Is Your Car Now an Inflation Hedge?
We learn something new every day.
What was always seen as a depreciating asset was our car. But with used car prices up over 20% in the last 12 months, we now realize we are riding around in an inflation hedge.
And remember Greece a couple of years ago, when they were on the edge of bankruptcy? Well, the Greek government borrowed money last week by issuing $3 billion worth of 10 year bonds. You would think they would have to pay a little more interest than the U.S. does to borrow money, but all the bonds were purchased at a yield of .9%, while the U.S. has to borrow money for 10 years at 1.5%.
And what is happening in the U.S. that seems a little out of whack? This past Monday, junk bond yields as measured by the Bloomberg Barclays High Yield Index were at a whopping 3.84%, the lowest level ever.
These are the results of monetary and fiscal policies in Europe, the U.S. and elsewhere.
Obviously, Greece is not economically stronger than the U.S. But when the European Central Bank announces it will be buying bonds from European governments at even faster pace than it has been, then we should expect results that have no basis in old fashioned economic analysis.
Last week, Federal Reserve (Fed) Chairman Jay Powell spoke and said monetary policy in the U.S. is status quo. The Fed will continue to buy $80 billion dollars of U.S. government bonds and $40 billion of mortgage backed securities every month. He continued to state their belief that this big spike up in inflation that we have seen the last couple of months is “transitory”.
But we all know that only time will tell us if this bout of inflation is transitory or not. And there are supply bottle necks in ports, shortages in certain computer chips and basic materials such as lumber, copper etc. that may be temporary.
But on the other hand, everywhere we go we are seeing help wanted signs and labor costs going up as businesses try to entice workers to leave their juiced up unemployment benefits and actually work again. And so far, finding workers is still a huge challenge for many businesses. Will these workers gladly accept a pay cut if/when the labor market gets back to normal? Or are higher labor costs here to stay?
We don’t know. But we do know that labor costs are approximately two thirds of the cost structure of a developed economy. So if the labor cost increases turn out to be sticky, we may well see a higher level of inflation.
And this is why diversified portfolios have assets that react differently to different economic scenarios. Stocks are a good long term hedge against inflation, bonds are a good hedge against a deflationary environment, and gold has a history of being a hedge against bouts of uncertainty and geopolitical risk.
Since we don’t have a crystal ball, and can’t correctly predict future interest rates, economic cycles, commodity prices, tax policies etc., we will do our best to have portfolios that are as “all weather” as we can make them.
And we control what we can control- which is utilizing cost and tax efficient investment vehicles, while not taking any unnecessary risk.
Thanks as always for your trust and confidence in us. And please don’t hesitate to call us with any thoughts or questions.
Disclosure: The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Beach Foster and not necessarily those of Raymond James. Past performance may not be indicative of future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Investment strategies mentioned may not be suitable for al investors. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated.