A review of what happened
Around mid 2019 I explained why I was bullish on real estate, silver, and bonds for the next 18 months. That’s why I purchased an investment property that year.
Well 18 months have passed. Silver is up 50% since 2019. Bond funds, such as ZLC, are up double digits too. And the housing market is on fire! A house bought for $19,000 in 1959 was recently sold this year for $2 million in Toronto, Canada.
I don’t have a crystal ball. But there were clear signs of where asset prices were heading. So I invested my money accordingly.
Where things go from here
About half a year ago I wrote about the state of the economy for 2020 and 2021. I debunked the claims by experts who argued for a housing correction. Most of what I described in that blog post is still true today.
Last summer large parts of the economy were shut down. Oil companies were running on fumes. The hospitality industry was in shambles. And gasoline demand was down as fewer cars were on the road.
But I wrote that, “once consumer confidence returns the cost of living will increase.”
Well today that consumer confidence is coming back. Restrictions are being lifted. A massive $1.9 trillion stimulus package is hitting the U.S. economy.
This suggests higher inflation is just around the corner. In fact, it’s already showing up in many aspects of our lives – from housing to lumber prices. Even the S&P 500 index has seen 13 new all-time highs since the start of this year.
Evidence is mounting that we will see a higher consumer price index this coming summer. You read it here first.
Will history repeat itself?
Major western countries like the U.S. are printing a ton of money. 20% of all U.S. dollars were created in 2020 alone. Something similar was done before in 1946. It was just after the second world war.
The United States fell into a recession and president Truman’s budget called for massive deficit spending to help the failing economy. As a result debt shot up over 100% of GDP.
The massive flood of money created an inflation spike. At one point in the following year (1947) the inflation rate was double digits.
So the question is how did all that money printing affect the stock market?
The S&P 500 fell after 1946. And it didn’t recover until the end of the following recession in 1948.
This is normal. Higher inflation drives up bond yields. With higher rates investors naturally rotate out of risk assets like stocks, and into safer bond investments where yields have gone up.
How to position your assets now?
So given this information here’s what I’m doing for the next 6 to 12 months..
- Stay fully invested with a backup plan.
I may nibble at some value stocks if I think they are cheap. Value stocks outperform growth stocks when inflation rises. But if the government stimulus has the same effect as it did in 1946 then the stock market could be due for a correction.
- Buy more deflationary assets.
If we do see higher inflation soon, it would be wise to get out of cash and into assets that are deflationary. Real estate and digital assets are great examples of this. You can’t make more land, and the number of bitcoins is capped at 21 million. I recently purchased a rental property, so now I will continue to add to my crypto holdings.
- Keep a close eye on CPI and other inflation measures.
CPI could easily jump to 3% this summer. I’m interested to see how policy makers deal with higher inflation when they can’t raise interest rates due to how much debt everyone has.
- Prepare for negative interest rates
Negative real interest rates can wreck havoc on your portfolio. It turns your debts into wealth building assets, and turn your bond holdings into liabilities that cost you money.
I predict that if we do see higher inflation, the stock market will fall this year by at least 10%. And if that happens I will be ready to buy discounted stocks. Let’s see how things play out.
Random Useless Fact:
We are closer to 2050 than to 1990.
I am the one waiting for that 10-12% correction to load on Tech and Banks. They are way too expensive now but what to do! I have about $140K which I am buying slowly weekly. Let’s hope it works out.
It’s good to have dry powder lying around when markets are at all times highs. 10%+ corrections have become more common in recent years. I look forward to a dip as well. 🙂
Great points!! I have been long buying banks since coming out of the Financial crash that started in 2008… they stabilized around 2014 and were stagnant for the most part… a little appreciation the last 2 years.. I think the next 5 year they will run a lot as they are financing a lot more these days and with cheap interest rates anyone and everyone is going after “free money” again…
Besides Value in the equity market… anywhere else you are considering?
Banks are excellent long term investments. Even during no growth years they still pay out dividends. 🙂 Given how high the equity market is today I’m personally putting most of my money in short term bonds and cash. I’m also looking at small cap companies in the medical psychedelics industry such as MindMed (MMED) for example.
Other than that, I’m sitting on the sidelines and waiting for a pull back in stocks. And when that happens I will be rotating out of cash and bonds to buy stocks. This chart shows the S&P 500 over the last 36 years. Things are starting to look dicey.
What are you buying for bonds? Individual bonds or ETFS? My bond ETF has fallen quite a bit since december.
I’ve also increased my holdings in gold and silver.
I’m looking at short term bond ETFs such as the iShares Core Canadian Short Term Corporate Bond Index ETF (XSH.TO)
If interest rates go up it’s better to be in short term bonds than long term bonds. I do have long term bonds as well, but I’m using short term bonds as a strategic holding to potentially sell and buy stocks at some point. I see short term bond funds as essentially cash with yield for me. There is some risk with this strategy, but there is risk in anything I do with my money right now. Lol.
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