Are You Prepared For the Coming Wave of Inflation?

• Tweet
• Pin It

We all knew it was bound to happen sooner or later.

After all, the U.S. government has been dropping 747-sized bombs of cash on this country for 5 years now.  And massive amounts of debt coupled with massive amounts of monetary supply equal one thing and one thing only . . . inflation.  This is not a debate.  It’s a fact.

As investors, it is critical to understand where we are in an inflationary or deflationary environment.

Why?

Because the strategies that work in one environment will get your portfolio killed in the other.

During deflation, cash is king.  During times of inflation, cash is trash.

Deflation increases the value of your cash, because it causes everything else to go down in value.  For example, real estate has been in full-on deflation mode for the past few years and still showing signs of struggling to regain firm footing.  If you had $1,000,000 in cash sitting in the bank for the past 5 years earning 0% interest – guess what?  Your cash actually increased in buying power for real estate.  Many properties are off 40% to 50% from their highs.  For example, if there was a property you liked in 2006 that was $1 million, today it’s probably trying to be sold for $600,000.  This means your cash increased in value in relation to real estate.

However during inflation, the opposite is true.  Inflationary times bring hikes in real estate prices.  A $500,000 house can turn into a $1,000,000 house quickly during extreme inflation.  Your cash is “trash” during these times, as it loses purchasing power each and every day.

Well, get ready.  Cash is about to be trash.

Inflation, once it rears its ugly head, is very tough to tame.  A new trend in inflation can end up lasting for years, even for the better part of a decade.

So how do we know when it starts?

The good news is, that’s easy.

All you have to do is look at the 30 year treasury bonds.

Bonds work like this – they move to the inverse of interest rates.  As bond prices go up, long term interest rates are driven down.  When long term rates are moving lower, this is a deflationary force.  However, when long term rates bounce and start heading higher, then inflation starts to take hold.

Bonds have been trading near their highs at the 144 level over the past few months.  As I’m writing this, they have rolled over and are trading near 137.  This is the first serious sell off in a long time.  Although we haven’t broken major key support levels yet, we have taken out short term support, and the weekly charts are rolling over.  This means that more selling pressure is around the corner.

And remember, as bonds sell off, it means long term interest rates are headed higher.  And the secret to this is as follows: Once interest rates start a new trend, that trend tends to last for 8 to 10 years.

This means it would be the start of a 10 year move in higher interest rates and inflation.

This isn’t some temporary thing.

This is a major trend reversal – the type of move where fortunes can be made.  And for those who aren’t aware of this – it’s the type of thing that causes the unprepared to get wiped out.

One of the easiest ways to participate in this move is to buy TBT, which is an Exchange Traded Fund that trades in the direction of long term interest rates.

In other words, if we expect long term rates to move high, TBT will move higher as well.

The stock is currently trading at $20.45.  I like it at these levels and I’m getting in with a stop near support at $17.  For a target, I’m leaving it “open” for now.  For a potential big move, the best thing you can do is get into a position, figure out how much you are willing to risk, place a stop loss, and then do nothing.  Let the upside take care of itself.

For the past 5 years, holding onto your cash hasn’t yielded great returns, and for real estate, now is the time to buy.  But as inflation ramps up, holding your cash will be very painful.

Successful investing,

John Frederick Carter

facebook   twitter   linkedin   reddit   email