How to protect yourself from inflation?

[Gabbe18]

Recently saw this tweet about how to protect yourself from inflation. Is this something you would do? If not, what would you do instead?

 

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[MTF]

Depends on your financial situation, where you live, how your local currency performs, what your plans are, etc.

The situation is way different for someone from Switzerland (official inflation rate 0.441%) vs someone from Turkey (36% but in reality probably way more).

Your profile says Sweden so at 2% it's little and I guess you don't have to worry about it so much.

I think that tech stocks, crypto, hard assets and own business are all fundamental but in different percentages depending on your net worth (someone who has $2k won't be able and shouldn't diversify into all of that).

I'd also add another simple way to protect yourself against inflation: buy non-perishable food (or food with long shelf life) in bulk. If you're in a country with 10% inflation rates, buying such food in bulk is an investment with guaranteed 10%+ ROI (probably more since you get a discount for buying in bulk and then for buying today instead of in a year).

 

[Gabbe18]

buy non-perishable food (or food with long shelf life) in bulk

That is very true! Especially if the inflation is very high and there are food shortages.

Depends on your financial situation, where you live, how your local currency performs, what your plans are, etc

How would the advice be if you're living in the US today?

 

[Jobless]

Borrow money at low fixed rate if possible (inflation eats debt) and invest in natural resources, or stocks in that sector. You want to buy companies close to the source of a supply chain, and stay away from the retail side.

That's if you think there is major inflation coming and you want to not just conserve capital, but also profit in the short-term.

We cannot protect ourselves when the inflation has already happened, however inflation does not strike everywhere at once. It leads to a slow asset inflation, but the first major inflation shocks are usually in natural resources like oil, lumber, metals, agricultural goods etc., the effect then trickles into companies that purchase these materials for production of refined goods, and later to retail stores who sell the finished goods to an end costumer. The end customer is last affected by the taxation through inflation, taking the largest financial hit.

Look closely at how the inflation is created and distributed. Consumers (the general public) may receive for example stimulus checks, which reverses this guidance and creates favor for investment into retail. But, taking the US during COVID as an example, stimulus checks and other direct welfare pale in comparison to corporate stimulus through lending programs etc.:

The Coronavirus Aid, Relief, and Economic Security Act,CARES Act - Wikipedia[1] also known as the CARES Act,[2] is a $2.2 trillion economic stimulus bill passed by the 116th U.S. Congress and signed into law by President Donald Trump on March 27, 2020, in response to the economic fallout of the C0VlD-19 pandemic in the United States.[3][4] The spending primarily includes $300 billion in one-time cash payments to individual people who submit a tax return in America (with most single adults receiving $1,200 and families with children receiving more[5]), $260 billion in increased unemployment benefits, the creation of the Paycheck Protection Program that provides forgivable loans to small businesses with an initial $350 billion in funding (later increased to $669 billion by subsequent legislation), $500 billion in loans for corporations, and $339.8 billion to state and local governments.

After the CARES act there were a few other initiatives and the Fed's balance sheet increased from $4.7 trillion on March 17, 2020, to over $7.6 trillion by March 17, 2021.

Corporations received the most, if not the majority, of the stimulus money. If a government, a consumer and a corporation all receive money, who is most likely to invest it wisely? The corporation, and it will do so quickly, purchasing any scarce resource necessary for it to continue production in the near future. A consumer 'invests' in whatever they find in retail (who will raise their prices first). Example: Canned food, toilet paper. The government will prioritize things such as healthcare and defense spending.

With stimulus checks and short-term security, working for lower real wage is not as enticing as before. This, combined with price shocks in natural resources, leads to supply problems and staffing shortages in construction, manufacturing, transportation, retail. Who is least affected by this supply and labor shortage? Industries like financial, real estate, wholesale, agriculture. These are all closer to the source of supply chains and deal with natural resources and existing assets.

Of course this explanation cannot fit into a tweet, so I suggest you research what happened historically in hyperinflationary economies. They were extreme versions of what is now playing out globally.

 

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[Gabbe18]

Thank you for the thorough response!

I'll have a look at different hyperinflations like Germany in the 1920s or more recently, Venezuela.

Borrow money at low fixed rate if possible (inflation eats debt) and invest in natural resources, or stocks in that sector. You want to buy companies close to the source of a supply chain, and stay away from the retail side.

So the way you protect yourself from inflation is to invest in businesses closer to the supply chain? Do you invest in businesses in the US, a specific country, globally or all of them?

 

[woken]

Avoid inflationary foods.




On a more serious note, if the money is put to work, inflation shouldn’t be a problem.

 

[Guest-5ty5s4]

Read about this guy. He profited massively off of Germany's inflation and total currency collapse around 100 years ago (and some of his companies still exist!):

Hugo Stinnes - Wikipedia

en.wikipedia.org

Basically, he borrowed heavily, only for businesses and valuable assets, and watched as the currency he borrowed in collapsed, making the debts very easy to pay off (people were burning the money for warmth and spending hundreds or thousands of times more than usual for far less).

He probably could have asked someone for money, gotten a wheelbarrow full, and paid off some of his fixed rate debt.

Now, what happens if EVERYONE follows this plan and starts buying up real estate, taking SBA loans, commercial loans, and getting hard assets like gold on credit? Probably a massive bubble. But the point stands: inflation kills fixed debt.

 

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[Jobless]

Thank you for the thorough response!

I'll have a look at different hyperinflations like Germany in the 1920s or more recently, Venezuela.



So the way you protect yourself from inflation is to invest in businesses closer to the supply chain? Do you invest in businesses in the US, a specific country, globally or all of them?

Look at Romania, Russia, other countries in eastern europe during 90's etc. That was my inspiration at least.

It's not for protection, but if you want to speculate and profit (invest). This means you take risks. I think you can invest in most places, as long as they produce commodities that are traded on a global market.

For protection (insurance) you can buy physical gold for example.

 

[Marigold]

I'd also add another simple way to protect yourself against inflation: buy non-perishable food (or food with long shelf life) in bulk. If you're in a country with 10% inflation rates, buying such food in bulk is an investment with guaranteed 10%+ ROI (probably more since you get a discount for buying in bulk and then for buying today instead of in a year).

I'd add in buying seeds and learning to grow food.

Amazon stock and bitcoin is pretty pointless when you can't eat.