef! So anyway, here are my thoughts.

1. If you made it nearly to the age of 80 and are just now thinking about getting a good deal on inflation protection, then you are probably too late. Sorry! There are too many people just like you.

2. If you made it nearly to the age of 80 and are convinced that inflation is going to be a problem, then why are you asking for "expert" mainstream financial advice? You seem to already know what's going to happen. (For the record, we've had a century of inflation. It's not exactly "on its way".)

3. If you made it nearly to the age of 80 and *always* knew what was going to happen next, then you should easily be a billionaire by now. Are you? If so, why are you asking financial advice from a non-billionaire? Feeling lucky?

4. If you are a Ph.D., CFA, and CFP who thinks that TIPS rates are too low to invest ("the music has to stop"), then you probably did not read thought #1 above nor did you read about other times throughout history when real yields were even lower than they are now (the 1970s, World War II).

5. If you are a Ph.D., CFA, and CFP who thinks 0.0% I-Bonds are still a worthy investment (as do I) and yet you do not think that 0.0% TIPS are a similarly worthy investment (if held within a tax-deferred IRA) then you must not have heard of the concept of buy and hold to maturity. Might want to brush up on that. (That said, I'm not suggesting that an 80-year-old should probably buy 30-year TIPS of course.)

6. If you are a Ph.D., CFA, and CFP who can mention "stocks, bonds or cash" in an inflation article without also at least mentioning "gold, silver or oil" (especially after their meteoric rise over the last decade) then you probably haven't studied what monetary policy, bubble blowing, and a lack of worthy alternative long-term mainstream investments can do (think stocks since 2000). Too bad! It was a good decade to think outside the box.

For what it is worth, I think hyperinflation theories are likely to be poned again soon. Oil's having a very difficult time pushing through $100. Should this be unexpected? I'll start to worry more about heavy inflation when non-Japanese 80-year-old investors ask the "experts" how to safely diversify against deflation. Let's just put it that way. (I'm always worried some about both inflation *and* deflation.)

And lastly, this is not an endorsement to buy gold and silver. I sold long ago (way too early in hindsight) and have no desire to buy back at these prices (relative to toilet paper). I might even suggest that both are looking a bit toppy lately (silver's taken a serious beating over the last 2 years), and I'm not speaking of world's first cloned working dog. What precious metals do next is anyone's guess, but I doubt they do it "safely" (in a non-volatile manner).

Just opinions!


Stagflationary Mark said...

Alan Greenspan already answered the question in this post back in 1966.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. - Alan Greenspan (1966)

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)

Stagflationary Mark said...

For what it is worth, I have chosen to pick TIPS and I-Bonds as my long-term poison.

Nothing is truly safe though. I figure that if I am financially ruined at least I won't be first. Sigh.

Mr Slippery said...

I think a big question on the future of gold will be answered soon. It is now 2.5 sigma below where it has been since 2001. That could mean game over for gold or an amazing entry point but the price will tell the tale over the next few months.

Troy said...

real estate has been a historically good hedge against inflation:

(real rents, 1950=100)

except, curiously, right when inflation was kicking everyone in the teeth in the 1970s.

I'll leave the reason for that as an exercise for the reader.

Troy said...

Casey Serin killed 40 million people.

Luke Smith said...

Working in the oil industry, I must look crazy to my coworkers when I tell them that oil price will be dropping - seriously dropping. Recessions, depressions, booming stock markets and aging demographics point toward an overbid price.

That's my view. You want magic numbers? $85 WTI and $95 Brent before the end of this year.

Interest rates? Too difficult to say right now what they'll do; working on it, but if rates go up, gold goes down.

Anonymous said...

but if rates go up, gold goes down.<<

There is certainly more danger to the darling investments of our time, "solid dividend stocks", utilities, high yield bonds, etc. in rising interest rates than there to PMs. If you hadn't noticed, much of the investment public has crowded into these "safe" investments in a ZIRP environment. I would expect a rotation out of the "safe" investments into PMs and other volatile things when there is a little less ZIRP, at least for a while. This kind of rotation is common in the late stages of an equity boom.

