The New Inflation Playbook: How Investors Should Protect Themselves


TThis morning, data from the US Department of Labor showed that the Consumer Price Index (CPI) jumped 5% last month, the biggest gain since August 2008. There has been a lot of talk at over the past couple of years as to when inflation would come, but this data suggests it’s here now, so how should investors react?

If you go back a few decades, inflation protection was an important part of building a portfolio for any investor. Boom and bust cycles were seen as normal, and investors were all too aware of the negative impact of rising prices on real returns. After an extended period of time in which the Fed and other central banks around the world have been troubled by inflation they deem too low, there is no well-known and established strategy for investing in a rising price environment but, even if there were, the circumstances are now different from those of the 1970s, so the protective measures are also different.

To begin with, many of the items that would now be considered inflation hedge options did not exist at the time, and investors’ access to even those that did exist was very limited.

From an economic point of view, it can be argued that rising consumer prices are not the definition of inflation, but a symptom of the real problem. These price increases happen because the real value of the dollar goes down, even though the real value of things bought has not changed. Purchases are exchanges and two things go into the price: the value of the thing purchased and the value of the thing exchanged for it. In America, these are usually US dollars. If it takes more dollars to buy something than before, it stands to reason that the change is in the relative value people place not only on the item purchased, but also on the currency used to make the purchase. .

If this is true, then the best protection against inflation is to buy another currency, the purchasing power of which will remain the same or even increase as the dollar loses ground. In the past, the classic way to do this was to invest in gold. Now there are alternatives such as cryptocurrencies, especially bitcoin. One of the advantages of bitcoin is that the supply is inherently limited, so its price and dollar value is pre-programmed to increase.

Regular readers will know that I have been a supporter of bitcoin for a long time, in part because it offers protection against the corrosive effects of QE and the massive expansion of federal debt. However, that would not be my choice at these levels as an inflation hedge.

There has been so much speculation about crypto over the past couple of years that its role as a store of value is far more than expected at this point. Simply put, any asset that is more than 250% above its level of a year ago accounts for many price increases. It is clear that other factors are influencing prices, and that means even if the CPI increases continue and the dollar loses value. , there is no guarantee that Bitcoin will be a beneficiary. In fact, economic weakness and the resulting monetary and fiscal tightening will translate into less capital-seeking assets, and this could lead to an adjustment that would negatively impact assets such as bitcoin.

So as much as I support bitcoin in a general sense, I would look elsewhere for inflation protection at this time.

That doesn’t mean, however, that I would prefer gold, commodities, or real estate, which are the traditional inflation hedges in this situation. The problem is, the system has been so inundated with money that fund managers have been able to increase these types of assets before inflation while investing huge amounts in stocks and bonds. Inflation in consumer goods prices may be coming, but asset inflation has preceded it for years.

In these circumstances, inflation protection is not so much about finding assets that will actually benefit from a rise in prices or a falling dollar, as it is about finding things that will not lose value. This is why stocks of companies capable of quickly passing higher prices on to their customers, such as those in the consumer staples sector, would be a better option, as would something else that was not available in years. 1970 and 80: Treasury Inflation Protected Titres (TIPS).

TIPS are treasury bills that protect the principle of an investment by increasing their face value in accordance with the CPI and were launched in 1997. It is an extremely conservative investment option, emphasizing on the return of principle rather than on the return of principle, but that is a bit the point here. Prices are rising and the price of most covers has already skyrocketed, so there is too much risk for them to be a real cover.

It’s not your grandfather’s inflation, so you can’t turn to your grandfather’s inflation protection manual. At current levels, things like gold, other commodities, and real estate do not offer risk reduction, so if you are worried and want to make changes, you need to be extremely careful and focus on things like consumer staples and TIPS. This can negatively impact your returns for a while, but it’s an insurance policy worth considering.

Do you want more from Martin? If you know Martin’s work, you’ll know that he brings a unique perspective to the markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free weekly newsletter with in-depth analysis and business ideas focused on a single, recently underperforming sector that is rebounding quickly. To find out more and subscribe to the free newsletter, click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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