"Protect Yourself From Inflation"
by Bill Bonner
"The arithmetic makes it plain that inflation is a far more
devastating tax than anything that has been enacted by our legislatures."
- Warren Buffett, in Fortune magazine, 1977
YOUGHAL, IRELAND – "Yesterday, a dear reader asked how the average Joe can “get a leg up” in a dangerous and difficult world? It won’t be easy. Here’s the latest mouthful from Bloomberg: "Fed Officials Rattle Rate-Hike Saber as Price Pressures Surprise" What Bloomberg is trying to say is that the Federal Reserve is hinting that it might… possibly… perhaps... raise rates.
Wednesday’s Fed forecast suggested that two increases are likely in 2023; none before. In other words, it said nothing. It could raise rates twice… three times… four times… even 10 times… and still be well below the level of consumer price increases. Which is to say, the Fed is now “behind the curve”… following the trend of events, not leading it… and hopelessly stuck in an Inflate and Die trap. But that is just to say that the “average Joe” should prepare now: Consumer prices will probably continue to rise. And if not now… later.
Price Crime: So let’s look at the leg we’re trying to get up. Most people get their income from selling their time. A man with a backhoe can dig a trench faster than 10 men with shovels. The capital – the backhoe – is what makes a man’s time more valuable. But inflation takes away the backhoe. Here’s Warren Buffett to explain: "High rates of inflation create a tax on capital that makes much corporate investment unwise – at least if measured by the criterion of a positive real investment return to owners."
Remember, there are two sources of price increases. One is natural, normal, and honest… caused by changing economic circumstances and signaling a real change of value – like the invention of the backhoe. The other is phony – a product of the Fed’s money-printing.
We have no quarrel with higher prices – if they’re the first kind. But the second kind are a scam, designed to mislead, confuse, and ultimately defraud. It is a crime perpetrated by the feds. Naturally, it favors the feds themselves and the elite, the top 10% of Americans they represent. They’re not going to rip themselves off. It’s the others – the less well-off 90% of the population – that gets robbed.
Time Lag: And it’s been going on a long time. Earnings for people in elite industries – medical care, education, media, defense, Wall Street, and government itself – have all gone up smartly over the last 30 years. Those for people in manufacturing, construction, mining, hospitality, and other uncool industries – where they produce real goods and services – have been mostly flat. And now, as inflation increases, so will the rip-off.
As we explored yesterday, wage increases don’t keep up with price increases. Prices rise daily… weekly… monthly. Wages tend to be adjusted more slowly – on an annual basis… and in response to the previous year’s inflation. The wage-earner inevitably falls behind. The same is true for people who get Social Security; the adjustments lag the damage.
False Premise: But the whole idea of the Fed’s intentional inflation was a scam from the get-go… Going back to the mid-20th century, economists noticed something they called the Phillips Curve. It purported to reveal that as inflation rose, workers got higher wages and suffered less unemployment. This was shown to be false in the stagflation of the 1970s. But the “stimmy” fantasy survived. And the feds still claim they can stimulate the economy by inflating it with fake money. They even set an annual inflation target – 2% – as if they knew exactly how much a bar of soap should cost. The idea is laughable. But it still guides Fed policy.
Official Rip Off: Even before the 1970s, the French economist Jacques Rueff, explained the real reason the Phillips Curve was nonsense… and why inflation was so harmful to the working classes. As prices rise, the relative cost of an hour of labor goes down. As labor becomes cheaper, the demand for it increases. In other words, inflation only seemed to benefit the proletariat because it made the working man poorer! And now, ripping him off is official policy – intentional, deliberate, and disastrous. The government is spending trillions it doesn’t have. The Fed is printing the cash to cover the deficits. And the costs will fall – principally – on the masses.
The elite are better able to protect themselves. They own property. And stocks. Their jobs, too, are more secure. They are also more sophisticated financially, and can move their money into inflation-resistant assets. The shrewdest of them may take advantage of the chaos to buy valuable assets at discount prices. (As the inflation crisis deepens, however, even many of the elite will suffer as their incomes fail to keep pace. That – when it no longer pays for the elite – will mark the beginning of the end of the inflation cycle.)
Ideal Investment: But what can you do to safeguard your wealth while prices spiral? We mentioned real estate yesterday. At today’s low interest rates, a rental unit could turn out to be a very profitable asset. As prices rise, you should be able to raise the rent. And your fixed mortgage payments will become more and more affordable. But real estate requires attention and work – which might not be practical.
As for stocks, energy companies typically do well in an inflationary period. They already have their rigs and refineries in place, so there’s little extra cost to keeping the juice flowing. And they can increase prices without causing a significant drop in consumption. That’s why energy is on the buy side of our Trade of the Decade.
[Paid-up Bonner-Denning Letter subscribers can read all about Bill’s latest Trade of the Decade here. To subscribe, click here. And colleague Tom Dyson has created a model portfolio of energy-related stocks for his Tom’s Portfolio subscribers. To subscribe, click here.]
Infrastructure businesses may be even better. Toll roads. Hospitals. Airports. They have pricing power… and relatively little need for further investment. What you want for your business investments is the same thing you want for yourself – a steady, reliable stream of income with no need to spend more money to get it. The ideal investment may be in a “royalty” or “streaming” company. These are businesses that own the rights to a stream of income – from, say, gold mining – but are not actively mining themselves. As the price of gold goes up, their revenues increase in value, while they have few offsetting costs.
The Boy Scouts’ Motto: But money is only a part of it. Inflation discombobulates a society. People get confused… distracted. They feel betrayed. They don’t know who to trust or what to believe. Our colleague Dan Denning emphasizes the need to be prepared socially and psychologically… as well as financially.
You want to be in a place where you are comfortable and safe, where you are as little exposed to chaos and rising prices as possible. You may not be able to increase your income; your time may become less valuable. So use your time to make yourself more independent. Plant a garden. Rick up some firewood. Sit on the porch and read our book, Win-Win or Lose. Buy gold. Sell bonds. Be happy. Amor fati."