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Inflation
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Inflation
Resulting from printing money, and even with the forecast high unemployment and falling wages. some say we are heading for general inflation.
With the poor employment outlook do you think general inflation is likely in the next say 2 years, and if so what specific investment strategies are most likely to show the best return?
And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
It is said for big borrowers and asset holders inflation would be good news.
For what its worth I think general inflation is unlikely, but specifics like food as an example are likely suffer inflationary pressures.
With the poor employment outlook do you think general inflation is likely in the next say 2 years, and if so what specific investment strategies are most likely to show the best return?
And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
It is said for big borrowers and asset holders inflation would be good news.
For what its worth I think general inflation is unlikely, but specifics like food as an example are likely suffer inflationary pressures.
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- Lemon Half
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Re: Inflation
G3lc wrote:And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
If you wish to keep ahead of inflation, avoid fixed interest securities and cash deposits. The only possible way is to invest in equities or property.
Which equities or which property is another question. Some might like to speculate in gold or silver.
TJH
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Re: Inflation
It’s a double-edged sword is inflation. Low inflation, low repayments. OTOH higher inflation diminishes the capital burden that much faster.
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Re: Inflation
tjh290633 wrote:G3lc wrote:And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
If you wish to keep ahead of inflation, avoid fixed interest securities and cash deposits. The only possible way is to invest in equities or property.
Which equities or which property is another question. Some might like to speculate in gold or silver.
TJH
Ah - but here's the thing, equities haven't always offset inflation, depends upon which time period. There are periods when equities have massively failed to offset inflation. A 1 ounce gold coin would buy a Roman soldier a nice suit. As might a 1 ounce gold coin buy a nice suit nowadays. But again that comes with very high volatility. With Fiat currencies its a game of try and secure enough net growth to offset the decay in value of the currency, often where those that are you are up against also set the rules. Somewhat agree that bonds are a bad choice for that very reason. Buying a gilt is lending to the state, where the state also gets to set the rules and 'steer' the economy (rate of inflation, interest rates, tax on interest rates ...etc.). Land is a good inflation hedge, but again with volatility and can't be moved, so at risk of loss/confiscation. Inflation can be induced by printing money - but where more often the state print money in seeking to avoid/reduce deflation - as that tends to cripple the economy, but after having printed enough to stem off deflation that can rapidly turn around into rapid inflation. One way to mitigate risk is to hold foreign currencies/investments. Combine that altogether and owning (or be buying) a UK home (£/land), holding some US stocks (US$/equities), and some gold (global currency/commodity), and that's a asset allocation that the ancient Talmud were advocating millennia ago (third each in land, commerce, in-hand). As a home is illiquid, you can supplement that with some UK stocks as a proxy for UK property. If in rebalancing the portfolio the indications are to reduce home value, selling some UK shares is better than selling the tiles off your roof
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Re: Inflation
G3lc wrote:Resulting from printing money, and even with the forecast high unemployment and falling wages. some say we are heading for general inflation.
With the poor employment outlook do you think general inflation is likely in the next say 2 years, and if so what specific investment strategies are most likely to show the best return?
And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
It is said for big borrowers and asset holders inflation would be good news.
For what its worth I think general inflation is unlikely, but specifics like food as an example are likely suffer inflationary pressures.
During deflation bonds do well. And boy have bonds done well since 2008. On that measure we're already in a deflationary cycle. Japan's been in that cycle for decades now. Try as they might to induce inflation they've been stuck in deflation.
Within deflation people will prefer not to buy/invest today, as things can become less expensive tomorrow. Fewer jobs, plenty of capacity to produce things but where the demand is low (no job, just buying the bare necessities). In throwing everything at ending deflation when it does turn it can turn around fast, resulting in high inflation. But when? Could be days away, could be years or even decades away.
Stocks borrow. They're like a 1.5x leveraged holding (on average) i.e. corporate debt (bonds). Some de-risk that by only investing 66% into stocks and holding 33% bonds, which then is like having both invested in the stock and lending what it borrows. Leverage tends to lead to the same overall reward, but with greater volatility along the way, sometimes borrowers win, sometimes lenders win, overall washes. Lending (buying bonds) to offset what stocks borrow is somewhat wasted capital. My left hand could borrow £1 from my right hand, produces (nor loses) nothing. Deploy the 33% that you might otherwise have invested into bonds to offset what stocks borrow elsewhere and if that achieves a > return than the cost of borrowing you win, if it lags the cost of borrowing you lose. A Permanent Portfolio is a reasonable asset allocation choice IMO for that gameplay.
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- Lemon Slice
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Re: Inflation
G3lc wrote:
And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
I don't know about taking advantage, but Index Linked Government Bonds should protect you against inflation.
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Re: Inflation
1nvest wrote:tjh290633 wrote:G3lc wrote:And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
If you wish to keep ahead of inflation, avoid fixed interest securities and cash deposits. The only possible way is to invest in equities or property.
