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Best performing assets against inflation

82 points by snird 5y ago

theodorewiles 5y ago
Not sure I agree with the real estate conclusion in this market. I think there is a lot of uncertainty on how real estate values will change post-COVID as how we use places for shopping, working, and travel change (or dont)
- runbathtime 5y ago
  Real estate might be the best play for the average joe. Where else can you borrow a ton of money at low interest rates for 30 years with a real asset (the house) as collateral? It is like a free call option, with government policies. If you overpay you can always turn in the key or get the bank to write down your loan to fair value for the home. You make money on the debt, paying back in dollars with lower purchasing power, you do not need the home price to go up.
  - dagw 5y ago
    Real estate might be the best play for the average joe. I agree with your general analysis, but I'm also seeing that it's becoming harder and harder for the average joe to get into the real estate market. Unless you can make a hefty down-payment banks just won't talk to you. The big driver of inequality going forwards is going to be between those who managed to get on the property ladder and those who didn't.
    - runbathtime 5y ago
      I think that will be a big topic that government will try to solve. I think they will offer policies that help inequality directly in housing, giving away homes to those that qualify, further pushing up home prices ultimately.
      - frockington1 5y ago
        As a home owner, I'm really hoping that the government gets involved in helping with first time buyer down payments. Each $1,000 of government assistance will be a ~$15,000 higher sale price. Would also benefit those renting out units as well as the overall market would surge upwards
    - twiddling 5y ago
      REITs are your friend.
      - dagw 5y ago
        You can't get a mortgage to invest in REITs. Also you can't live in your REIT investment, so you still have to pay rent. Of course if you have an investment portfolio adding an RETI is probably a good idea, but it's not really comparable to investing in actual real estate.
        twiddling 5y ago
        I can invest in a lot more rental markets and manage idiosyncratic risk. Plus I don't have to deal with maintenance issues with physical property upkeep. I have also invested in vehicles (private offerings) that fund residential construction especially in housing constrained markets. Very nice reliable returns
        dagw 5y ago
        All this is assuming you have liquid funds to invest or have some other access to credit. The only realistic shot your "average joe" has at any sort of reasonable leverage is getting a mortgage and buying some property. Obviously if you're already rich then you have lots of better options to become even richer (like the ones you've mentioned), but they're not really open to your "average joe", if for no other reason than that most of them require you to be an accredited investor or require a high minimum investment.
        mullingitover 5y ago
        Valid points, but also you don't have to pay maintenance expenses or property taxes on your REIT.
  - NhanH 5y ago
    How do you make money on the debt? Rent it out?
    - frockington1 5y ago
      If inflation hits 4% and your mortgage is 3.5% you would be making 0.5% a year off the mortgage interest + the tax deduction you get from it. If inflation picks up to 70s levels, current homeowners will have a great time assuming they do not have a variable rate
      - JumpCrisscross 5y ago
        > If inflation hits 4% and your mortgage is 3.5% you would be making 0.5% a year off the mortgage interest This ignores the rates-price and inflation-rates nexuses. When inflation goes up, ceteris paribus, rates rise. When rates rise, all else held equal, the price of leveraged assets like real estate falls. TL; DR this trade is an arbitrage only if you've perfectly hedged the price of your underlying asset, the house.
        frockington1 5y ago
        Agreed this is an overly simplified model. Another thing to keep in mind would be population dynamics. Are people moving out of the area the home is in (Chicago) or are people moving in (Nashville).
        runbathtime 5y ago
        The hedge is refinancing out any market appreciation, like a piggy bank, keeping debt high while interest rates are low, you can always hand back the key if it goes south.
- emodendroket 5y ago
  I saw an analysis by the LA Times showing that LA traffic was nearly at pre-pandemic levels already. I suspect most people will be going to the office at least part of the week still.
  - stadium 5y ago
    Similar for other cities. Also bus and train ridership is still down, and I believe a lot of the road traffic is single person rides that would have taken public transportation pre-pandemic.
- PragmaticPulp 5y ago
  I’m skeptical that there will be dramatic changes post-COVID. We’ve been bombarded with news stories and think pieces about how COVID is changing everything about how we work and how we live, but most people are excited to return to their pre-COVID normal life ASAP. There are scattered anecdotes about people using COVID to move out of big cities and take up simpler lives working remote, but I also have scattered anecdotes of people taking advantage of the situation to move to big cities and get high paying jobs due to the post-COVID job boom. Housing and rent prices are skyrocketing and lumber prices are up because demand for housing and new construction, including in big cities, continues to increase rapidly. The articles about how we were all going to flee bug cities and work remote jobs after COVID were premature.
