On one hand, we know inflation is starting to run hot… and we want to “play defense” to protect our wealth.
On the other, we want to continue to “play offense.” And we want to target the kind of gains you’re used to reading about here at the Cut…
The kind that can really move the needle on our wealth.
But as you’ll see today… we don’t need to give up on the chance of gains to shield our wealth from inflation.
History shows there’s one asset class that defends against inflation AND still targets life-changing gains.
I (Chris Lowe) will reveal all below…
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Our goal is to make sure you never miss a big idea from Teeka Tiwari, Jeff Brown, and the rest of the Legacy team.
By “big idea,” I mean something that helps you either grow your wealth… or protect it against threats on the horizon.
And we began sounding the warning on the inflation threat long before it hit the headlines in the mainstream press.
In our May 14, 2020 dispatch, colleague Tom Dyson warned that the return of inflation was the “most contrarian, most unexpected, most dismissed trading idea right now.”
And when Tom’s “rabbit foot” starts to twitch, it’s best to pay attention. He’s been right on several big calls like this before.
He turned bullish on gold in 2000… right as the last great bull market was getting going.
He also bought bitcoin (BTC) in 2011. The cryptocurrency was trading at just $10 at the time.
At the time, the government’s measure of inflation, the Consumer Price Index (CPI), was running at an annual rate of 0.1%.
The most recent reading was 5%.
There are two reasons for this. Back to Tom…
We’ve had a supply shock. And we’ve got all the stimulus in the system. That’s a potent mix for inflation.
Supply shocks cripple the supplies of goods, services, and labor. In this case, the shock was due to government-ordered lockdowns and supply-chain problems. If you cut the supply of something, all else being equal, its price goes up.
Plus, we’ve got a central bank and a Treasury Department that would love to see a little inflation. And if they get it, they will nurture it, and they will let it run hot for a little while to make sure it catches on…
That’s why, in 2018, he converted nearly all his dollar savings – roughly $1 million – to gold.
And that makes sense… Gold has long been a go-to inflation hedge, along with silver, other commodities, and real estate.
Unlike the U.S. dollar, the government can’t print more of these assets on a whim. So they hold their value as the dollar sinks.
But scarce assets like these aren’t the only way to protect against inflation.
Stocks are also a good way to outrun rising prices.
I recently came across figures from Ben Carlson at Ritholtz Wealth Management…. and they’re eye-opening.
Since 1928, inflation has risen at an average rate of 3% a year.
And the stock market – tracked here by the S&P 500 – has risen 9.8% a year, on average.
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This means an investment in the U.S. stock market boosted your buying power by about 7% a year.
That’s a decent return. But it comes with a caveat…
The S&P 500 does better when inflation is low or falling.
It’s all in the table below…
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What’s happening here?
When inflation was falling, the average annual return for stocks was 16.5%. When inflation was rising, that dropped to 6.7%.
It’s a similar story when you look at the 3% inflation threshold.
When inflation was lower than 3%, the average annual return on stocks was 15.7%. When it was higher than 3%, the return on stocks plunged to 6.3%.
In the short-term, inflation tends to dampen the return on stocks. So it’s not something stock market investors pray for.
But over the long run, the stock market has outpaced the rise in consumer prices and protected you from inflation.
So if you’re worried about inflation, don’t be tempted to sell all your stocks. Chances are, they’ll keep your buying power safe.
And that’s just a broad investment in the S&P 500.
You can do even better by targeting stocks in sectors that offer increased inflation-fighting power.
More about that later in the week…
Regards,
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Chris Lowe
June 28, 2021
Bray, Ireland