Which equities or which property is another question. Some might like to speculate in gold or silver.
TJH
Ah - but here's the thing, equities haven't always offset inflation, depends upon which time period. There are periods when equities have massively failed to offset inflation. A 1 ounce gold coin would buy a Roman soldier a nice suit. As might a 1 ounce gold coin buy a nice suit nowadays. But again that comes with very high volatility. With Fiat currencies its a game of try and secure enough net growth to offset the decay in value of the currency, often where those that are you are up against also set the rules. Somewhat agree that bonds are a bad choice for that very reason. Buying a gilt is lending to the state, where the state also gets to set the rules and 'steer' the economy (rate of inflation, interest rates, tax on interest rates ...etc.). Land is a good inflation hedge, but again with volatility and can't be moved, so at risk of loss/confiscation. Inflation can be induced by printing money - but where more often the state print money in seeking to avoid/reduce deflation - as that tends to cripple the economy, but after having printed enough to stem off deflation that can rapidly turn around into rapid inflation. One way to mitigate risk is to hold foreign currencies/investments. Combine that altogether and owning (or be buying) a UK home (£/land), holding some US stocks (US$/equities), and some gold (global currency/commodity), and that's a asset allocation that the ancient Talmud were advocating millennia ago (third each in land, commerce, in-hand). As a home is illiquid, you can supplement that with some UK stocks as a proxy for UK property. If in rebalancing the portfolio the indications are to reduce home value, selling some UK shares is better than selling the tiles off your roof
.....................so while one can immerse oneself in research and data, timing and forecasting are perhaps as relevant to getting a result, plus a bit of luck of course, all hard to measure or calculate.
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- Lemon Half
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Re: Inflation
Parky wrote:... Index Linked Government Bonds should protect you against inflation.
Nice theory but unfortunately Index Linked Gilts are on negative real yields, they have been for quite a while now.
"Her Majesty’s government has a special deal right now. Give the Treasury £100 and in 30 years’ time you will receive £64.36 back, allowing for inflation. Investors can’t get enough of it.
This may sound like a bad joke, but it isn’t. The product in question is the 30-year inflation-linked gilt, whose real yield is currently -1.46% (see graph). If you 'invest' in it, you will lose 1.46% of the real value of your investment every year." https://www.cii.co.uk/learning/learning ... elds/72691
That article was almost a year ago. The current state of play for them in the secondary market is even worse. https://www.fixedincomeinvestor.co.uk/x ... oupid=3530
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Re: Inflation
Parky wrote:G3lc wrote:
And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
I don't know about taking advantage, but Index Linked Government Bonds should protect you against inflation.
But do they?
My NS&I index-linked certificate 2011 - 2016 was RPI + 0.5% which I felt, after researching how inflation was measured, not perfect, but reasonable.
My NS&I index-linked certificate 2016 - 2021 is RPI + 0.1%. Since, after experiencing the fun and games in how other countries calculate inflation, I always add on 1% to the RPI, this is, for me, taking the p**s.
From 2021, my index-linked certificate will be based on the CPI. This taking the p**s big time, but since it is only a small part of the portfolio and the certificates are no longer for sale, I will probably let them run, but I am under no illusion as to how contrived and clever it is.
Steve
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Re: Inflation
Parky wrote:G3lc wrote:
And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
I don't know about taking advantage, but Index Linked Government Bonds should protect you against inflation.
Only if you can buy them at par (or close perhaps since they generally pay 0.125% coupon).
You are far from alone in believing this though. Until real yields get back to zero, or above, you will have some inflation protection by owning linkers, and may be (broadly speaking) better off than owning conventional Gilts, and perhaps other assets. As things stand though you will be protecting perhaps only 2/3rds, or worse, of your purchasing power depending on your maturity (assuming held to maturity).
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Re: Inflation
dealtn wrote:Parky wrote:G3lc wrote:
And if you think we will have specific inflation, how should/could we be investing to take advantage of this situation?
I don't know about taking advantage, but Index Linked Government Bonds should protect you against inflation.
Only if you can buy them at par (or close perhaps since they generally pay 0.125% coupon).
You are far from alone in believing this though. Until real yields get back to zero, or above, you will have some inflation protection by owning linkers, and may be (broadly speaking) better off than owning conventional Gilts, and perhaps other assets. As things stand though you will be protecting perhaps only 2/3rds, or worse, of your purchasing power depending on your maturity (assuming held to maturity).
Another Government "savings" con then. They will soon be able to pay for all the free money they have given away over the past months.
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Re: Inflation
Don't overlook the fact that inflation rates will vary between countries. The UK has traditionally been a high inflation country whilst Switzerland has had low inflation. One option therefore is to hold at least some of your wealth in, say, Swiss francs rather than having it in weak sterling. In the longer term currencies will move to reflect differing inflation rates. I recall my great uncle saying that when he was young it was 23 Sw Fr to the pound!