  - dennisgorelik 5y ago
    > lumber prices are up Lumber futures fell 2x from $1670.9 peak (in 2021-05-07) down to $884.3 (2021-06-23): https://www.tradingview.com/symbols/CME-LBSN2021/ https://www.tradingview.com/symbols/CME-LBSN2021/
- mdtancsa 5y ago
  There is an assumption too for the long term that you will pick the right market and time it right. Things looked amazing in Buffalo, Cleveland and Detroit for places to invest if you bought in the 50s. Same with New York City. If you had to unload your property in the late 70s, it didnt seem like a great investment. If you could buy and hold in the 70s, and unload 2006, looks good :)
- Winsaucerer 5y ago
  The following is as I understand it, but I’m no expert. In Australia where house prices are at very high levels, a lot of that price is driven by the availability of cheap loans. Lower interest rates have increased the ability of people to service larger loans, so we Australians have borrowed and paid more for a home. Presumably an increase in inflation reduces how much money people can affordably borrow, and therefore also directly slows or even reverses real estate growth. Conversely, if wages also increase in an inflationary era, that increases affordability of loans. Overall, I have no idea what real estate would do with inflation and wage growth, but in the absence of wage growth I’d guess real estate values would plummet, at least in Australia.
devops000 5y ago
Many assets such as real estate, stocks, bitcoin are overvalued. So they can return to a fair value and make a loss against inflation.
- runbathtime 5y ago
  Agree, the question to ask is compared to what? Compared to gold, which hasn't had a run up like the other assets, comes to mind. What others?
  - slumdev 5y ago
    I own some (paper) gold because I think it's been neglected. The market and real estate have produced outsized returns for 20 years (even factoring in the 2008-9 recession), and investors haven't really gotten spooked. Popular stocks are still trading at 100+ (or even 1000+) P/E ratios, and everybody's kid sister is now a stock wiz. I don't know what it's going to take to scare retail investors out of stocks, but when it happens, metals will benefit.
    - swader999 5y ago
      You don't own it if you can't hold it.
      - slumdev 5y ago
        Fair enough. I have significantly more PSLV than GLD. I recognize that even the PSLV isn't sitting in my safe, but because it's in a retirement account, I don't have the option of taking physical delivery.
- nico_h 5y ago
  "How do bubbles burst?" Real estate prices are sky high, but what can bring them down? The taxes on corporations and the rich is sufficiently low that they can't spend all their money, and what is most safe for pension funds to invest in? What don't we make more of (with rare and expensive exceptions) ? Land!
kingsuper20 5y ago
'Best performing assets against inflation' ...here's a list of things that don't work.
Nick87633 5y ago
Lost me at lemonade stand "capital expenditure" being lemons... that's COGS, not capital.
- deleted 5y ago
  [deleted]
- dragontamer 5y ago
  I like the idea of the lemonade stand representing different parts of a business. COGS are the parts of a product that can be relatively easily tracked per unit. So lemons, water, sugar are your COGS (cost of goods sold). If you sell lemonade at $1, your revenue is $1 per lemonade bottle. If your COGS is $0.40, your gross profit is $0.60, also known as "gross margin", or a 60% margin (IIRC, I always kind of forget how these things are calculated) Operating profit gets trickier: you add in all the bits of your business that you're amortizing over every sale. If you have a $10,000 juicer that squeezes lemons for you, and you EXPECT the juicer to last for 1-million units of lemonade, that's $0.01 per lemonade, so you subtract that out of operating profits. This $10,000 juicer, is what Nick87633 calls "capital expenditure", or CapEx as it is sometimes known. You need to buy this to "start" the business. In theory, you can sell the juicer for a depreciated value if your business goes under. (Ex: If you sell 500-thousand lemonade and then go out of business, you could make the argument that you can sell the juicer for $5000 as your business goes bankrupt). As you can see, Operating Profit has a lot of "opinion" in it: you estimate the value of your equipment if it were sold and/or the cost of replacement if it were damaged. (Ex: hurricane wipes away your lemonade stand and juicer. How much will it cost to replace the juicer?)
wyager 5y ago
The author completely misunderstands the value proposition of both gold and Bitcoin. Neither of them is valuable because of “intrinsic value” - both derive approximately all of their value from monetization. If gold was only valuable for its physical uses, it would be worth a negligible fraction of its current value. Also, comparing the price of gold to the rate of inflation doesn’t make any sense. The derivative of the price of gold should be compared with the rate of inflation, or the price of gold vs some adjusted value of a dollar.
- Retric 5y ago
  37% of all gold minded each year is used in electronics despite it’s current price. Which means if gold stopped being used as a currency or jewelry it’s value would crash in the short term, but still remain high long term. In a very real way it’s inherently worth more than copper or steel. Though that only makes it valuable as a hedge not an investment.
  - 988747 5y ago
    And let's not forget jewellery - some people still like wearing gold rings or bracelets.
    - marvin 5y ago
      The demand for gold jewelry is in very large part due to its price and scarcity. You don't see people flaunting their cubic zirconia jewelry even though it's optically at least as nice as diamond.
  - koheripbal 5y ago
    Exactly, I would argue that gold having some meaningful value to anchor the price is what allows it to function as a means of exchange. Ideally though, we should use something else so that gold can be cheaper for electronics. Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover. Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality.
tester34 5y ago
>Let's say you have a lemonade stand, and your capital expenditure is mostly lemons. In the first year, you buy 1,000$ lemons to produce 1,100$ worth of lemonade that you sell. >That's a 10% margin on regular days. Next year, you can choose to reinvest and expand your business, buying 1,100$ worth of lemons to sell 1,210$ of lemonade. >This is an oversimplification Of course it is! haha, what the ... 10% margin on lemonade? I'd say that lemonade margin (in restaurant) is closer to something like 700-1000%
- akcreek 5y ago
  That would be markup, margin can't be over 100%.
  - tester34 5y ago
    thank you
howmayiannoyyou 5y ago
Inflation hysteria. Ask yourself how much of current inflation is speculative (eg. Blackrock buying single-family homes, Glencore buying copper, Zhongda Group buying aluminum). Now ask yourself what these folks are doing as they watch Fed reserve rates climb, reverse-repos skyrocket, PBOC/CCP order reduced commodity speculation, and 4 months of declining US home sales, falling lumber prices. The inflation shock is/was temporary and could well be followed by a deflationary shock if the powers that be overreach (as they usually do). Lead-times on goods remain long. This induced reversion to the mean won't happen overnight, but I believe it is well under way.
- deleted 5y ago
  [deleted]
- fny 5y ago
  So yes, there is a huge transitory supply shock that's inflationary. At the same time, there are structural labor and energy issues that in my view will contribute to longer term price strains but not of the 70s variety.
- yks 5y ago
  > Inflation hysteria. And it doesn’t help that there is a strong financial incentive in spreading inflation fears now.
  - AnimalMuppet 5y ago
    Do tell. What are the strong financial incentives, and who has them?
    - yks 5y ago
      Advertising cryptocurrency as a "hedge against the imminent inflation" helps the holders of a given cryptocurrency to increase the value of their holding.
      - AnimalMuppet 5y ago
tmoneyfish 5y ago
He spelled SaaS as SASS..?
- CountDrewku 5y ago
  Maybe he's really into CSS ?
belter 5y ago
The best performing assets used to be Lego: https://www.cnet.com/news/lego-bricks-outshine-gold-bars-as-investments-report-says/ https://www.cnet.com/news/lego-bricks-outshine-gold-bars-as-...
camjohnson26 5y ago
Highly recommend the book “When Money Dies” about hyperinflation in the Weimar Republic. It digs into how the inflation grew and its effects on real people. Those who illegally transferred their savings to foreign currency early did the best, but many long term savers had their entire life savings wiped out. Early in the process people were exuberant since the markets were rising and their paper net worth was increasing, so they were selling valuable assets like pianos for money that would quickly become worthless. Eventually the farmers became extremely powerful since they had the one thing everyone needed. Also worth mentioning that Bitcoin’s volatility makes it a poor inflation hedge, but this is for different reasons than the author of the article suggests. It’s more because the Bitcoin ecosystem is highly manipulated and it’s still unclear what a fair price for Bitcoin looks like. https://www.amazon.com/dp/1586489941/ref=cm_sw_r_cp_awdb_imm_0N66Y6F9M5WMFCB26D1D https://www.amazon.com/dp/1586489941/ref=cm_sw_r_cp_awdb_imm...
- nostrademons 5y ago
  > it’s still unclear what a fair price for Bitcoin looks like Note that if Bitcoin replaces the U.S. dollar as the global reserve currency (or even as a functioning currency), the fair price for Bitcoin is infinite. Dollars will be worthless; we'll be pricing everything in Bitcoin. We can get rough estimates of what price levels will be by dividing total $USD supply by total BTC supply: there are $20T USD within the M2 money supply, there will be a max of $21M BTC ever minted, so you'd expect 1 BTC = roughly $1M USD. A satoshi will be worth roughly 1 cent, so a Big Mac would be around 400 satoshi, a nice restaurant meal out would be maybe 5K satoshi, etc. Bitcoin's volatility is because it's not at all clear that the USD will be replaced as a currency, and even if it is, it's not clear that BTC will be the replacement. You can actually compute the probability that the market ascribes to complete monetary collapse from the ratio between BTC's actual market price to its predicted equilibrium price based on money supply, much like you can compute inflation expectations from the spread between TIPS and T-bills. Right now BTC is trading at about $30K, fair market value on a money-supply-parity basis is about $1M, so the market is assuming about 3% chance that the dollar will be replaced by Bitcoin.
