A good buddy of mine, Matt Baldoni, was telling me about his investment strategy. Given the $2 trillion CARES act and latest round of money printing, he was convinced to reallocate his investment portfolio into precious metals and precious metals mining companies. He believed the new $2 trillion in printed money (and lord knows how much when you consider the M2 money supply and other MS derivations) would lead to inflation and wanted to invest in vehicles that traditionally were hedges against inflation.
I didn't disagree with him. I too have a position in precious metals (as well as crypto-currency) as a hedge against inflation, even economic collapse. But I advised him to reconsider investing in the stock market if he really wanted to hedge against inflation because - bar a true economic collapse - the stock market is a natural hedge against inflation and has some other interesting traits that going forward in the post-boomer economy will make it a mandatory part of any post-boomer's retirement planning.
The most obvious reason is that the stock market (at least as we speak) is off 30% from it's peak. This right now doesn't guarantee future positive returns, but it is much cheaper than it was before and likely (though not guaranteed) will prove to be another "dip" people in the future will lament they didn't take advantage off. I know people like my friend see the Fed further diluting their currency and have a natural impulse to purchase precious metals, but this is like "Burger Mondays" at your local happy house where a luxury gourmet $13 burger is going for $9. On price alone, you might want to consider throwing a couple bucks into the stock market.
But this logical reason to invest in the stock market is one of simple price, not necessarily an argument of using it as a hedge against inflation. And here we need to understand a couple things about inflation and the nature of the stock market to see why the future of investing has changed and has huge ramifications to future generation's retirement planning.
First, what is inflation?
Most people look at the price of a gallon of milk at the grocery store or price of clothes at Wal-Mart. They see cheap consumer goods and they think inflation is under control. And the government's official inflation measure - the Consumer Price Index - bears this out. Inflation has been in control (more or less) since the 1980s and we Americans have not suffered any bouts of major inflation or hyperinflation.
But this measure of inflation is folly because it fails to consider one key and important thing - the average person's personal budget.
It's very nice that the CPI includes 80,000 items in a "basket of goods" that keeps a pulse on prices in the economy. But these are individual items, many of which people don't buy and when you consider them in the personal budget, do not account for people's largest expenses. And the largest expenses in your average person's budget are usually:
Tuition (if going to college or had gone to college)
And if you're smart enough to be planning for retirement
Investments (in the form of stock prices)
The price of these things have skyrocketed and have consequently wreaked utter havoc on people's standards of living (just ask any Millennial about what they pay in rent). And since they account for the lion's share of any person's budget, we as Americans already are and have suffered great bouts of inflation. It's just instead of the price of a flat panel TV or a gallon of milk, it's in our car payments, health premiums, tuition bill, and rent payments that have gone up.
The question is why did the price of those things go up and not a flat panel TV or a gallon of milk. And while cheap foreign labor and a dreadfully boring discussion about "the velocity of money" addresses some of that, it's more our banking system that has caused those large and important budget items to increase more than what the CPI typically covers.
Take for example the stock market. This is not to bring politics into the discussion, but in an attempt to fight off The Great Recession President Obama quadrupled the money supply. We are not going to Monday morning quarterback his decision, but the fact remains he did. And while The Great Recession was indeed a horrific recession, we inevitably got out of it, things returned to normal, some would say even great as unemployment dropped below 4% under Trump's successive administration. But what also happened is the stock market also quadrupled and housing prices tripled (depending on which areas you want to measure), which behooves the question:
Did the value of American houses really increase threefold in a decade's time?
Did the productive economic capacity of the US economy (as measured by the value of the stock market) really go up 4 times that amount in a decade???
The answer is of course not. Economic growth didn't quadruple. We as a people did not become 3-4 times more productive. But we did print off 4 times more money. And over time, that money found its way into the stock market and housing prices.
The catalyst by which this was done was our banking system.
