What’s the correct diversification for high inflation?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: What’s the correct diversification for hyperinflation?

Post by 000 »

Scott S wrote: Wed Mar 31, 2021 8:38 pm Check Corsair's post before yours...
Sorry, you'll have to be more specific.

Ctrl-F GameStop shows your post as the first.
User avatar
Corsair
Posts: 584
Joined: Mon Oct 21, 2019 9:57 am
Location: USA

Re: What’s the correct diversification for hyperinflation?

Post by Corsair »

000 wrote: Wed Mar 31, 2021 8:52 pm
Scott S wrote: Wed Mar 31, 2021 8:38 pm Check Corsair's post before yours...
Sorry, you'll have to be more specific.

Ctrl-F GameStop shows your post as the first.
It’s in the image I posted a few posts back.
All posts are my own opinions and are not financial advice.
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: What’s the correct diversification for hyperinflation?

Post by 000 »

Corsair wrote: Wed Mar 31, 2021 9:07 pm It’s in the image I posted a few posts back.
Thanks. That image didn't show for me (for those wondering, I found the link by quoting the post to see the text).

I'm not sure why Scott's takeaway from that image was GME and BTC when the main point of the image was various industrial / agricultural commidites are up 21% - 145% despite CPI being up 1%.
User avatar
Scott S
Posts: 1937
Joined: Mon Nov 24, 2008 2:28 am
Location: building my position

Re: What’s the correct diversification for hyperinflation?

Post by Scott S »

000 wrote: Wed Mar 31, 2021 9:10 pm
Corsair wrote: Wed Mar 31, 2021 9:07 pm It’s in the image I posted a few posts back.
Thanks. That image didn't show for me (for those wondering, I found the link by quoting the post to see the text).

I'm not sure why Scott's takeaway from that image was GME and BTC when the main point of the image was various industrial / agricultural commidites are up 21% - 145% despite CPI being up 1%.
My point is that if you're going to make a case about CPI being inaccurate, it's nonsense to include things that aren't normal everyday expenses.
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: What’s the correct diversification for hyperinflation?

Post by 000 »

Scott S wrote: Wed Mar 31, 2021 9:15 pm My point is that if you're going to make a case about CPI being inaccurate, it's nonsense to include things that aren't normal everyday expenses.
I think it's a greater nonsense to pretend that listing one or two irrelevant things on a list of 20 relevant things means inflation isn't real. It amazes me the cognitive hoops through which people will jump to rationalize their belief inflation doesn't exist.
User avatar
Scott S
Posts: 1937
Joined: Mon Nov 24, 2008 2:28 am
Location: building my position

Re: What’s the correct diversification for hyperinflation?

Post by Scott S »

000 wrote: Wed Mar 31, 2021 9:19 pm
Scott S wrote: Wed Mar 31, 2021 9:15 pm My point is that if you're going to make a case about CPI being inaccurate, it's nonsense to include things that aren't normal everyday expenses.
I think it's a greater nonsense to pretend that listing one or two irrelevant things on a list of 20 relevant things means inflation isn't real. It amazes me the cognitive hoops through which people will jump to rationalize their belief inflation doesn't exist.
Please show me where I said that. I'm all for a reasonable discussion about the extent to which inflation may be happening.
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: What’s the correct diversification for hyperinflation?

Post by 000 »

Scott S wrote: Wed Mar 31, 2021 9:23 pm Please show me where I said that. I'm all for a reasonable discussion about the extent to which inflation may be happening.
Sorry, that's what I thought you meant by criticizing the two things offered for reference / scale and omitting the other twenty things in that chart.

So, with that out of the way, do you have a comment on industrial / ag commodities up >20%, housing and wages up many multiples of CPI, and CPI being 1%?
User avatar
Scott S
Posts: 1937
Joined: Mon Nov 24, 2008 2:28 am
Location: building my position

Re: What’s the correct diversification for hyperinflation?

Post by Scott S »

000 wrote: Wed Mar 31, 2021 9:40 pm
Scott S wrote: Wed Mar 31, 2021 9:23 pmPlease show me where I said that. I'm all for a reasonable discussion about the extent to which inflation may be happening.
Sorry, that's what I thought you meant by criticizing the two things offered for reference / scale and omitting the other twenty things in that chart.

So, with that out of the way, do you have a comment on industrial / ag commodities up >20%, housing and wages up many multiples of CPI, and CPI being 1%?
I'm willing to accept temporary supply chain disruptions for many of the price spikes, like steel and lumber. It's well-documented that supply isn't keeping up with demand in the housing market. Remember that CPI is computed from a wide range of prices, some of which have gone down (likely also temporarily) in the last year. Of course it doesn't serve a tinfoil hat "the government is hiding inflation" graphic to list anything that has gone down! ;)

I wouldn't be surprised if CPI comes up from it's current 1.7% as demand for all things roars back. Hyperinflation? Doubt it.
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: What’s the correct diversification for hyperinflation?