- throw0101a 5y ago
  When Money Dies is on my to-read list, but haven't gotten to it yet. However, there's some interesting stuff available that may be of interest in this matter: > Weimar is often mentioned as if it were the only case of post WWI currency collapse. In fact, as the CATO working paper by Hanke and Krus (2012) points out, it was one of 6 cases: Germany, Austria, City of Danzig, Russia/USSR, Hongary Poland. > Now think about that – did 6 different governments, all within a 4 year time period, and all bordering each other and/or in the same post WWI region and intellectual/political climate (with the seeds of the some of the farthest right and farthest left regimes in all of history within them that would lead to WWII just ~18 years later)— > Did all of a sudden this little world region and precise time period and intellectual milieu decide to just start spending like crazy? At the same time? While the rest of the world did not? * https://clintballinger.wordpress.com/2021/01/12/the-myth-of-hyperinflation/ https://clintballinger.wordpress.com/2021/01/12/the-myth-of-... > The Weimar Republic is the most notable hyperinflation. But it was not the only case of hyperinflation that occurred in Europe at the time. In fact, several European nations were ravaged by the war, war reparations and regime changes that ensued. In the case of Weimar the country was already in a fragile state after Germany lost WWI. To add insult to this injury the allied nations demanded punitive war reparations resulting in foreign denominated debt. * https://www.pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon/ https://www.pragcap.com/hyperinflation-its-more-than-just-a-... > In this paper I will argue why the common misconception that “inflation is always and everywhere a monetary phenomenon” cannot be used to explain most historical hyperinflations. I will argue that “money printing” is often the response to exogenous and unusual events and not the direct cause of the hyperinflation. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102 In Germany, the argument goes, it the problem wasn't necessarily that printing money was the cause of inflation, but rather the printing of money was the effect of something else.
shpongled 5y ago
Not all government bonds are worthless against inflation! You can purchase up to $10k in Series I bonds every year that carry a fixed rate (currently 0) + a variable rate set by inflation (CPI) that is adjusted semi-annually. I bonds purchased right now are yielding 3.5% (due to recent CPI data) for the next 6 months. They are an excellent place to park some cash/emergency fund with some caveats (no redemption for 12 months, lose 3 months of interest if you redeem before holding for 5 years)
- Symmetry 5y ago
  The TIPS spread, the difference in price between regular and inflation protected bonds, is even a standard measure of the market's expectations of future inflation.
rsync 5y ago
Certain asset classes have inflated dramatically and may continue to do so. Further, we may indeed have a "blow off top" in inflation across all asset classes as policy makers desperately attempt to stave off deflation. For that reason it is very difficult to hedge properly against short and medium term inflation rates. Make no mistake, however - the world is in a massively deflationary state. Birth rates across the rich, global north have crashed - including the US, ex-immigration. The population of China will shrink by hundreds of millions over the next few decades. Further, it is the imperative of youth, globally, to pursue a "modern" life script of delaying and minimizing childbirth, etc. In addition to these very long term, basic drivers of inflation there are now new and interesting factors like work-from-home that serve to further minimize resource use. When people stay home to netflix instead of going out to a movie, that's not inflationary. Again, very difficult to gauge near-term (Don't Fight the Fed, etc.) but on a longer horizon (but within my own lifetime) I would expect to see significant deflation and/or wild economic gyrations stemming from desperate attempts to stave off said deflation.
- splithalf 5y ago
  “ or wild economic gyrations stemming from desperate attempts to stave off said deflation.” Seems certain as it’s already begun and once it has begun there’s nothing stopping it.
standardUser 5y ago
No mention of federal I Bonds, which would be a decent low risk investment if inflation actually does get high for the first time in 40 or so years. I guess TIPS work roughly the same way.
anm89 5y ago
> Unproductive assets like gold and commodities are not like Bitcoin for a simple reason: they have intrinsic, underlying value. There are industrial uses for gold I don't understand how this guy is going to claim that the value of gold is strongly based on its industrial utility with a straight face. My take-seriously-o-meter went from 60 to 0 on this one.

