According to the Cambridge Dictionary, the term Hedge (noun) is defined as: a way of protecting, controlling, or limiting something. As a result of Modern Monetary Theory, investors are now worried about the inflation tax, and what they need to do to protect, control and limit their exposure to this devastating wealth killer.
The Federal Reserve has unleashed the printing presses causing a tidal wave of liquidity in the US and global economies. In fact, the Federal Reserve is printing $120 billion every month, according to Richard Duncan, author of Dollar Crisis: Causes, Consequences, Cures. As the US post-COVID-19 economy reopens for business, the cost of goods and services will undoubtedly soar.
You have probably noticed that inflation is already rising so far in 2021, in terms of consumer goods like food, gasoline, lumber and metals. According to Manoj Pradhan, a former Morgan Stanley economist, the real increase will begin next year. “The real challenge will come in 2022, when a lot of spending will have been deployed into goods or into housing, monetary aggregates will still be high with velocity rising.” In simple terms, inflation is a tax on savers, wage earners, and those without hard assets. Any class of US citizen who is not hedging the inflation tax will be crushed under the weight of soaring costs, similar to the 1970’s Carter Administration’s era of loose money policies causing runaway inflation.
Here are a few “hedges” against inflation you should consider:
1. Leveraged multi-tenant real estate: Recentric invests in multi-tenant health care real estate that is conservatively levered with debt. In today’s low interest rate environment, you would be better served to finance the purchase with 10-year fixed rate boosting your internal rate of return and hedging against inflation with the annual increases in rent and ultimate rise in the value of the asset.
2. “Commodities tend to have outsized returns during times of high inflation,” says Adem Selita, CEO of the Debt Relief Company. Commodities are a type of real asset. They are things like crops, raw materials, or natural resources. Their prices go up with those of other goods or services that use those goods. Two easy ways to invest in commodities are:
- Buying shares of exchange-traded funds (ETFs) that specialize in commodities.
- Buying shares of stock in companies that produce commodities.
3. Stable Foreign Currencies/Foreign Stocks: Investing in corporations that buy from suppliers using dollars or are paid by customers in foreign currencies is a great hedge against inflation. Corporations that source resources in the United States will have lower costs from an international perspective. Many multinational companies, such as Coca-Cola and Boeing, have benefited from a weaker dollar. As always, discuss your financial decisions with your accountant of financial planner.
In today’s fiscal runaway train of inflationary “print and spend” policies, and soon to be “tax and spend even more” fiscal policy, hedging against inflation will be the most important financial topic for 2021 and beyond.
Stay tuned for next month’s article on Biden’s Tax Policy and how to legally lower your tax bill in an unfriendly tax climate coming out of the US government.