Post by JoMoney »

2 Filet-O-Fish sandwiches is $6 where I am now
A year ago it was 2-for-$5
That's a 20% increase :shock: maybe not "hyperinflation" but that's something...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
HomerJ
Posts: 21282
Joined: Fri Jun 06, 2008 12:50 pm

Re: What’s the correct diversification for hyperinflation?

Post by HomerJ »

JoMoney wrote: Wed Mar 31, 2021 10:16 pm 2 Filet-O-Fish sandwiches is $6 where I am now
A year ago it was 2-for-$5
That's a 20% increase :shock: maybe not "hyperinflation" but that's something...
On the other hand, I got a Wendy's Biggie Bag for $5 the other day and that seemed like a heck of deal.

I'm still finding Coca-Cola at bargain prices too. Heck, even Bud Light is cheaper than it was last year.

(and have you seen TV prices?)
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
calwatch
Posts: 1447
Joined: Wed Oct 02, 2013 1:48 am

Re: What’s the correct diversification for hyperinflation?

Post by calwatch »

Perhaps these are famous last words, but diversifying for hyperinflation is like diversifying for nuclear war - especially in the US context where the US is still one of the top economies of the world and will likely never lose one of the top spots in my lifetime. I'm not going to worry about doing slightly better than the other person in this scenario. For a 20-30% annual inflation period, which is more likely, I would probably rely on my gold stash and bankable skills.
User avatar
Topic Author
thethinker
Posts: 381
Joined: Sun Mar 02, 2014 8:15 am

Re: What’s the correct diversification for hyperinflation?

Post by thethinker »

watchnerd wrote: Mon Mar 29, 2021 10:48 am
thethinker wrote: Mon Mar 29, 2021 7:39 am I suspect many here have a version of the 3 fund portfolio. Are there any specific tilts or alternations to this portfolio which would help reduce risk in an environment of United States hyperinflation?
Do you really mean hyper inflation (Weimar Germany, Zimbabwe)?

Or are you just asking about 1970s style "high inflation"?
I misspoke. My question should have asked about high inflation. The kind of inflation which might take place as a result of money printing to pay debt. I’ll try to change my original post.
User avatar
HanSolo
Posts: 2313
Joined: Thu Jul 19, 2012 3:18 am

Re: What’s the correct diversification for hyperinflation?

Post by HanSolo »

thethinker wrote: Thu Apr 01, 2021 12:55 pm I misspoke. My question should have asked about high inflation. The kind of inflation which might take place as a result of money printing to pay debt. I’ll try to change my original post.
I think it may also be a good idea to clarify what one means by "money printing". While I'm aware that this term is used in the popular media to describe what the Fed is doing now, I think there's a difference between having something on the other side of the balance sheet vs. not. There ought to be two different terms for the two different things, because I think the effects are different, and therefore the response on the part of investors should be different.

In any case, I'd say the first response you got is what reflects my thinking on your question:
Ramjet wrote: Mon Mar 29, 2021 7:41 am It has to be gold, right? Are you familiar with TIPS? Maybe you are a candidate for the Permanent Portfolio or the Golden Butterfly
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: What’s the correct diversification for hyperinflation?

Post by Robot Monster »

Pursuing inflation protection with commodities — Higher inflation may come sooner than many asset allocators expect. While value-oriented equities may provide some protection, commodities (excluding precious metals) have historically been the most inflation-sensitive asset class.
source
BJJ_GUY
Posts: 882
Joined: Wed Mar 13, 2019 7:45 am

Re: What’s the correct diversification for hyperinflation?

Post by BJJ_GUY »

Scott S wrote: Wed Mar 31, 2021 10:05 pm
000 wrote: Wed Mar 31, 2021 9:40 pm
Scott S wrote: Wed Mar 31, 2021 9:23 pmPlease show me where I said that. I'm all for a reasonable discussion about the extent to which inflation may be happening.
Sorry, that's what I thought you meant by criticizing the two things offered for reference / scale and omitting the other twenty things in that chart.

So, with that out of the way, do you have a comment on industrial / ag commodities up >20%, housing and wages up many multiples of CPI, and CPI being 1%?
I'm willing to accept temporary supply chain disruptions for many of the price spikes, like steel and lumber. It's well-documented that supply isn't keeping up with demand in the housing market. Remember that CPI is computed from a wide range of prices, some of which have gone down (likely also temporarily) in the last year. Of course it doesn't serve a tinfoil hat "the government is hiding inflation" graphic to list anything that has gone down! ;)

I wouldn't be surprised if CPI comes up from it's current 1.7% as demand for all things roars back. Hyperinflation? Doubt it.
I wouldn't use the absolute phraseology 'the government is hiding inflation' but I would say they are pretty indisputably manipulating it. Now, if you want to say they are doing so responsibly and in good faith, then that is probably where the debate would be most appropriate. What is factual is that CPI has been altered in construct and will continue to be adjusted -- and materially influenced at times, when they substitute certain goods used in the methodology.

