“The finance gerontocracy that runs the country through whatever silly virtue-signaling-slash-hate-factory term like ESG [environmental, social, and governance] they have versus what I would call—what we have to think of as a revolutionary youth movement …. When they choose not to allocate to Bitcoin, that is a deeply political choice, and we need to be pushing back against them.” — Peter Thiel
Warren Buffet is probably the top brand name in what fellow billionaire Peter Thiel calls the “the finance gerontocracy.” With a net worth of $125 billion at age 91, Buffet has followed his advice to invest in himself as a hedge against inflation.
He also advises investors seeking to protect themselves from the ravages of inflation to invest in “wonderful companies.”
Buffett once said that an unregulated toll bridge would be an excellent property to own in an inflationary world because having the bridge in place, you could raise tolls to offset inflation. “You build the bridge in old dollars and you don’t have to keep replacing it.”
Elon Musk, a co-founder of PayPal with my friend Thiel, echoes Buffet’s advice. In March, Musk wrote on Twitter that in times of high inflation, it is “generally better to own physical things like a home or stock in companies you think make good products,” as opposed to keeping your money in cash.
At age 51, Musk is the richest man in the world, with a net worth of $273 billion as of April 2022. That is twice what Warren Buffett or Bill Gates is worth.
Arguably, Musk and Thiel are as worthy tutors on making money as Warren Buffett. [Remember, Thiel made one of the best angel investments in history when he paid $500,000 for 10.2 percent of Facebook in 2004. As I write, Facebook (Meta Platforms) has a market cap of $589.89 billion, meaning that 10.2 percent would be worth $60 billion].
Not that you need to confine your search for profitable information to the pronouncements of billionaires. Take good ideas wherever you find them. That is why I advise you to heed Musk’s advice against holding large cash balances in banks.
Rather than scouring the footnotes to identify a standard American bank that offers 0.80 percent interest on deposits in excess of $25,000, I suggest that you follow Thiel’s advice and hold liquidity reserves in Bitcoin.
However, after denouncing Bitcoin for years as “rat poison,” Warren Buffett’s Berkshire Hathaway sold shares in Visa and MasterCard and bought $1 billion worth of stock in NuHoldings, the Brazilian Company (trades in dollars on the New York Stock Exchange) that operates NuBank, a depository that offers Brazilian interest rates, currently 6.47 percent, as well as crypto currency products.
An account in NuBank offers at least the prospect of earning enough interest to beat inflation, plus cryptocurrency options.
Also check PayPal’s options. If you have relatively large sums available for investment, in excess of $10,000, you might explore Yieldstreet.com. It offers sophisticated hybrid instruments, including income notes leveraged on the stock of blue chip financial companies.
Here are some other widely touted hedges that may help you mitigate the impact of inflation:
TIPS, or Treasury inflation-protected securities, are U.S. government bonds indexed to inflation. If inflation moves up (or down), the effective interest rate paid on TIPS will too.
TIPS bonds pay interest every six months, and they’re issued in maturities of 5, 10, and 30 years. Because they’re backed by the U.S. federal government (like other government debt), they’re notionally considered among the safest investments in the world.
The downside is that you can count on the government to give you a low-ball inflation adjustment, because TIPs adjustments are calculated according to the Consumer Price Index.
Bonds usually offer a fixed payment for the life of the bond, meaning bonds have their broad side exposed to rises in inflation. One way to mitigate that effect, however, is with a floating rate bond, where the payout rises in response to upticks in interest rates caused by rising inflation.
One way to buy these is through ETFs or mutual funds, which typically own a wide assortment of such bonds. So, in addition to inflation protection, you’ll also get some diversification, meaning your portfolio may benefit from lower risk.
A Mortgage on a House
Real property can be a useful hedge against inflation. The higher inflation goes, the more likely real property can protect you. But to gain windfalls from inflation in real estate, you may need to pay for your property with devalued dollars. In other words, you need to pay with a fixed rate mortgage. With a long-term mortgage—at close to historically low rates—you’ll lock in cheap funding for up to three decades.
A fixed-rate mortgage allows you to maintain the biggest portion of housing expenses at the same payment. Of course, property taxes will rise and other expenses could be expected to rise, but unlike when you rent, your monthly mortgage payment remains the same.
And, of course, by owning a home you’ll have the potential for tax-savings. And your property’s value may increase over time, especially if it is likely to appeal to cash buyers in the future. Remember, inflation may tend to dry up the supply of future mortgage money.
Stocks are a good long-term vehicle for hedging against inflation, even if they may get hit by anxious investors in the short term as their worries rise. But not all stocks are equally good inflation hedges. You’ll want to look for companies that have pricing power, so that as their own costs rise, they can raise prices on their customers.
And as a company’s profits grow over time, its stock price should climb. While the stock market might get hit by worries of inflation, the best companies power through it with their better economics.
Gold is the all-time winner as a safe-haven asset for investors when inflation revs up, especially when financial repression keeps interest rates very low. Gold tends to fare well when real interest rates—that is, the reported rate of interest minus the inflation rate—go into negative territory.
Investors often view gold as a store of value during tough economic times, and it has succeeded in this purpose over long periods. As detailed by Roy W. Jastram,
in “The Golden Constant,” Gold has consistently held its value over the centuries remarkably well over the centuries—notwithstanding wars, pandemics, and technological upheaval.
As Professor Jastram documented, the price of gold was precisely the same in 1930 as in 1700. “This remarkable stability was interrupted only by brief upward flurries during the Napoleonic Wars and World War I.
Equally, commodity prices fluctuated around the level of 1700, with brief exceptions for the Napoleonic inflation, and the late 19th century deflation. Yet after those episodes, commodity prices returned to the level of 1700. This was true even after the great inflation of World War I. Even after prices nearly tripled in the Great War, they returned to 1700 level by 1930.
One convenient option for investing in gold is to buy it through an ETF. This has the superficial appeal of sparing you from having to actually store and protect the gold yourself. Plus, you have several options with ETFs, allowing you to own physical gold or the stocks of gold miners, which can offer higher upside if gold prices soar.
That said, gold and silver coins offer a superior option for holding gold.
Rising inflation is a big concern for investors right now, but it remains to be seen whether high levels of inflation will persist or recede as the Fed starts to raise interest rates.
Regardless, it makes sense for you to think about making certain money moves now, such as refinancing a mortgage into a fixed mortgage at historically low rates or paying down debt balances that have adjustable rates. These are simple, relatively low-cost moves that can help you benefit even if higher inflation doesn’t last.
Investors, if they own individual stocks, could evaluate which of their holdings are most exposed to inflation and consider paring back that exposure or perhaps not adding to the position further.
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Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.