82 points by snird 5y ago

Not sure I agree with the real estate conclusion in this market. I think there is a lot of uncertainty on how real estate values will change post-COVID as how we use places for shopping, working, and travel change (or dont)

runbathtime 5y ago
Real estate might be the best play for the average joe. Where else can you borrow a ton of money at low interest rates for 30 years with a real asset (the house) as collateral? It is like a free call option, with government policies. If you overpay you can always turn in the key or get the bank to write down your loan to fair value for the home. You make money on the debt, paying back in dollars with lower purchasing power, you do not need the home price to go up.
- dagw 5y ago
  Real estate might be the best play for the average joe. I agree with your general analysis, but I'm also seeing that it's becoming harder and harder for the average joe to get into the real estate market. Unless you can make a hefty down-payment banks just won't talk to you. The big driver of inequality going forwards is going to be between those who managed to get on the property ladder and those who didn't.
  - runbathtime 5y ago
    I think that will be a big topic that government will try to solve. I think they will offer policies that help inequality directly in housing, giving away homes to those that qualify, further pushing up home prices ultimately.
    - frockington1 5y ago
      As a home owner, I'm really hoping that the government gets involved in helping with first time buyer down payments. Each $1,000 of government assistance will be a ~$15,000 higher sale price. Would also benefit those renting out units as well as the overall market would surge upwards
  - twiddling 5y ago
    REITs are your friend.
    - dagw 5y ago
      You can't get a mortgage to invest in REITs. Also you can't live in your REIT investment, so you still have to pay rent. Of course if you have an investment portfolio adding an RETI is probably a good idea, but it's not really comparable to investing in actual real estate.
      - twiddling 5y ago
        I can invest in a lot more rental markets and manage idiosyncratic risk. Plus I don't have to deal with maintenance issues with physical property upkeep. I have also invested in vehicles (private offerings) that fund residential construction especially in housing constrained markets. Very nice reliable returns
        dagw 5y ago
        All this is assuming you have liquid funds to invest or have some other access to credit. The only realistic shot your "average joe" has at any sort of reasonable leverage is getting a mortgage and buying some property. Obviously if you're already rich then you have lots of better options to become even richer (like the ones you've mentioned), but they're not really open to your "average joe", if for no other reason than that most of them require you to be an accredited investor or require a high minimum investment.
      - mullingitover 5y ago
        Valid points, but also you don't have to pay maintenance expenses or property taxes on your REIT.
- NhanH 5y ago
  How do you make money on the debt? Rent it out?
  - frockington1 5y ago
    If inflation hits 4% and your mortgage is 3.5% you would be making 0.5% a year off the mortgage interest + the tax deduction you get from it. If inflation picks up to 70s levels, current homeowners will have a great time assuming they do not have a variable rate
    - JumpCrisscross 5y ago
      > If inflation hits 4% and your mortgage is 3.5% you would be making 0.5% a year off the mortgage interest This ignores the rates-price and inflation-rates nexuses. When inflation goes up, ceteris paribus, rates rise. When rates rise, all else held equal, the price of leveraged assets like real estate falls. TL; DR this trade is an arbitrage only if you've perfectly hedged the price of your underlying asset, the house.
      - frockington1 5y ago
        Agreed this is an overly simplified model. Another thing to keep in mind would be population dynamics. Are people moving out of the area the home is in (Chicago) or are people moving in (Nashville).
      - runbathtime 5y ago
        The hedge is refinancing out any market appreciation, like a piggy bank, keeping debt high while interest rates are low, you can always hand back the key if it goes south.
emodendroket 5y ago
I saw an analysis by the LA Times showing that LA traffic was nearly at pre-pandemic levels already. I suspect most people will be going to the office at least part of the week still.
- stadium 5y ago
  Similar for other cities. Also bus and train ridership is still down, and I believe a lot of the road traffic is single person rides that would have taken public transportation pre-pandemic.
PragmaticPulp 5y ago
I’m skeptical that there will be dramatic changes post-COVID. We’ve been bombarded with news stories and think pieces about how COVID is changing everything about how we work and how we live, but most people are excited to return to their pre-COVID normal life ASAP. There are scattered anecdotes about people using COVID to move out of big cities and take up simpler lives working remote, but I also have scattered anecdotes of people taking advantage of the situation to move to big cities and get high paying jobs due to the post-COVID job boom. Housing and rent prices are skyrocketing and lumber prices are up because demand for housing and new construction, including in big cities, continues to increase rapidly. The articles about how we were all going to flee bug cities and work remote jobs after COVID were premature.
- dennisgorelik 5y ago
  > lumber prices are up Lumber futures fell 2x from $1670.9 peak (in 2021-05-07) down to $884.3 (2021-06-23): https://www.tradingview.com/symbols/CME-LBSN2021/ https://www.tradingview.com/symbols/CME-LBSN2021/
mdtancsa 5y ago
There is an assumption too for the long term that you will pick the right market and time it right. Things looked amazing in Buffalo, Cleveland and Detroit for places to invest if you bought in the 50s. Same with New York City. If you had to unload your property in the late 70s, it didnt seem like a great investment. If you could buy and hold in the 70s, and unload 2006, looks good :)
Winsaucerer 5y ago
The following is as I understand it, but I’m no expert. In Australia where house prices are at very high levels, a lot of that price is driven by the availability of cheap loans. Lower interest rates have increased the ability of people to service larger loans, so we Australians have borrowed and paid more for a home. Presumably an increase in inflation reduces how much money people can affordably borrow, and therefore also directly slows or even reverses real estate growth. Conversely, if wages also increase in an inflationary era, that increases affordability of loans. Overall, I have no idea what real estate would do with inflation and wage growth, but in the absence of wage growth I’d guess real estate values would plummet, at least in Australia.