I also think it's telling that a lot of the very best investors in the world have long criticized CPI-U, which is one of the reasons many of the top endowments and foundations (and other large allocators) ultimately soured on the efficacy of TIPS. I'm not saying CPI isn't going to be directionally accurate, at least most of the time, especially when there is traction at some point, but I don't think it's saying something incredibly controversial to point out that it's flawed at a minimum. And yes, there is certainly the more draconian view everyone should at least acknowledge as a greater than 0% chance that the government does in fact (or already is) manipulating the calculation for the wrong reasons -- and it's prudent to at least understand why they might have motivation to act in bad faith.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

Robot Monster wrote: Thu Apr 01, 2021 2:22 pm
Pursuing inflation protection with commodities — Higher inflation may come sooner than many asset allocators expect. While value-oriented equities may provide some protection, commodities (excluding precious metals) have historically been the most inflation-sensitive asset class.
source
DB2 wrote: Mon Mar 29, 2021 4:02 pm A commodity index fund (I have no idea about these, but I think there is a futures component to them?) would be an option along with precious metals and those mining companies, and some international equity holdings - especially emerging markets - is one guess to diversify against such a situation.
Commodities get pitched a lot as inflation hedges, but their recent track record vs inflation over recent decades has been one of the worst compared to other assets.

The green line is the Goldman Sachs Commodity index.

Image
In the exhibit we also include commodities, which are sometimes hawked as a hedge against inflation; as we can see, they failed to deliver on that count in a spectacular fashion. (In fairness, the S&P Goldman Sachs Commodity Index we are using is dominated by energy exposure, which has been extraordinarily volatile over the past two decades).
Source

https://www.morningstar.com/articles/80 ... -delivered

Full disclosure:

I held the PIMCO commodity futures fund during the spiky green bull commodities run from about 2002-2009.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
Scott S
Posts: 1937
Joined: Mon Nov 24, 2008 2:28 am
Location: building my position

Re: What’s the correct diversification for hyperinflation?

Post by Scott S »

BJJ_GUY wrote: Thu Apr 01, 2021 8:18 pmI wouldn't use the absolute phraseology 'the government is hiding inflation' but I would say they are pretty indisputably manipulating it. Now, if you want to say they are doing so responsibly and in good faith, then that is probably where the debate would be most appropriate. What is factual is that CPI has been altered in construct and will continue to be adjusted -- and materially influenced at times, when they substitute certain goods used in the methodology.

I also think it's telling that a lot of the very best investors in the world have long criticized CPI-U, which is one of the reasons many of the top endowments and foundations (and other large allocators) ultimately soured on the efficacy of TIPS. I'm not saying CPI isn't going to be directionally accurate, at least most of the time, especially when there is traction at some point, but I don't think it's saying something incredibly controversial to point out that it's flawed at a minimum. And yes, there is certainly the more draconian view everyone should at least acknowledge as a greater than 0% chance that the government does in fact (or already is) manipulating the calculation for the wrong reasons -- and it's prudent to at least understand why they might have motivation to act in bad faith.
A little healthy skepticism about these things is good. Like scrutinizing what "unemployment" means in an official sense. It's very possible that government departments may find ways to make the numbers look a little better -- it's human nature for them to try!

Once again, all I'm saying is that it doesn't serve the discussion to throw in a bunch of wacky stuff that normal people don't consume on a regular basis, or to omit valid things that don't help one's case. :)
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for high inflation?

Post by watchnerd »

....and now we come full circle back to 'what do you mean by inflation and how are you measuring it'?

TIPS are flawed and CPI-U is flawed, but I'll take a flawed inflation-indexed bond over nothing inflation indexed at all and/or having to rely on something like gold.

Just don't put all our eggs in the TIPS basket.

I don't, but I'm glad to have them as a tool in the toolkit.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Always passive
Posts: 1267
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: What’s the correct diversification for hyperinflation?

Post by Always passive »

aristotelian wrote: Mon Mar 29, 2021 10:32 am Long term, the best bet to beat inflation is stocks. The biggest risk with stocks is market risk, of course. Bonds are to hedge against market risk and are most subject to inflation risk. You can buy inflation protect bonds but right now you would be locking in negative real yields. At best they are defense against inflation but not an actual hedge to go up in real terms should inflation spike.

Some people believe in gold as inflation hedge. Currency speculation?
This may only be a matter of semantics, but your statement that inflation protect bonds right now would lock negative real yields is not entirely correct. What really happens is that the premium you pay up front is high enough to allow you to buy a TIPS bond that provides positive real yields. The lowest TIPS bonds you can buy deliver inflation plus 0.15%.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

Always passive wrote: Fri Apr 02, 2021 1:19 am This may only be a matter of semantics, but your statement that inflation protect bonds right now would lock negative real yields is not entirely correct. What really happens is that the premium you pay up front is high enough to allow you to buy a TIPS bond that provides positive real yields. The lowest TIPS bonds you can buy deliver inflation plus 0.15%.
No, "front loading" TIPS by paying more principal doesn't somehow turn a negative real yield bond into a positive real yield bond.

If such a magical thing happened, there would be little reason to buy any other type of fixed income right now (unless you're just trying to get greedy with junk).

TIPS are just being more 'honest' in making you pay for your negative returns up front, as opposed to nominals which make you pay for negative returns in the future when you try to buy something with your devalued money.

Both 10 YR nominals and TIPS have negative real yields right now.

And that negative real yield is the exactly same for both, as it must be via the breakeven inflation rate.

Break Even Inflation Rate: 2.35%
10 YR Treasury = 1.69% = -0.66 real yield = 10 YR TIPS real yield


Only 30 YR has a positive real yield right now of .07, and, as it must be, it is the same for both nominals and TIPS.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Always passive
Posts: 1267
Joined: Fri Apr 14, 2017 4:25 am
Location: Israel

Re: What’s the correct diversification for hyperinflation?

Post by Always passive »

watchnerd wrote: Fri Apr 02, 2021 4:58 am
Always passive wrote: Fri Apr 02, 2021 1:19 am This may only be a matter of semantics, but your statement that inflation protect bonds right now would lock negative real yields is not entirely correct. What really happens is that the premium you pay up front is high enough to allow you to buy a TIPS bond that provides positive real yields. The lowest TIPS bonds you can buy deliver inflation plus 0.15%.
No, "front loading" TIPS by paying more principal doesn't somehow turn a negative real yield bond into a positive real yield bond.

If such a magical thing happened, there would be little reason to buy any other type of fixed income right now (unless you're just trying to get greedy with junk).

TIPS are just being more 'honest' in making you pay for your negative returns up front, as opposed to nominals which make you pay for negative returns in the future when you try to buy something with your devalued money.

Both 10 YR nominals and TIPS have negative real yields right now.

And that negative real yield is the exactly same for both, as it must be via the breakeven inflation rate.

Break Even Inflation Rate: 2.35%
10 YR Treasury = 1.69% = -0.66 real yield = 10 YR TIPS real yield


Only 30 YR has a positive real yield right now of .07, and, as it must be, it is the same for both nominals and TIPS.
I think that I fully understand your comments and obviously you are right. However, I look at it as an “insurance” and insurance is not free. I pay more up front to assure that the bonds I buy cover inflation. It is just a matter of the way you look at things.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

Always passive wrote: Fri Apr 02, 2021 5:30 am
I think that I fully understand your comments and obviously you are right. However, I look at it as an “insurance” and insurance is not free. I pay more up front to assure that the bonds I buy cover inflation.
It's not the insurance cost, actually.

The "inflation protection insurance" price element is a separate issue and it is so small as to be virtually undetectable.

At negative real yields, you're paying for a loss to expected inflation.

You're just paying in the present instead of the future.

TIPS are not protecting you from expected inflation, they're simply charging you in the present for it. They're only protecting from unexpected inflation.
Always passive wrote: Fri Apr 02, 2021 5:30 am It is just a matter of the way you look at things.
I think it's important to be accurate when it comes to financial terminology.

The higher upfront price is a loss, period, because intermediate term bond yields are negative in real terms.

i.e. you're losing money

(me, too....I also buy intermediate TIPS)

If you buy 30 YR TIPS, which have a positive real return, you'll see the difference because you won't have to pay 'extra' upfront.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
aristotelian
Posts: 12277
Joined: Wed Jan 11, 2017 7:05 pm

Re: What’s the correct diversification for high inflation?

Post by aristotelian »

I think it is fair to say that TIPS protect you from inflation (hence the name) but that does not mean they guarantee positive real return. Yes, TIPS will go up if inflation goes up, but with current rates you will still be locking in negative real return.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for high inflation?

Post by watchnerd »

aristotelian wrote: Fri Apr 02, 2021 7:07 am I think it is fair to say that TIPS protect you from inflation (hence the name)
If 'inflation' means CPI-U.

It can be an error to assume that CPI-U is enough to cover your real life personal inflation.

aristotelian wrote: Fri Apr 02, 2021 7:07 am but that does not mean they guarantee positive real return. Yes, TIPS will go up if inflation goes up, but with current rates you will still be locking in negative real return.
I think this is important to understand.

I buy TIPS (and other bonds), but I don't buy more than I need at these rates, and I don't buy them too far in advance, because the opportunity cost of negative real returns is high.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: What’s the correct diversification for high inflation?

Post by hudson »

thethinker wrote: Mon Mar 29, 2021 7:39 am I suspect many here have a version of the 3 fund portfolio. Are there any specific tilts or alternations to this portfolio which would help reduce risk in an environment of United States high inflation?


(I mistakenly used the term hyperinflation, and have now edited to more accurately ask my intended question)
Inflation Protection:
a job
social security
TIPS and ibonds
frugal living

I have no job, but I'm on social security. I'll do frugal living if forced. In 3 years at age 76, I plan to do a 20 year non-rolling TIPS rolling ladder or a fund/ETF equivalent.
User avatar
dodecahedron
Posts: 6607
Joined: Tue Nov 12, 2013 11:28 am

Re: What’s the correct diversification for high inflation?

Post by dodecahedron »

hudson wrote: Fri Apr 02, 2021 7:53 am
thethinker wrote: Mon Mar 29, 2021 7:39 am I suspect many here have a version of the 3 fund portfolio. Are there any specific tilts or alternations to this portfolio which would help reduce risk in an environment of United States high inflation?


(I mistakenly used the term hyperinflation, and have now edited to more accurately ask my intended question)
Inflation Protection:
a job
social security
TIPS and ibonds
frugal living
Also:

1) advance purchase contracts

e.g., I bought 20 solar panels in a Community Solar Array in 2017, which amounted to locking in a fixed price for my electricity needs for at least the next 20 years

2) more generally, investing by purchasing things NOW that will reduce your future needs to buy goods or services that may go up in cost

e.g., insulation, energy improvements, upgrading appliances and cars to models that will have lower ongoing operating costs (fuel, repairs, insurance)

3) to underscore observation above about "frugal living," I would include cultivating lifestyle habits that allow you to get a lot of joy at relatively low cost (e.g., walking, meditating, creative writing, reading library books, storytelling groups, yoga, etc.) and/or from things you already own or can acquire now at low/moderate cost (gardening tools, art supplies)
hudson
Posts: 7119
Joined: Fri Apr 06, 2007 9:15 am

Re: What’s the correct diversification for high inflation?

Post by hudson »

dodecahedron wrote: Fri Apr 02, 2021 8:28 am
hudson wrote: Fri Apr 02, 2021 7:53 am
thethinker wrote: Mon Mar 29, 2021 7:39 am I suspect many here have a version of the 3 fund portfolio. Are there any specific tilts or alternations to this portfolio which would help reduce risk in an environment of United States high inflation?


(I mistakenly used the term hyperinflation, and have now edited to more accurately ask my intended question)
Inflation Protection:
a job
social security
TIPS and ibonds
frugal living
Also:

1) advance purchase contracts

e.g., I bought 20 solar panels in a Community Solar Array in 2017, which amounted to locking in a fixed price for my electricity needs for at least the next 20 years

2) more generally, investing by purchasing things NOW that will reduce your future needs to buy goods or services that may go up in cost

e.g., insulation, energy improvements, upgrading appliances and cars to models that will have lower ongoing operating costs (fuel, repairs, insurance)

3) to underscore observation above about "frugal living," I would include cultivating lifestyle habits that allow you to get a lot of joy at relatively low cost (e.g., walking, meditating, creative writing, reading library books, storytelling groups, yoga, etc.) and/or from things you already own or can acquire now at low/moderate cost (gardening tools, art supplies)
Ha! You are probably on target!
Now I have an excuse to re-insulate, buy a new vehicle, and upgrade appliances! :)
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: What’s the correct diversification for hyperinflation?

Post by Robot Monster »

watchnerd wrote: Thu Apr 01, 2021 8:29 pm Commodities get pitched a lot as inflation hedges, but their recent track record vs inflation over recent decades has been one of the worst compared to other assets.

The green line is the Goldman Sachs Commodity index.

Image

(In fairness, the S&P Goldman Sachs Commodity Index we are using is dominated by energy exposure, which has been extraordinarily volatile over the past two decades)
That index is currently 61.71% energy. link Unsure if energy dominated the index even more than that historically in that chart. Energy sure has been volatile these past two decades. I see crude oil hit a year high of $145.31 in 2008. In 2014 it had an average closing price of $93.17, sinking to half that the following year. The average closing price this year is $58.20. So, I'm gonna go ahead and agree that a commodity index dominated by energy has not tracked inflation well these last two decades.

Crude oil prices link
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

Robot Monster wrote: Fri Apr 02, 2021 9:16 am
That index is currently 61.71% energy. link Unsure if energy dominated the index even more than that historically in that chart. Energy sure has been volatile these past two decades. I see crude oil hit a year high of $145.31 in 2008. In 2014 it had an average closing price of $93.17, sinking to half that the following year. The average closing price this year is $58.20. So, I'm gonna go ahead and agree that a commodity index dominated by energy has not tracked inflation well these last two decades.

Crude oil prices link
I've been trying to find a commodity index that has 0 energy.

Or that maps more directly to consumer goods.

I haven't found one yet.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Robot Monster
Posts: 4215
Joined: Sun May 05, 2019 11:23 am

Re: What’s the correct diversification for hyperinflation?

Post by Robot Monster »

watchnerd wrote: Fri Apr 02, 2021 10:07 am ...
Related to our commodities discussion above, look what I just found. "Relying on Federal Reserve data, the correlations of all commodity prices over the last decade with the rate of inflation are negative." source

Image
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

Robot Monster wrote: Fri Apr 02, 2021 1:56 pm
watchnerd wrote: Fri Apr 02, 2021 10:07 am ...
Related to our commodities discussion above, look what I just found. "Relying on Federal Reserve data, the correlations of all commodity prices over the last decade with the rate of inflation are negative." source

Image
Not even Polyethylene....

So much for going all in on plastic bags.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
Wk1014
Posts: 91
Joined: Wed Mar 10, 2021 3:43 pm

Re: What’s the correct diversification for hyperinflation?

Post by Wk1014 »

stimulacra wrote: Wed Mar 31, 2021 9:57 am Zero debt
Real tangible assets
Hold currencies outside of US dollar
In a high inflation scenario you would want to have as much fixed interest debt that is possible
DB2
Posts: 1396
Joined: Thu Jan 17, 2019 9:07 pm

Re: What’s the correct diversification for hyperinflation?

