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      09-27-2021, 08:08 AM   #32

Drives: Potato
Join Date: Feb 2012
Location: USA

iTrader: (1)

Originally Posted by mdf View Post
I think the premise is unrealistic. I just don't see the US economy experiencing 10 straight years of 6% inflation. On a ten year horizon, I am more concerned about federal budget deficits, and the impact of politics on the management of our economy than I am about persistent inflation.

What would I invest in, and what would I divest from, if I was expecting a decade of moderate inflation? Yes, equities as observed above. If I was expecting persistent but unpredictable rates of inflation, I'd steer towards business that can pass along price increases. With the greening of the economy and infrastructure spending, Utilities might be an opportunity, but combined with the frequency of extreme weather events we're seeing and lethargic regulatory agencies it is a sector I would probably avoid.

In terms of bonds, you could look at TIPS. There are ETFs and funds for TIPS.

Crypto is a puzzle to me. Personally, I am not investing in it. It seems so risky and speculative, I have trouble seeing it as a rational investment, and there are apparently hacks of some of the exchanges. Also I'm surprised China was the first to ban crypto, and my understanding is they've banned both mining and trading. Who is next?
Average inflation (CPI) for the 1970s was 7.25% and in the 80s still averaged over 5% even though the annual inflation rate declined in that decade. I donít recall anyone in the late 1960s predicting this, although by the end of the 1970s the American economy was done and stagflation was to persist perhaps indefinitely.

So, yes, it can happen. Will it? I donít know. I tend to doubt it but there are some underlying pressures, so it is a risk worth considering.

I share your view on Crypto and note that several governments are looking at Crypto as an official currency (The US Fed included). This would make it traceable and eliminate the value for black market transactions. There may be marginal improvements versus ACH, etc. but then if the governments make their own cryptos, what is the value of Bitcoin, Etherium and the others?

Utilities are very bond-like in that they pay steady dividends so their price responds to interest-rate changes. They may suffer some devaluation due to rising rates in an inflationary environment. Plus their rates lag their costs, so there could be a squeeze on profitability and cash flow. On the plus side, their allowed ROE should increase (again with a lag, but this time the lag helps once inflation stabilizes and begins to fall).

TIPS are a good idea; I think they really came about in the 1970s because of the devaluation of bonds during that inflation, just to help preserve value by floating the rate with inflation. Not sure there would be a good real rate of return but at least no loss of value (real or nominal).

Thanks for the thoughts.

This is the source I used for the inflation data:
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