devops000 5y ago

Many assets such as real estate, stocks, bitcoin are overvalued. So they can return to a fair value and make a loss against inflation.

runbathtime 5y ago
Agree, the question to ask is compared to what? Compared to gold, which hasn't had a run up like the other assets, comes to mind. What others?
- slumdev 5y ago
  I own some (paper) gold because I think it's been neglected. The market and real estate have produced outsized returns for 20 years (even factoring in the 2008-9 recession), and investors haven't really gotten spooked. Popular stocks are still trading at 100+ (or even 1000+) P/E ratios, and everybody's kid sister is now a stock wiz. I don't know what it's going to take to scare retail investors out of stocks, but when it happens, metals will benefit.
  - swader999 5y ago
    You don't own it if you can't hold it.
    - slumdev 5y ago
      Fair enough. I have significantly more PSLV than GLD. I recognize that even the PSLV isn't sitting in my safe, but because it's in a retirement account, I don't have the option of taking physical delivery.
nico_h 5y ago
"How do bubbles burst?" Real estate prices are sky high, but what can bring them down? The taxes on corporations and the rich is sufficiently low that they can't spend all their money, and what is most safe for pension funds to invest in? What don't we make more of (with rare and expensive exceptions) ? Land!

kingsuper20 5y ago

'Best performing assets against inflation' ...here's a list of things that don't work.

Nick87633 5y ago

Lost me at lemonade stand "capital expenditure" being lemons... that's COGS, not capital.

deleted 5y ago
[deleted]
dragontamer 5y ago
I like the idea of the lemonade stand representing different parts of a business. COGS are the parts of a product that can be relatively easily tracked per unit. So lemons, water, sugar are your COGS (cost of goods sold). If you sell lemonade at $1, your revenue is $1 per lemonade bottle. If your COGS is $0.40, your gross profit is $0.60, also known as "gross margin", or a 60% margin (IIRC, I always kind of forget how these things are calculated) Operating profit gets trickier: you add in all the bits of your business that you're amortizing over every sale. If you have a $10,000 juicer that squeezes lemons for you, and you EXPECT the juicer to last for 1-million units of lemonade, that's $0.01 per lemonade, so you subtract that out of operating profits. This $10,000 juicer, is what Nick87633 calls "capital expenditure", or CapEx as it is sometimes known. You need to buy this to "start" the business. In theory, you can sell the juicer for a depreciated value if your business goes under. (Ex: If you sell 500-thousand lemonade and then go out of business, you could make the argument that you can sell the juicer for $5000 as your business goes bankrupt). As you can see, Operating Profit has a lot of "opinion" in it: you estimate the value of your equipment if it were sold and/or the cost of replacement if it were damaged. (Ex: hurricane wipes away your lemonade stand and juicer. How much will it cost to replace the juicer?)

wyager 5y ago

The author completely misunderstands the value proposition of both gold and Bitcoin. Neither of them is valuable because of “intrinsic value” - both derive approximately all of their value from monetization. If gold was only valuable for its physical uses, it would be worth a negligible fraction of its current value. Also, comparing the price of gold to the rate of inflation doesn’t make any sense. The derivative of the price of gold should be compared with the rate of inflation, or the price of gold vs some adjusted value of a dollar.