Post by DB2 »

watchnerd wrote: Thu Apr 01, 2021 8:29 pm
Commodities get pitched a lot as inflation hedges, but their recent track record vs inflation over recent decades has been one of the worst compared to other assets.

I'm thinking of a truly significant inflationary situation - like 1970s. Look at commodities for that decade. Gold and Oil went through the roof - I'm thinking many other commodities did too.

We've been in a disinflationary environment since the 80s, so I wouldn't expect them to have done much. Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

DB2 wrote: Fri Apr 02, 2021 6:59 pm

I'm thinking of a truly significant inflationary situation - like 1970s. Look at commodities for that decade. Gold and Oil went through the roof - I'm thinking many other commodities did too.

We've been in a disinflationary environment since the 80s, so I wouldn't expect them to have done much. Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
I don't have high confidence that the same commodity pattern of the 1970s will be repeated.

Gold was newly off the gold standard, a one time event that won't be repeated.

The 1970s economy was far more dependent on oil than the modern one, and the political act of the oil embargo probably won't be repeated, either.

Maybe copper and rare earth metals would be the ones in the 21st century, but those are not highly represented in most commodity indexes.

If we have a commodities boom, I think it will look different because the economy is different.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: What’s the correct diversification for hyperinflation?

Post by Beensabu »

DB2 wrote: Fri Apr 02, 2021 6:59 pm Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
Which factors?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

Beensabu wrote: Fri Apr 02, 2021 7:56 pm
DB2 wrote: Fri Apr 02, 2021 6:59 pm Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
Which factors?
Resurgence of sea pirates
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: What’s the correct diversification for hyperinflation?

Post by Beensabu »

watchnerd wrote: Fri Apr 02, 2021 8:06 pm
Beensabu wrote: Fri Apr 02, 2021 7:56 pm
DB2 wrote: Fri Apr 02, 2021 6:59 pm Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
Which factors?
Resurgence of sea pirates
Arrr!

For real though. I would be interested in the naming of the "certain factors". No explanation necessary if that would become a problem. Just give me something to search.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

Beensabu wrote: Fri Apr 02, 2021 8:17 pm
watchnerd wrote: Fri Apr 02, 2021 8:06 pm
Beensabu wrote: Fri Apr 02, 2021 7:56 pm
DB2 wrote: Fri Apr 02, 2021 6:59 pm Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
Which factors?
Resurgence of sea pirates
Arrr!

For real though. I would be interested in the naming of the "certain factors". No explanation necessary if that would become a problem. Just give me something to search.
I don't know what DB2 was thinking.

ETF trading of gold?

Growing wealth of gold loving Asian countries?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: What’s the correct diversification for hyperinflation?

Post by Beensabu »

watchnerd wrote: Fri Apr 02, 2021 8:21 pm
Beensabu wrote: Fri Apr 02, 2021 8:17 pm
watchnerd wrote: Fri Apr 02, 2021 8:06 pm
Beensabu wrote: Fri Apr 02, 2021 7:56 pm
DB2 wrote: Fri Apr 02, 2021 6:59 pm Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
Which factors?
Resurgence of sea pirates
Arrr!

For real though. I would be interested in the naming of the "certain factors". No explanation necessary if that would become a problem. Just give me something to search.
I don't know what DB2 was thinking.

ETF trading of gold?

Growing wealth of gold loving Asian countries?
Calling DB2. Are you resting?
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
User avatar
HanSolo
Posts: 2313
Joined: Thu Jul 19, 2012 3:18 am

Re: What’s the correct diversification for hyperinflation?

Post by HanSolo »

Robot Monster wrote: Fri Apr 02, 2021 1:56 pm Related to our commodities discussion above, look what I just found. "Relying on Federal Reserve data, the correlations of all commodity prices over the last decade with the rate of inflation are negative."
The chart limited it's interpretation of inflation as excluding food and energy. They didn't tell us whether there's a positive or negative correlation between the oil/ag commodities and food/energy consumer price inflation.

Perhaps we need to ask the OP whether they wanted to guard against inflation excluding food/energy, or including food/energy.

Back to the chart... if consumer price inflation is negatively correlated to commodity prices, then maybe a solution can be found in owning businesses that produce consumer products, and having pricing power, while the inputs in terms of production costs are more around commodities than labor and/or other products/services exhibiting price inflation.

In other words, if prices are going up, be on the receiving end of the payments that are going up, and not so much on the other end.
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

HanSolo wrote: Fri Apr 02, 2021 9:31 pm
Robot Monster wrote: Fri Apr 02, 2021 1:56 pm Related to our commodities discussion above, look what I just found. "Relying on Federal Reserve data, the correlations of all commodity prices over the last decade with the rate of inflation are negative."
The chart limited it's interpretation of inflation as excluding food and energy. They didn't tell us whether there's a positive or negative correlation between the oil/ag commodities and food/energy consumer price inflation.

Perhaps we need to ask the OP whether they wanted to guard against inflation excluding food/energy, or including food/energy.

