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Commodities, man, commodities. Gold/silver/uranium top the list. Load up now!!

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Apr 13, 2022·edited Apr 13, 2022Author

I loaded up months ago, but with commodity index funds. Now, if real interest rates rise, commodities could get hurt along with other real assets

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I would have said if you need income look to dividend-bearing equities in an inflationary environment. Earnings can usually stay close to even on a real basis in many companies. Perhaps things tied to commodities are even better -- like high dividend oil transportation sector. I also think of things like property REITs that have inflation adjusters on rent contracts and fixed rate debt obligations that are reduced on a real basis by inflation.

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A stock that you buy for dividend yield is like a real bond, and if real interest rates rise it would lose value.

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It seems that companies with pricing power and, if possible, low capital investment requirements would be good performers in an inflationary environment. They have the ability to raise prices and do not need to make high expenditures to maintain (or grow) earnings. I don't know that dividends are so crucial; if the company were able to generate high returns on capital, I'd rather they keep the money and re-invest it in the business.

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Warren Buffett has a 1970's piece, "How Inflation Swindles the Equity Investor", where he discusses how equities behave a lot like a 12% coupon perpetual bond. The equity holder doesn't do very well if stocks are like a 12% coupon perpetual bond during high inflation.

http://csinvesting.org/wp-content/uploads/2015/01/Buffett-inflation-file.pdf

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Can you (or anyone) explain the put strategy to us slow dozers?

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My take is that this is all a predictable result of the push, from about 2008 to the present, to raise the minimum wage to $15 (from much less in some states). In the states with the lowest cost of living this has been as much as a 300% increase. Once that movement succeeded in getting its way across most of the US, which it did during the Obama administration, the only way to keep the economy growing was to inflate real wages most of the way back to what they were before.

This is why the Fed and Treasury do not want to raise interest rates anytime soon.

At this point about the only investment I expect to rise in price is the newly gold-backed ruble. And I wish I knew if there were any way to invest in it without violating sanctions laws.

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founding

INFL attempts to invest in inflation resistant companies. Long dated out of the money calls on TMV or out of the money puts on TLT are bets on rising interest rates (against the price of long term bonds). These are hedges I'm using currently, but not core portfolio. S&P + BTC + Prayer is my core strategy.

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Shortage is shortage, interest rates or no. They'd have to raise rates to 9% to get to real interest rates. Who at the Fed has that kind of a backbone? They are a wishy-washy pathetic bunch at best. Get right, sit tight, it's a long road ahead. Shortages of food, minerals, energy, all things "real" on their way.

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I have seen little discussion of the dynamic time delays between when the Fed effectively creates more money supply and the value of money decreases (aka price inflation of everything measured in dollars). It takes many years after printing money before the inflation becomes apparent.

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I believe in the neutrality (but not super-neutrality) of money, which means that in the medium to long run the fed doesn't control real interest rates at all. They just control nominal rates at those horizons.

The forces that have driven real rates negative seem older than the COVID-era stimulus. The one-year real interest rate has been negative in the US for almost 100% of the time since 2010 and 95%+ of the time since 2008. At those horizons that's real issues are driving real rates, not nominal ones. And it isn't just a US phenomenon. Real rates are negative almost everywhere in the rich world.

The WSJ had an article today about iBonds today, which potentially have high nominal yields, low risk, and good liquidity (redeem with 3 month interest penalty). https://www.wsj.com/articles/the-safe-investment-that-will-soon-yield-almost-10-11649769505

A friend suggested that, if you have a substantial equity portfolio, you borrow against the equity portfolio using a discount margin broker like Interactive Brokers. They'll lend you money against securities at 1.5% per year and you can keep doing that as long as the inflation rate is above the financing rate. He believed your maximum downside is the 3 months of interest lost from early redemption. One limitation is that you can only do $10k per household member (there are ways to do a bit more through your tax refund). This strategy gets you an arb like return, which is nice. Otherwise, if you fund iBonds with cash your real return will always be negative after tax.

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My understanding was i-bonds are untaxed (https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm). I'm curious about this as well because while it is limited to $10k, it seems like an extremely secure hedge against inflation.

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author

I believe the only drawback is the dollar limit. The question is what to do with the rest of my portfolio.

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Tbills and Tbonds going out no longer than 2 years once the rates on that short term curve are. Will minimize a hit to PP without having to speculate or taking any large risks to maintain or increase PP.

And one needs to differentiate between a taxable and tax deferred account as to addressing PP concerns.

Finally , do you really see large real interest rates ahead for some protracted long term? If only a short term inflationary period the loss of PP is not the same as if we are to see a 5% inflation for the long run in which one's PP is reduced by half in 14 years.

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If you like them and want more, you could buy them for your spouse, children, and grandchildren. And buy another $5k with your tax refund. Maybe you could stretch that to $10k if you file separately. (not tax advice).

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They are only state and local tax exempt.

"Is savings bond interest taxable? The interest that your savings bonds earn is subject to federal income tax, but not to state or local income tax any federal estate, gift, and excise taxes as well as any state estate or inheritance taxes."

https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_itaxconsider.htm

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