Why Inflation Matters
You’ve probably been hearing lots of debates about inflation in recent weeks. Some say it’s not coming at all. Some say it’s going to hit the U.S. like a runaway freight train.
Some will tell you that inflation is a good thing — it means the economy is growing. Some will tell you inflation is terrible because it devalues your money.
But out of all the arguments I’ve heard recently, not many really hit the point. Sure, inflation sucks for us “rich” people in developed countries like the U.S. It makes everything cost more, but the thing is, in developed countries, we can usually afford those price increases. On a global scale, even our “poor” are “rich.”
But when you start to get into countries that are barely keeping their heads above water, countries that live on their ability to issue debt, inflationary pressures are a real danger.
Riding the Yield Curve
You see, those developing countries are only able to make ends meet by issuing debt to investors. And as inflation grows, investors demand higher interest rates on the debt they’ll buy.
It’s got to keep up with the downward pressure of inflation.
If you’ve ever bought a home, you know that a little difference in your interest rate can translate into a massive increase in the total amount you’ll pay back.
So as investors demand higher rates, countries that exist on that debt will have to offer bigger incentives for buying their debt. Eventually, they’ll have to offer rates so high they can’t even make the interest payments on them.
They’ll either default on the high-interest loans, or they’ll be unable to issue debt since nobody wants the low rates they could pay.
Then they run out of money to keep their social programs (and even just their governments) running.
That’s just on the government side. I haven’t even gotten into how inflation can wreak havoc on the lives of their citizens…
I Already Can’t Pay
That’s where things get even more real. Here in the U.S., when prices for things like food and energy go up, we’ve got assistance from the government if we can’t afford them.
In most cases, even as prices increase, while we may have to cut a few expenses, we can usually still afford the things we need.
But when you live in a developing country and are already struggling to provide food for your family, a small increase in prices can be devastating.
Even in countries we view as partially developed, like Brazil, inflation can take a nasty toll. According to Reuters, last year, inflation in Brazil ran up 14% — the biggest increase in almost two decades.
But that headline number hides the true harm felt by people just trying to buy necessities like rice, which went up 76% in price last year, or soy oil, which doubled in cost.
Brazil wasn’t alone. Last year, other countries, from Turkey to Nigeria, also booked double-digit inflation.
According to data from the UN, food prices hit a six-year high this past January after rising steadily for eight months in a row.
Here in the U.S., food makes up about 10% of our inflation calculation basket. In developing countries like India and Pakistan, it accounts for about half of the inputs.
If you were wondering what makes the rest of the world riot (since we already know Americans will riot over anything), food scarcity is definitely one of them.
Rising food prices have contributed to social unrest in the past, and they will again in the future.
As recently as 2006, there were riots across Mexico after corn prices spiked and caused the price of tortillas to skyrocket. In case you didn’t know, tortillas are a staple of the Mexican diet.
The price rose from about 8 pesos per kilo to over 10 pesos per kilo, and people took to the streets. It was starting to look like an uprising that might destabilize the government.
Now a rise from eight to 10 doesn’t seem that big, but it calculates out to a 25% increase. What would you do? Buy and eat 25% less? If you’re already feeling hungry on a daily basis, you probably don’t have that many calories to cut.
And if you’re not sure where your next meal is going to come from or when it's coming, you’re not likely to care about much else. So it makes complete sense to me that the increase in prices caused the now-famous “tortilla riots.”
But the Mexicans weren’t the only ones to take to the streets over inflationary pressures. In 2008, rising rice prices led to unrest in several Asian countries. The Arab Spring revolts of a decade ago were also influenced by the cost of food.
Food scarcity is definitely something to make people riot around the world. And a rioting populace is not a good thing for a developing government to have to deal with.
It could easily spread to neighboring countries and turn into a full-scale global conflict.
In the words of one of my colleagues, “This is a really bad setup for the world.”
But there’s not much we can do other than protect our own capital and families by finding a way to profit from the setup. It probably sounds callous, but at some point, you’ve got to be selfish and take care of yourself first.
It’s like the oxygen masks on an airplane — you have to get yours on first so you can make sure you’re able to help the kid sitting next to you.
Hard Times for Soft Assets
In the world of investing, there are two kinds of assets: hard and soft. Soft assets are the ones you’re probably most familiar with investing in.
They’re also known as intangible assets and, to investors, are things like stocks and bonds. On a company’s balance sheet, they can be things like brand recognition and goodwill, but that’s not what we’re talking about today.
Soft assets are assets you can’t physically handle. Maybe they represent some form of ownership of a hard asset, but they’re not the hard asset itself.
Hard assets are tangible. They’re things like real estate, precious metals, natural resources, fleets of vehicles, equipment and machinery, and commodities like food and industrial metals.
And it’s those assets that do best in times of inflation. They’re real assets that you can hold in your hand and put to use no matter what their “market value” is at the time.
They’re priced in currency (usually U.S. dollars), so that means as the value of a dollar falls thanks to inflation the prices of these assets in those dollars will grow.
It’s really simple math. If your dollar bought two ears of corn last year and inflation knocks off half of its value by this year, your dollar will buy one ear of corn.
For you, that sucks. You’re paying twice as much for the same thing. For the guy growing and selling the corn, it’s incredible — he’s making twice as much for selling you the exact same thing.
That’s why inflation makes for hard times for soft assets but good times for hard ones. And that’s why I suggest you get at least some of your savings invested in those assets before inflation really kicks in.
In a worst-case scenario, you’ll own some land or some materials you can use to build a new life for yourself after the world burns.
In a best-case scenario, you’ll weather the inflationary pressures and come out on the other side much more successful and with the resources necessary to help others recover too.
Time to Get Hard
My favorite hard asset is real estate. The majority of my wealth is tied up in our family’s farm. We have no intention of ever selling it; we come from a family that lives by the adage “never sell the farm.”
But it’s there growing in value as more and more people need the food it produces and the space it takes up. In a worst-case scenario, it would support my family and me forever as a subsistence farm.
For now, though, it provides steady, reliable income year in and year out. If the price of food keeps climbing, it’ll provide more income for us and the people who farm it for us.
You don’t have to buy a whole farm to invest in real estate. I love real estate investment trusts (REITs) because they give you a share of the ownership of hard assets and pay you a share of the rental income generated from them.
Side note: My readers at The Wealth Advisory have made some serious loot thanks to our REIT recommendations, and we’ve recently uncovered another incredible REIT that’s primed to pay out because its hard assets are the backbone that the U.S. 5G network will rest upon. Click here to find out more...
But we need other hard assets to make the farm fruitful. Fleets of cultivators and harvesters and all the other big equipment you’ll see on a farm; trucks to get the produce to market (or elevators in the case of grains); elevators and silos to store the grains until they’re dried and ready to ship out to the buyers...
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Those are all hard assets too. You can invest tangentially in them by owning companies like Deere, Bunge Ltd., and even Caterpillar. So don’t worry, you don’t have to buy a whole tractor if you don’t want to.
But they’re not the only hard assets around...
If you don’t want to buy land because you’re worried about property values being too high right now or because it just seems too big and you’d prefer something that you can keep at home and pull out to admire, there are still lots of options.
You’ve got all the precious metals like gold, silver, platinum, and others. You can buy them in their physical form to keep in your safe deposit box or under your mattress.
You can also invest in companies with hard assets, like the oil and gas industry. EVs may be the way of the future in the States, but it’s going to be a long time before the rest of the world stops using oil.
Then there are collectibles like baseball cards, paintings, vintage cars, etc. They’re not usually what you’d think about when you think investing, but they are hard assets and will go up in price as each dollar buys less and less.
The Most Important Step
I hope I haven’t scared you any more than the news media already has. But I also hope I drove home the point of why inflation is important and why it could turn out to be a real problem for the entire world.
I know I’ve given you some good ideas about where to invest to protect your capital and your family. I hope you take my advice and at least look into investing in hard assets.
The most important thing you can do is to keep reading Wealth Daily. We’re the people who are going to bring it to you straight.
We’re not incentivized to sell you cars or mortgages or anything else. We’re incentivized to give you good advice — because if we don’t, you won’t listen anymore.
We gave you the advice to start buying quality stocks at rock-bottom prices last March. Our founder even took to the airwaves himself to implore you to listen to us and be bold while others were fearful.
Now I’m saying it’s time to be a little fearful because the markets are getting a little too bold in the cavalier way they’re brushing off inflationary pressures.
I’m not telling you to pull all your money from soft assets and put it into hard ones. Stock prices can (and probably will) go higher. But if inflation strikes the U.S., you can expect it to hit the rest of the world too.
We live in a global community despite what some politicians around the world might want. So inflation in Egypt, Kenya, or Myanmar can and will have a negative impact on every other nation.
It will definitely have an impact on the prices of hard assets. So get yourself some exposure to them in the form of real estate, precious metals, commodities, or even collectibles.
Once all this has played out, you’ll be happy you listened.
For a head start picking out the best real estate investments, check out our report on the "5G Tollbooth" company. Its most valuable assets are all hard ones.
And if you decide to join us at The Wealth Advisory, you’ll get immediate access to our other hard asset investment recommendations, which are poised to profit as life gets more expensive.
I hope to see your name on my list when I send out my next trade alert or market update.
To your wealth,
After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter, and co-authors The Wealth Advisory income stock newsletter. He also contributes regularly to Wealth Daily. To learn more about Jason, click here.
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