Back to the chart... if consumer price inflation is negatively correlated to commodity prices, then maybe a solution can be found in owning businesses that produce consumer products, and having pricing power, while the inputs in terms of production costs are more around commodities than labor and/or other products/services exhibiting price inflation.

In other words, if prices are going up, be on the receiving end of the payments that are going up, and not so much on the other end.
Maybe the proper hedge to CPI-U is a commodity index that focuses heavily on food and energy?

GSG ETF (Goldman Sachs index):

51% Energy
21% Agriculture
7% Livestock

VCMDX (Bloomberg index):

32% Energy
24% Grains
6% Livestock
8% Softs (coffee, cotton, cocoa, etc.)


Hmmm....

One of the reasons I hold 10% cash is as a deflation hedge (along with lowering the duration of my barbell and optionality).

Perhaps I should take half of my cash, 5%, and pick the commodities index that picks up what CPI-U neglects?

This would be a logical compliment to my TIPS holdings.

The Bloomberg Index is 38% food / softs, which is probably closer to my consumption than the GS Index; I spend far more on food each month than energy.

And it's far lower ER than GSG.

I might have to plop 5% in. It's not like the cash is doing anything really useful right now, anyway.

Backtesting using GSG (VCMDX is too short history) isn't so hot, though....it loses to cash since 2012.

Badly. -7.12% CAGR!!

SWEET CHRISTMAS -88% Drawdown!

https://www.portfoliovisualizer.com/bac ... ion2_2=100

VCMDX, with its short 16 months of history, has a nice 10.23% CAGR. But still a whopping -21% drawdown!

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Both zero real return assets with no IRR. Grr. Then again, it's not like the cash is generating much IRR, either.

Hmmm...
Last edited by watchnerd on Fri Apr 02, 2021 11:19 pm, edited 5 times in total.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: What’s the correct diversification for hyperinflation?

Post by Beensabu »

HanSolo wrote: Fri Apr 02, 2021 9:31 pm
Robot Monster wrote: Fri Apr 02, 2021 1:56 pm Related to our commodities discussion above, look what I just found. "Relying on Federal Reserve data, the correlations of all commodity prices over the last decade with the rate of inflation are negative."
The chart limited it's interpretation of inflation as excluding food and energy. They didn't tell us whether there's a positive or negative correlation between the oil/ag commodities and food/energy consumer price inflation.

Perhaps we need to ask the OP whether they wanted to guard against inflation excluding food/energy, or including food/energy.
CPI excludes food and energy, so... yeah... If you want to look at PPI vs crude oil prices, here you go: https://fredblog.stlouisfed.org/2018/11 ... inflation/ plus here's an updated chart: https://fred.stlouisfed.org/graph/?g=CRxD
Back to the chart... if consumer price inflation is negatively correlated to commodity prices, then maybe a solution can be found in owning businesses that produce consumer products, and having pricing power, while the inputs in terms of production costs are more around commodities than labor and/or other products/services exhibiting price inflation.

In other words, if prices are going up, be on the receiving end of the payments that are going up, and not so much on the other end.
You mean... *gasp* tilting to sectors based on economic conditions or in anticipation of certain economic conditions? Tread carefully... lol.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
User avatar
HanSolo
Posts: 2313
Joined: Thu Jul 19, 2012 3:18 am

Re: What’s the correct diversification for hyperinflation?

Post by HanSolo »

Beensabu wrote: Fri Apr 02, 2021 11:12 pm
HanSolo wrote: Fri Apr 02, 2021 9:31 pm Back to the chart... if consumer price inflation is negatively correlated to commodity prices, then maybe a solution can be found in owning businesses that produce consumer products, and having pricing power, while the inputs in terms of production costs are more around commodities than labor and/or other products/services exhibiting price inflation.

In other words, if prices are going up, be on the receiving end of the payments that are going up, and not so much on the other end.
You mean... *gasp* tilting to sectors based on economic conditions or in anticipation of certain economic conditions? Tread carefully... lol.
A possible example of what I'm talking about: own a company that manufactures catalytic converters (which use platinum or palladium as an input). If consumer prices are going up, and commodities are going down, then it seems you'd come out ahead. There is no "gasp".

The OP asked a question. Do you have something to contribute on that?
Strategic Macro Senior (top 1%, 2019 Bogleheads Contest)
DB2
Posts: 1396
Joined: Thu Jan 17, 2019 9:07 pm

Re: What’s the correct diversification for hyperinflation?

Post by DB2 »

Beensabu wrote: Fri Apr 02, 2021 8:17 pm
watchnerd wrote: Fri Apr 02, 2021 8:06 pm
Beensabu wrote: Fri Apr 02, 2021 7:56 pm
DB2 wrote: Fri Apr 02, 2021 6:59 pm Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
Which factors?
Resurgence of sea pirates
Arrr!