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Re: Inflation
1nvest wrote:
Within deflation people will prefer not to buy/invest today, as things can become less expensive tomorrow. Fewer jobs, plenty of capacity to produce things but where the demand is low (no job, just buying the bare necessities).
I've never bought in to this. Check out the level of this so called deflation in Japan. Would you really put off buying something because it might be 0.1% cheaper in a years time? Or even 1% cheaper? We're not talking the inverse of 70's style inflation here.
Most people are so keen to buy what they want they will happily get it on credit rather than save for it. Which is the same as paying more now than in a years time, no deflation needed.
The persistence of debt, when debt levels are high, in a deflationary or low inflationary environment is more of an issue.
BoE
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Re: Inflation
On the subject of Japan I don't know if they have used 'helicopter money' or relied solely on more traditional methods of reducing the cost of borrowing via the banks. Governments/central banks this time round have actually handed out huge wodges of cash to people and businesses. This is very different to what happened post-GFC and IMO far more likely to result in inflation.
Gold and inflation-linked gilts are signalling this which means it's in the price. Depending on the level of inflation that actually transpires of course.
BoE
Gold and inflation-linked gilts are signalling this which means it's in the price. Depending on the level of inflation that actually transpires of course.
BoE
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Re: Inflation
Parky wrote:dealtn wrote:Parky wrote:
I don't know about taking advantage, but Index Linked Government Bonds should protect you against inflation.
Only if you can buy them at par (or close perhaps since they generally pay 0.125% coupon).
You are far from alone in believing this though. Until real yields get back to zero, or above, you will have some inflation protection by owning linkers, and may be (broadly speaking) better off than owning conventional Gilts, and perhaps other assets. As things stand though you will be protecting perhaps only 2/3rds, or worse, of your purchasing power depending on your maturity (assuming held to maturity).
Another Government "savings" con then. They will soon be able to pay for all the free money they have given away over the past months.
Nothing to do with the Government. Gilt prices are set by the market by supply and demand. If anything the Government is doing its best to push prices down with all the Primary Supply required.
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Re: Inflation
MasterCard makes up ten percent or so of my dividend growth portfolio. It has a natural inflation hedge as it will still take its cut of rising prices.
Best wishes
Mark.
Best wishes
Mark.
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Re: Inflation
G3lc wrote: some say we are heading for general inflation.
I’m not sure what general inflation is, unless it’s consumer price inflation, but UK has had inflation for at least the past 35 years, continuously. So it wouldn’t surprise if we are heading for more. If nothing’s changing in that regard, I’m not sure any investing changes are needed.
G3lc wrote:And if you think we will have specific inflation
There is always specific inflation is there not? Some sectors of the economy experiencing different inflation levels. That seems like another ‘nothing’s changing’; does it need an investment approach change?
tjh290633 wrote:If you wish to keep ahead of inflation, avoid fixed interest securities and cash deposits. The only possible way is to invest in equities or property.
The usual suspects will know what that means but for the non-cogoscenti, beware the uncommon exceptions. Equities growth can lag behind inflation for periods of several years, a decade wouldn’t shock, and more commonly occurred in the past when inflation was higher rather than lower.
The French stock market lagged inflation for almost a century after WW1, ignoring dividend payouts. That’s when you’re glad you have some international diversification. https://evergreensmallbusiness.com/rate ... ne-charts/
And fixed interest securities? Inflation linked bonds will keep ahead of inflation if their yield to maturity is above zero and they’re held to maturity, I think.
dealtn wrote:Only if you can buy them at par (or close perhaps since they generally pay 0.125% coupon).
The average unweighted coupon for UK inflation linkers is 1.1% now.
http://www.fixedincomeinvestor.co.uk/x/ ... oupid=3540
dealtn wrote: ...you will have some inflation protection by owning linkers,
I think it’s fair to say you will have COMPLETE inflation protection, if you accept that your inflation is the same as the officially measured inflation. But your purchasing power will be eroded by the negative yield of the bond.
Parky wrote:Another Government "savings" con then. They will soon be able to pay for all the free money they have given away over the past months.
I think the market, not the government, sets the yields for bonds, whatever else they callously do to the long suffering citizen.
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Re: Inflation
JohnW wrote:dealtn wrote: ...you will have some inflation protection by owning linkers,
I think it’s fair to say you will have COMPLETE inflation protection, if you accept that your inflation is the same as the officially measured inflation. But your purchasing power will be eroded by the negative yield of the bond.
So how is that COMPLETE inflation protection then!
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Re: Inflation
JohnW wrote:The average unweighted coupon for UK inflation linkers is 1.1% now.
http://www.fixedincomeinvestor.co.uk/x/ ... oupid=3540
Check out those last 2 columns. That negative yield demonstrates how much purchasing power you are losing annually. If that can't be visualised look at the penultimate column of the price. Those bonds will all pay out at (real) 100, so even holding less than 10 years you are only getting 75% purchasing power, for the longer maturities less than half!
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