WSJ - The Short March Back to Inflation

Great article as we approach the cliff that is high inflation… hopefully our monetary leaders can soften the almost inevitable blow.

What changes you guys making to your portfolio to hedge against it? I’ve added a little more gold/real estate/TIPS than usual.

Shifted some money back into a money market and high-interest savings account. Maybe some real estate syndication opportunities soon!

Just don’t keep it there too long! Money market/savings yields are virtually zero right now hah

Motley fool just posted a pretty good article on options to counter inflation risk - essentially TIPS, commodities, and gold.

Commodities can be unique so be careful, but tips are stable and gold is solid.

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Another great article on the risk of inflation:

Interesting article, but one thing it doesn’t consider is the impact that the counter to inflation - raised interest rates - will have on stocks.

Basically, higher interest rates make stocks appear less attractive compared to bonds (which are safer), thus draw money away from stocks, depressing their market caps.

Michael Burry is sounding his thoughts too…

History repeats itself…

Wow… money supply is up 26%!?! That’s a ridiculous amount of new dollars in circulation…

Since then, the quantity of money in the U.S. economy, measured by M2, has increased by an astonishing $4 trillion. That’s a one-year increase of 26%—the largest annual percentage increase since 1943.

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It’s why I’m looking so much at short term TIPS etfs to hedge against inflation… good article from Vanguard explain its historical performance against inflation.

Executive summary.

Assets can be considered an “inflation hedge” if either their purchasing power is maintained over the long run or their nominal returns closely track realized inflation over shorter horizons. Since the introduction of the U.S. Treasury Inflation Protected Securities (TIPS) market in 1997, broad-market TIPS returns have generally met both criteria.

That said, the aggregate U.S. TIPS market carries considerable interest rate risk, compared to shorter-maturity TIPS benchmarks. This paper compares the correlation of U.S. inflation with TIPS benchmarks in three distinct maturity buckets. We then compare their inflation-hedging properties to those of other asset classes.

We found that the return on a short-term TIPS benchmark (of 0-to-5-year maturities) has been more highly correlated to actual monthly and yearly CPI (Consumer Price Index) inflation than other segments of the U.S. TIPS market over the past decade. Although, in practice, all TIPS securities receive the same CPI principal adjustment, short-term TIPS returns tend to most closely track actual CPI inflation because of their lower duration and greater responsiveness to temporary, unexpected inflation spikes. We found similar results for the United Kingdom’s inflation-linked gilt market, which has existed since 1981. Short-term TIPS returns have shown markedly lower volatility, yet a similar or higher inflation correlation, than that observed for certain “real assets” such as REITs, commodity futures, and gold.

Our results imply that a short-term TIPS portfolio may be a more appropriate inflation-sensitive investment than the broad TIPS market for risk-averse investors who want their total portfolio to more closely track realized CPI inflation over short horizons. Of course, the higher inflation correlation of short-term TIPS comes at a cost—a lower expected income return versus that of the
broad TIPS market. In this sense, the risk−return trade-offs of investing in a short-maturity versus a longer-maturity TIPS portfolio parallel those involved when selecting the interest rate exposure of any other bond portfolio.

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Good points!

Here it is in picture form for you :wink:

Key points… just look at those drop-offs in purchasing power (higher inflation)… scary to see how fast it can drop. I was always familiar with the 70’s period of inflation, which looks decently steep… but its nothing compared to the WW1 years or the late 1940s. Compare that to what we’ve experienced in our lifetime from the 1990’s on of basically flat purchasing power.