“Inflation takes from the ignorant and gives to the well-informed.” — Venita VanCaspel
Inflation is on the rise.
The Federal Reserve is saying it’s at 7% and had said it’s transitory.
It’s really not transitory.
It’s here to stay. Even the fed admits that now.
The consumer price index is not exactly an honest number.
They’ve changed the way that they count inflation at least twice since 1980.
If you use 1980 metrics, inflation is actually above 15% right now.
If you use 1990 metrics, it’s above 10%.
Any way you slice it, inflation is high.
That means by just leaving your money in a bank account, you’re losing $7,000-$15,000 per year on $100,000 sitting in the bank.
The question is: What do you do with your investments?
That really depends on where you think inflation is heading.
Are we gonna go back to a normalized level of inflation?
Will inflation continue to pick up?
Let’s talk about it!
1. Inflation Drops
Option number one is inflation drops.
If we have a drop in inflation, things will go back to normal somewhat.
Instead of the 6-7% inflation, we would go back to 2% or less.
Do you know what that would look like?
Before we get into that, let’s talk about inflationary and deflationary forces.
They’re both at work in our economy.
It’s really important that we understand both.
So there are things on this side that are inflationary.
One inflationary thing is all the QE currency creation that’s happening.
40% of our money supply was created in the last 18 months.
That’s very inflationary!
Debt has increased.
The government created assistance programs such as PPP loans to help businesses during the pandemic.
These programs allow entrepreneurs to obtain loans easily.
Some of those loans are not forgiven.
On the other side of that, you have deflationary trends.
You may be wondering: What does deflationary mean?
If the economy slows down, we could have some drop in prices.
A recession would be a deflationary event indeed.
If people start saving more than they’re spending, that’s going to impact interest rates.
The Fed has said they will raise interest rates 2-3x in 2022.
They’ve said they would do this before, but I think this time they’re serious.
That potentially means debt will be more expensive.
It discourages borrowing.
We also could have the potential of a Black Swan event.
COVID-19 was a Black Swan event.
But there could be another event that might rattle everyone.
The Fed will not be able to stop it.
We’ve seen this a little bit with commercial real estate.
Whether inflation goes up or down, we have not felt the financial pain of COVID.
We’ve seen more money and relief.
This is part of the reason why we have a pretty significant level of inflation.
What happens if we start to feel the financial pain of COVID?
What happens if we get another stock market crash?
Those are things that, at least for the short run, can be very deflationary.
They could actually cause inflation to go down because when recessions happen, usually we get a temporary drop in prices of goods, rents, etc.
2. Inflation Keeps Going Up
Instead of inflation going down, inflation could keep going up.
What does that actually look like?
We talked about inflationary forces, QE, and money printing.
Milton Freeman once said that inflation is anywhere and everywhere a monetary phenomenon.
It’s a “monetary” phenomenon.
The more money you print, the more inflation you’ll get.
People who believe in the modern monetary theory (or MMT) don’t believe that’s the case.
They think as long as we don’t have inflation, we can print, print, print.
I don’t think that’s true.
In the past, the Fed has said that they would taper these rates.
They started tapering, then the stock market went down.
After this happened, they decided not to taper and instead went back to doing QE even more.
The question now is: Are they going to taper?
I think they will.
They’ll taper and deal with the consequences.
If they don’t raise interest rates, inflation will get even higher, which a lot of people don’t want.
We also have this 120 trillion in estimated unfunded liabilities.
These are things like Medicare, Social Security, and pensions.
We don’t know exactly what this total financial responsibility is because it changes.
As inflation rises, this number will go up.
The government owes a lot of off-balance stuff as well.
When COVID first hit, country productivity went down because people needed to stay at home.
As we continue to deal with COVID, we’re having to import more goods.
A lot of businesses have been really hurt by this.
There have been port issues where boats are stranded.
You can’t find enough truckers to transport stuff.
Think about these struggles in relation to printing more money.
You’re producing less goods and services, but you have more money.
If you increase the amount of dollars and reduce the amount of goods and services, that’s a recipe for substantial inflation.
I predict that inflation will continue to rise and the government may try to fudge those numbers.
I think inflation is substantially higher than what they say.
Now, let’s talk about strategies you can do to take advantage of this!
3. Options to Take Advantage of Inflation
How do you take advantage of inflation?
There are a few things to avoid when you look at an inflationary environment.
The first is stocks.
People will argue with me on this and say stocks are great.
The price earning multiples are super high in the stock market right now.
The stock market has increased over 500% in the last 12 years!
I think we could experience some pretty significant volatility there.
If you want to learn more about why, check out this video!
Another thing to avoid are TIPS.
These are Treasury Inflation-Protected Securities.
TIPS are the federal government saying they will protect you from inflation.
Remember: Inflation is very likely higher than they are saying it is.
I would avoid TIPS because you’ll still have a loss due to the underreported inflation.
The next thing to avoid is bonds.
Bonds become less valuable if better bonds come out.
I would also say that you should avoid single family.
Now I put a disclaimer here: Single family is not a bad investment.
But right now there’s a chance that, if interest rates rise, single family could crash.
In California, we’ve had some places that have tripled in the last 7-9 years.
What goes up must come down.
I look at short term volatility and I think there’s a chance.
Now, let’s talk about stuff that can help you take advantage of inflation.
Look for inflation hedged assets such as multifamily investing.
I love multifamily.
I call it the bread and butter of passive investing.
You use debt when you buy it, so not only is it an inflation hedge, it’s actually an asset that pays you to hold it.
Then it appreciates based on inflation.
Since you have debt, you don’t need to put all the money down.
For example: If you have a $10 million property,
You put $2.5 million down.
The property appreciates over a few years to $12.5 million.
You haven’t increased 25% of your equity.
You’ve actually increased 100%.
You’ve only put $2.5 million down and there’s now an additional $2.5 million.
Another thing to help you take advantage of inflation is commercial real estate.
This can be something such as self-storage.
Here at Bronson Equity, we educate people on what they can do to prepare themselves for inflation.
I encourage you to share this post with someone else that you think might benefit.
If you want to hear more about how I made a fortune on investment, watch our video on the topic.
Now I want to hear from you!
What are you doing to prepare for higher inflation?
Let us know in the comments down below and we can start a conversation!
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.