Get ready for inflation – Are you prepared?

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 house the real estate market doing? On fire it seems. Last month 79% of Toronto houses sold over asking.
A house that was bought for $19,000 in 1959 just sold this year for ~$2 million.

This exuberance isn’t found only in Ontario. The national sale price is up 23% year over year.

I don’t have a crystal ball. But there were clear signs of where asset prices were heading. I invested 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. But a few things are changing now.

Last year 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.

“Once consumer confidence returns the cost of living will increase.” ~Liquid, August 2020

Well today that consumer confidence is coming back. Restrictions are being lifted. Wheels on cars are spinning again working extra hard. That’s why they’re always tired. 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 rose past 100% of GDP.


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The massive flood of money created a spike in the inflation rate (CPI) over the following few years. At one point in 1947 inflation was double digits.


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So the question for investors today is how did all this intervention affect the stock market? The S&P 500 fell from 1946. And it didn’t start to sustainably 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.

 

What to do when the dollar could be hemorrhaging value soon

So given this information here’s what I’m doing, at least for the next 6 months.

  1. For the most part, not touch my portfolio.
    I’m going to stick to my original long term investment plan of buy and hold. I will not be selling any investments.
    .
  2. Stay fully invested with a backup plan.
    I plan to put most of my new savings in either bonds or alternative investments. 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 is due for a correction.
    .
  3. 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 that. You can’t make more land, and Bitcoin is capped at 21 million. I have enough real estate already so I will continue to add to my crypto holdings.
    .
  4. Keep a close eye on CPI and other inflation measures.
    CPI is below 1% today. But it could easily jump to 2.4% 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.

I predict that if we do see higher inflation, the stock market will fall this year by at least 12%. And if that happens I will be ready to buy. ๐Ÿ˜€ I will be watching growth stocks in particular as they tend to sell off the most during corrections. Of course I could be wrong. So let’s see how things play out.

 

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Random Useless Fact:

We are closer to 2050 than to 1990.

 

 

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Mr. Dreamer
03/15/2021 9:56 pm

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.

Tim
Tim
03/16/2021 9:22 am

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?

ckat
ckat
03/19/2021 12:01 pm

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.

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