Many investors are wondering what the Fed’s welcoming of slightly higher inflation will mean for their investments. Theoretically, it could mean a weaker dollar. Indeed, the dollar is feeling the pressure in recent days. While we can handle a weaker dollar in the near-term, the long-term effect of a weaker dollar is disastrous for traditional savers…since the value of the dollars themselves decline over time. Inflation can take on a life of its own…as, Former Fed Chair Paul Volker knew well. He fought inflation head-on in the late 1970s with a series of interest rate hikes that proved challenging for our economy but, were much needed.
The danger is that inflationary pressures pick up speed before the Central Bank can intervene…and, thus, in an attempt to hedge their portfolios and prevent the devaluation of their savings… many investors are seeking diversification into assets that will either benefit from a weaker dollar, or not be as heavily impacted. Hoarding your cash under your mattress is definitely not an option (not that it ever was!) Instead, the smart money is looking to the following asset classes to hedge themselves against a lower dollar:
— Stocks. Equity markets will likely see a lift from this new policy so, be prepared to invest your money in stocks. We’ve already seen the effects of record low interest rates for over a decade…record high stock prices. As such, the expectation is for additional equity value appreciation.
— Real Estate. In an inflationary environment, you want to OWN your home. Think about it, whatever you borrow from the bank should, theoretically, diminish in time if the Fed ignites inflation. You’ll be like our grandparents who said, “Do you know I built this house and bought this land, all in for $7,000?”
— Gold and other Commodities. When currencies become worth less, hard assets like gold and other commodities typically go up in value. So, with an expected decline in the U.S. dollar, gold and commodities should move up.
— Currencies. Look around the world, what Central Bank isn’t doing what Powell is? Are there any fiscally responsible countries and governments? If so, it may be worth buying up some of that country’s currency, because, relative to the dollar… it could appreciate.
— Crypto Currency. This could have gone under other currencies, but given that there’s NO Central Bank or country-specific political risk you need to focus on in Cryptos, it was worth a column onto itself. The technology behind cryptos is significant but, the technology (and changing world) combined with the significance of a product free from Central Bank interference is pretty powerful.
Bottomline: Jerome Powell is going out on a limb to force people into different investments. Let’s hope Powell’s strategy doesn’t shortchange the everyday Americans that want and need to save for their future.