TJandTheBear said...

Luckily, the only kind of inflation TIPS will protect you from is the kind that'll never happen... at least, not according to government numbers. ;-)

Stagflationary Mark said...

Mr Slippery,

If I had to guess, game sideways... breaks the trend but slowly and painfully. Just a guess of course.

Stagflationary Mark said...


Food ultimately becomes more important than swimming pools during hyperinflation? ;)

Stagflationary Mark said...

Luke Smith,

If you are crazy then so am I, lol.

Stagflationary Mark said...

TJandThe Bear,

TIPS have protected me more than adequately since 2000 (and I'm not even counting market gains).

I'm very comfortable being tied to the CPI. How much did the CPI collapse when housing prices did? Not much!

We bought bananas for 49 cents a pound and potatoes for 20 cents per pound this week. Perhaps someone should inform shadowstats that their hyperinflation theories have been re-poned (yet again!).

Fritz_O said...

"real estate has been a historically good hedge against inflation:...except, curiously, right when inflation was kicking everyone in the teeth in the 1970s."

What we know happened since then is simple: the financial eCONonomy will positively guarantee that middle-class families will always have access to homes and mortgages that the can't quite comfortably afford.

Owning a home before you could afford it never made much sense, but today even more so. The days of falling back on your home when times get tough are over. Now, times are tough because the home is falling back.

Stagflationary Mark said...


I never bought in on the idea of a starter home. I am one and done in theory (lived here 16 years so far). The real estate transaction costs (10%?) seemed like a big waste of money.

Of course, the "boom" made starter homes appear to be a fantastic plan. The "bust", not so much!

There are no doubt many starters in a very stuck position, sigh.

Fritz_O said...

"I never bought in on the idea of a starter home. I am one and done in theory (lived here 16 years so far). The real estate transaction costs (10%?) seemed like a big waste of money."

Since long before the RE bust I never bought in on the idea of realtors. I believe they are the most over-compensated-per-unit-value-of-worth actors in our eCONomy. And not telling the truth makes them the same as liars in my mind

The computerized MLS services that realtors use were telling a grim story as early as 2005. Beginning in July/August of 2005, the number of listings began rising as home sales began to slow. Over the course of the next 7-8 months, the number of active listings soared in some of the more frothy areas.

Do you think realtors were telling buyers/sellers this story? Not much. More likely the stock line was "if you don't buy now you'll be priced out forever.

"There are no doubt many starters in a very stuck position, sigh."

Buying homes is one thing. Paying them off, maintaining them, and hanging on to them is another.

I wonder where the US middle-class household stands on the "house as a future source of equity" learning curve.

Stagflationary Mark said...


I have an ongoing joke with a friend. I tell him he's just "throwing his money away by renting". I then follow it up with a story involving some major housing expense that's just popped up, lol.

The most recent story was a tree branch that broke the outer pane of a two-pane window. I haven't fixed it yet. Still trying to decide just how many I want to replace. Many of my 20+ year old windows have condensation between the panes.

Previous stories included roof replacement, house painting, fence repair, septic tank maintenance (failed pump followed by failed wiring 2 years later), critters in the crawlspace, and general appliance failure.

Future stories include a new gas furnace, interior painting, a full replacement of this house's original carpeting, and a minor kitchen remodel (built-in oven and stovetop are on their last legs).

Fritz_O said...

Anyone going to their bank in the morning to take out their cash?

Stagflationary Mark said...


The Great Cyprussion?

yasef said...

Everyone needs a hedge against inflation. Since commodities prices usually rise when inflation is accelerating, they can protect you from the effects of inflation. Sometimes some goods can benefit from rising inflation, particularly unexpected inflation, but commodities usually do follow it even much better.