Retric 5y ago
37% of all gold minded each year is used in electronics despite it’s current price. Which means if gold stopped being used as a currency or jewelry it’s value would crash in the short term, but still remain high long term. In a very real way it’s inherently worth more than copper or steel. Though that only makes it valuable as a hedge not an investment.
- 988747 5y ago
  And let's not forget jewellery - some people still like wearing gold rings or bracelets.
  - marvin 5y ago
    The demand for gold jewelry is in very large part due to its price and scarcity. You don't see people flaunting their cubic zirconia jewelry even though it's optically at least as nice as diamond.
- koheripbal 5y ago
  Exactly, I would argue that gold having some meaningful value to anchor the price is what allows it to function as a means of exchange. Ideally though, we should use something else so that gold can be cheaper for electronics. Bitcoin is an entirely different creature with absolutely zero intrinsic value, and only successful due to the momentum of being the first mover. Of all the major cryptos in distribution, Bitcoin is one of the least advanced and most limited in functionality.

tester34 5y ago

>Let's say you have a lemonade stand, and your capital expenditure is mostly lemons. In the first year, you buy 1,000$ lemons to produce 1,100$ worth of lemonade that you sell. >That's a 10% margin on regular days. Next year, you can choose to reinvest and expand your business, buying 1,100$ worth of lemons to sell 1,210$ of lemonade. >This is an oversimplification Of course it is! haha, what the ... 10% margin on lemonade? I'd say that lemonade margin (in restaurant) is closer to something like 700-1000%

akcreek 5y ago
That would be markup, margin can't be over 100%.
- tester34 5y ago
  thank you

howmayiannoyyou 5y ago

Inflation hysteria. Ask yourself how much of current inflation is speculative (eg. Blackrock buying single-family homes, Glencore buying copper, Zhongda Group buying aluminum). Now ask yourself what these folks are doing as they watch Fed reserve rates climb, reverse-repos skyrocket, PBOC/CCP order reduced commodity speculation, and 4 months of declining US home sales, falling lumber prices. The inflation shock is/was temporary and could well be followed by a deflationary shock if the powers that be overreach (as they usually do). Lead-times on goods remain long. This induced reversion to the mean won't happen overnight, but I believe it is well under way.

deleted 5y ago
[deleted]
fny 5y ago
So yes, there is a huge transitory supply shock that's inflationary. At the same time, there are structural labor and energy issues that in my view will contribute to longer term price strains but not of the 70s variety.
yks 5y ago
> Inflation hysteria. And it doesn’t help that there is a strong financial incentive in spreading inflation fears now.
- AnimalMuppet 5y ago
  Do tell. What are the strong financial incentives, and who has them?
  - yks 5y ago
    Advertising cryptocurrency as a "hedge against the imminent inflation" helps the holders of a given cryptocurrency to increase the value of their holding.
    - AnimalMuppet 5y ago

tmoneyfish 5y ago

He spelled SaaS as SASS..?

CountDrewku 5y ago
Maybe he's really into CSS ?

belter 5y ago

The best performing assets used to be Lego: https://www.cnet.com/news/lego-bricks-outshine-gold-bars-as-investments-report-says/ https://www.cnet.com/news/lego-bricks-outshine-gold-bars-as-...

camjohnson26 5y ago

Highly recommend the book “When Money Dies” about hyperinflation in the Weimar Republic. It digs into how the inflation grew and its effects on real people. Those who illegally transferred their savings to foreign currency early did the best, but many long term savers had their entire life savings wiped out. Early in the process people were exuberant since the markets were rising and their paper net worth was increasing, so they were selling valuable assets like pianos for money that would quickly become worthless. Eventually the farmers became extremely powerful since they had the one thing everyone needed. Also worth mentioning that Bitcoin’s volatility makes it a poor inflation hedge, but this is for different reasons than the author of the article suggests. It’s more because the Bitcoin ecosystem is highly manipulated and it’s still unclear what a fair price for Bitcoin looks like. https://www.amazon.com/dp/1586489941/ref=cm_sw_r_cp_awdb_imm_0N66Y6F9M5WMFCB26D1D https://www.amazon.com/dp/1586489941/ref=cm_sw_r_cp_awdb_imm...