President Obama quadrupled the money supply. Trump I think has doubled it since. And no matter who got this newly minted money - be it a welfare sponge single mom, a defense contractor, or a simple federal employee - it always ends up in the bank (often times direct deposit). Banks make their money by lending out depositor's money, and they usually lend it out on items people can't afford to pay cash for. And surprise surprise, it's those same 5 major items that have gone up in price on the average person's budget:
Cars (auto loans)
Tuition (student loans)
Health care (usually this is afforded through credit card spending to provide the funds for health expenses)
The stock market (as US companies have borrowed trillions to repurchase their shares).
Again, the value of your home didn't go up 400%
The value of your health care coverage didn't go up 400%
The quality of cars didn't increase 300%.
American companies didn't increase their future profits 4 fold.
And the value of a college degree CERTAINLY HAS NOT INCREASED 400%.
But our money supply sure has and so the price of these things increased correspondingly.
This presents all Americans a paradox about investing. Since every politician since Nixon has increased the national debt (bar Bill Clinton) and more recently we've decided to print off trillions of dollars to finance it, it is no longer the true, underlying economic value of a house, a degree, rent, or a share of stock that drives asset prices today as much as it is how much money we're going to print. And whereas traditionally investors would look at a company's balance sheet, a rental property's Schedule E or the starting salary of a college degree to assess whether they were worthwhile investments, these traditional metrics are almost moot. Worse, it's not like you have a choice to "invest" in these things. You need a place to live and are thus either compelled to buy a house or rent. YOu need transportation and are going to be forced forever to have a car as a major expense on your personal budget. You need to garner some kind of skill, no matter what the local university will rape you for in the price of tuition. You need to put your money SOMEWHERE if it's going to have a shot at compounding exponentially to retire before you're 70, even if the profits the underlying investment pay is paltry. And so what printing off money to pay for deficit spending has done to retirement is make Americans, much like Germans did in the Weimar republic, buy assets regardless of their underlying and fundamental value as merely a place for their money NOT to lose purchasing power. And we're talking purchasing power in terms of living expenses, rent, transportation, education, health insurance, etc. Not minor and petty things like the cost of a flat panel TV or a gallon of milk.
And thus why my friend Matt Baldoni should consider at least diversifying some of his investments into the stock market.
Because unlike college tuition, health insurance, and transportation, the stock market (and one could argue housing) has an advantage over all those other things - it's the productive assets of the United States, and thus holds the future productive value of the US economy.
Most college degrees today are worthless and pay no divdends and offer no profits into the future.
Cars are a depreciating asset that most vain Americans pay top dollar for to drive while it's "new" while further crippling their personal finances.
And health insurance (though quite necessary) is to get you back to square one, not an investment that allows you to retire in a Floridian condo.
But the stock market is merely owning a share of the factories, buildings, technologies, machines, and networks that produces and is going to produce all our future economy value. And not only a share in the future productive value of the economy, but one that is naturally hedged against inflation because a widget today will be sold at inflation-adjusted prices as a widget tomorrow, thus given stocks an inherent hedge against inflation.
This obviously doesn't mean the stock market can't collapse, corporations won't go bankrupt, or that bubbles won't occur in the future. But it does mean that companies (or at least those you can invest in the stock market) and their underlying productive assets do at least hold future value in the fact they produce things of value (unlike say a liberal arts college) and those things are inherently hedge against inflation. And while the stock market will continue to have its ups and downs, if we triple the money supply, over the long-haul you can likely expect over time a tripling of the stock market. Not because the stock market is a good investment. It's not. It's just proven in the past to be a good long term hedge against inflation.
There is no guarantee with investing in the stock market or any market for that matter. And we could all lose all of our money tomorrow for unforeseen circumstances. But with the government printing off money to paper over all our self-inflicted problems, that money has to go somewhere. And since it isn't showing up in the CPI, but instead in our rents, 401k's, tuition bills, and health bills, perhaps you may want to consider diversifying some of your portfolio into stocks that both provide these things to our economy and have a natural hedge built into them against inflation.
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