niemand wrote: ↑Sun Aug 09, 2020 5:07 am
Not sure about points 1-3. Why should it be any different this time than the other times?
If you truly believe in the big inflation scenario then hard assets should serve you well, gold, possibly real estate?
Maybe also have a look at the Permanent Portfolio. It may be a better option if you don’t want to commit yourself to only one scenario (inflation in your case). The PP covers several scenarios (inflation, deflation, prosperity, recession).
Below is an example of the PP’ performance during the Iceland crash in 2008: while inflation was 18% and the Iceland stock market was down 90%, gold was up 182% and carried the portfolio into a +29% result.
(image pinched from Marc DeMesel)
Really Interesting data on the PP in conjunction with Iceland's situation during the GFC. A 90% drop in share prices, extraordinary. But overall I find it hard to justify the Permanent Portfolio (also because of gold) and gold itself, simply because I believe my investment horizon is long enough to allow for a share heavy allocation. Given that I'm short-mid term a pessimist, over the very long term (30 years+) I'm actually quite optimistic that there will be real growth, hence I lean towards shares. But down the track when I get close to the withdrawing stage, a shift towards capital retention strategies like you mentioned certainly make sense.
shemp wrote: ↑Sun Aug 09, 2020 7:40 am
This has been discussed in other threads. Inflation is coming because there are only 3 ways to deal with massive government debts: pay them off with high taxes and low spending; wipe them out by sovereign default; inflate them away. Inflation is the path of least resistance. Argentina recently took the default option for some foreign debts denominated in dollars. For debts in their own currency, they took the much easier inflation option. Whole world will eventually emulate Argentina.
[Edit: Price inflation I expect is like 6%/year over 20 years. Combined with 5% interest rates (slightly negative) and higher income and capital gains taxes, this will bring down government debt/GDP by maybe 3% per year. These are ballpark figures. I certainly don't expect 50%/year inflation like in Argentina to occur in the USA, Europe or Japan.]
Timing is hard to predict. People in power usually prefer to kick the can down the road as long as possible, and that's exactly what they have been doing for decades now.
Owning real estate loaded down with fixed rate mortgages is the obvious hedge against inflation. Problem is timing. If inflation takes a while to arrive, you need to be sure you can service the mortgage in the meantime. Lots of people bought real estate after the 2009 crash, levered up, then got burnt when covid recently cut rents, and inflation they expected still hasn't arrived.
Likewise for people who bought gold in 2011, expecting it to continue going up. We have another thread on gold here. Gold is most definitely not a good investment for the very long term, regardless of inflation, though it might continue soaring for another couple years. Or it might not.
Personally, I think moderate P/E stocks are the simplest safe haven. Such stocks do okay in all environments except massive deflation, but massive deflation has pretty much been ruled out as an option by the authorities. So just go 100% stocks for money you won't need in the near future, though be sure you won't panic if market prices temporarily dip 50%, as they sometimes do.
I agree with most of your post, inflating debt away is surely the easiest way that causes least upheaval, I see that as the most likely scenario by a fair margin. One unknown that's hard to predict is how and when central banks will raise interest rates, given how strong the backlash against any hike has been in particular in the US over the last 2-3 years. Another case of kicking the can down the road I suppose. Turkey is a good example of why politics and central banks don't go together too well. It'll also be interesting how the fragmented euro-zone will react to inflation and when to raise interest rates. A lot of potential conflicts there.
Thanks for advice re investments in stocks. As it's still early days for me when it comes to capital market investments (RE done), I can still make a meaningful use of DCA, so that should make the ride a bit less bumpy.
I believe you mentioned elsewhere you had a good experience with TIPS - do you see them or bonds in general making a comeback? In my mind bonds are dead as long as central banks are meddling in those markets to the extent that they have in the last 10 years but inflation may allow them to retreat.