nostrademons 5y ago
> it’s still unclear what a fair price for Bitcoin looks like Note that if Bitcoin replaces the U.S. dollar as the global reserve currency (or even as a functioning currency), the fair price for Bitcoin is infinite. Dollars will be worthless; we'll be pricing everything in Bitcoin. We can get rough estimates of what price levels will be by dividing total $USD supply by total BTC supply: there are $20T USD within the M2 money supply, there will be a max of $21M BTC ever minted, so you'd expect 1 BTC = roughly $1M USD. A satoshi will be worth roughly 1 cent, so a Big Mac would be around 400 satoshi, a nice restaurant meal out would be maybe 5K satoshi, etc. Bitcoin's volatility is because it's not at all clear that the USD will be replaced as a currency, and even if it is, it's not clear that BTC will be the replacement. You can actually compute the probability that the market ascribes to complete monetary collapse from the ratio between BTC's actual market price to its predicted equilibrium price based on money supply, much like you can compute inflation expectations from the spread between TIPS and T-bills. Right now BTC is trading at about $30K, fair market value on a money-supply-parity basis is about $1M, so the market is assuming about 3% chance that the dollar will be replaced by Bitcoin.
throw0101a 5y ago
When Money Dies is on my to-read list, but haven't gotten to it yet. However, there's some interesting stuff available that may be of interest in this matter: > Weimar is often mentioned as if it were the only case of post WWI currency collapse. In fact, as the CATO working paper by Hanke and Krus (2012) points out, it was one of 6 cases: Germany, Austria, City of Danzig, Russia/USSR, Hongary Poland. > Now think about that – did 6 different governments, all within a 4 year time period, and all bordering each other and/or in the same post WWI region and intellectual/political climate (with the seeds of the some of the farthest right and farthest left regimes in all of history within them that would lead to WWII just ~18 years later)— > Did all of a sudden this little world region and precise time period and intellectual milieu decide to just start spending like crazy? At the same time? While the rest of the world did not? * https://clintballinger.wordpress.com/2021/01/12/the-myth-of-hyperinflation/ https://clintballinger.wordpress.com/2021/01/12/the-myth-of-... > The Weimar Republic is the most notable hyperinflation. But it was not the only case of hyperinflation that occurred in Europe at the time. In fact, several European nations were ravaged by the war, war reparations and regime changes that ensued. In the case of Weimar the country was already in a fragile state after Germany lost WWI. To add insult to this injury the allied nations demanded punitive war reparations resulting in foreign denominated debt. * https://www.pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon/ https://www.pragcap.com/hyperinflation-its-more-than-just-a-... > In this paper I will argue why the common misconception that “inflation is always and everywhere a monetary phenomenon” cannot be used to explain most historical hyperinflations. I will argue that “money printing” is often the response to exogenous and unusual events and not the direct cause of the hyperinflation. * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102 In Germany, the argument goes, it the problem wasn't necessarily that printing money was the cause of inflation, but rather the printing of money was the effect of something else.

shpongled 5y ago

Not all government bonds are worthless against inflation! You can purchase up to $10k in Series I bonds every year that carry a fixed rate (currently 0) + a variable rate set by inflation (CPI) that is adjusted semi-annually. I bonds purchased right now are yielding 3.5% (due to recent CPI data) for the next 6 months. They are an excellent place to park some cash/emergency fund with some caveats (no redemption for 12 months, lose 3 months of interest if you redeem before holding for 5 years)

Symmetry 5y ago
The TIPS spread, the difference in price between regular and inflation protected bonds, is even a standard measure of the market's expectations of future inflation.

rsync 5y ago

Certain asset classes have inflated dramatically and may continue to do so. Further, we may indeed have a "blow off top" in inflation across all asset classes as policy makers desperately attempt to stave off deflation. For that reason it is very difficult to hedge properly against short and medium term inflation rates. Make no mistake, however - the world is in a massively deflationary state. Birth rates across the rich, global north have crashed - including the US, ex-immigration. The population of China will shrink by hundreds of millions over the next few decades. Further, it is the imperative of youth, globally, to pursue a "modern" life script of delaying and minimizing childbirth, etc. In addition to these very long term, basic drivers of inflation there are now new and interesting factors like work-from-home that serve to further minimize resource use. When people stay home to netflix instead of going out to a movie, that's not inflationary. Again, very difficult to gauge near-term (Don't Fight the Fed, etc.) but on a longer horizon (but within my own lifetime) I would expect to see significant deflation and/or wild economic gyrations stemming from desperate attempts to stave off said deflation.

splithalf 5y ago
“ or wild economic gyrations stemming from desperate attempts to stave off said deflation.” Seems certain as it’s already begun and once it has begun there’s nothing stopping it.

standardUser 5y ago

No mention of federal I Bonds, which would be a decent low risk investment if inflation actually does get high for the first time in 40 or so years. I guess TIPS work roughly the same way.

anm89 5y ago

> Unproductive assets like gold and commodities are not like Bitcoin for a simple reason: they have intrinsic, underlying value. There are industrial uses for gold I don't understand how this guy is going to claim that the value of gold is strongly based on its industrial utility with a straight face. My take-seriously-o-meter went from 60 to 0 on this one.