For real though. I would be interested in the naming of the "certain factors". No explanation necessary if that would become a problem. Just give me something to search.
Gold can often (although not 100% of the time) be a barometer of the dollar.
The dollar significantly weakened from 2001 (was around $118 on the DXY) down to around $72 before the climax of the GFC in 2008. After 2008, the U.S. embarked upon major QE as Ben Bernanke promised it was only temporary (LOL!), that we were not monetizing debt (LOL), and gold reached it's price max in 2011. There was a lot of concern the dollar would crash upon embarking on QE and trillion dollar deficits and that we would have a double dip recession. There was a lot of skepticism. But they pulled it off. After it was clear things were stabilizing and given Bernanke's words...gold started to weaken while the dollar gradually began to strengthen as the recovery continued. In addition, 9/11, two middle eastern wars before the GFC..all added fear that helped gold during the 2000s. Interestingly enough, gold has surpassed stocks and bonds since 2000.
Last edited by DB2 on Sat Apr 03, 2021 11:38 am, edited 2 times in total.
DB2
Posts: 1396
Joined: Thu Jan 17, 2019 9:07 pm

Re: What’s the correct diversification for hyperinflation?

Post by DB2 »

watchnerd wrote: Fri Apr 02, 2021 8:06 pm
Beensabu wrote: Fri Apr 02, 2021 7:56 pm
DB2 wrote: Fri Apr 02, 2021 6:59 pm Gold was the exception in the 2000s leading to 2011, but certain factors were at play for it...not as much for other commodities.
Which factors?
Resurgence of sea pirates
You should try to understand what moves certain asset classes based on events.
Last edited by DB2 on Sat Apr 03, 2021 11:23 am, edited 2 times in total.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

DB2 wrote: Sat Apr 03, 2021 11:19 am
You should try to understand what moves certain asset classes based on events.
Are you telling me you have inside knowledge on why pirates love gold?
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
DB2
Posts: 1396
Joined: Thu Jan 17, 2019 9:07 pm

Re: What’s the correct diversification for hyperinflation?

Post by DB2 »

watchnerd wrote: Sat Apr 03, 2021 11:23 am
DB2 wrote: Sat Apr 03, 2021 11:19 am
You should try to understand what moves certain asset classes based on events.
Are you telling me you have inside knowledge on why pirates love gold?
I'm explaining some history and what moved gold. But you seem to think it was also just some kind of randomness. But, nope.
User avatar
watchnerd
Posts: 13614
Joined: Sat Mar 03, 2007 10:18 am
Location: Gig Harbor, WA, USA

Re: What’s the correct diversification for hyperinflation?

Post by watchnerd »

DB2 wrote: Sat Apr 03, 2021 11:24 am
watchnerd wrote: Sat Apr 03, 2021 11:23 am
DB2 wrote: Sat Apr 03, 2021 11:19 am
You should try to understand what moves certain asset classes based on events.
Are you telling me you have inside knowledge on why pirates love gold?
I'm explaining some history and what moved gold. But you seem to think it was also just some kind of randomness. But, nope.
It was just a pirate joke.

Chill.
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: What’s the correct diversification for hyperinflation?

Post by Beensabu »

DB2 wrote: Sat Apr 03, 2021 11:13 am
Beensabu wrote: Fri Apr 02, 2021 8:17 pm For real though. I would be interested in the naming of the "certain factors". No explanation necessary if that would become a problem. Just give me something to search.
Gold can often (although not 100% of the time) be a barometer of the dollar.
The dollar significantly weakened from 2001 (was around $118 on the DXY) down to around $72 before the climax of the GFC in 2008. After 2008, the U.S. embarked upon major QE as Ben Bernanke promised it was only temporary (LOL!), that we were not monetizing debt (LOL), and gold reached it's price max in 2011. There was a lot of concern the dollar would crash upon embarking on QE and trillion dollar deficits and that we would have a double dip recession. There was a lot of skepticism. But they pulled it off. After it was clear things were stabilizing and given Bernanke's words...gold started to weaken while the dollar gradually began to strengthen as the recovery continued. In addition, 9/11, two middle eastern wars before the GFC..all added fear that helped gold during the 2000s. Interestingly enough, gold has surpassed stocks and bonds since 2000.
Thank you!
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
User avatar
Beensabu
Posts: 5657
Joined: Sun Aug 14, 2016 3:22 pm

Re: What’s the correct diversification for hyperinflation?

Post by Beensabu »

HanSolo wrote: Fri Apr 02, 2021 11:50 pm
Beensabu wrote: Fri Apr 02, 2021 11:12 pm
HanSolo wrote: Fri Apr 02, 2021 9:31 pm Back to the chart... if consumer price inflation is negatively correlated to commodity prices, then maybe a solution can be found in owning businesses that produce consumer products, and having pricing power, while the inputs in terms of production costs are more around commodities than labor and/or other products/services exhibiting price inflation.

In other words, if prices are going up, be on the receiving end of the payments that are going up, and not so much on the other end.
You mean... *gasp* tilting to sectors based on economic conditions or in anticipation of certain economic conditions? Tread carefully... lol.
A possible example of what I'm talking about: own a company that manufactures catalytic converters (which use platinum or palladium as an input). If consumer prices are going up, and commodities are going down, then it seems you'd come out ahead. There is no "gasp".
But that's *gasp* owning individual stock on the basis of the belief that you know something the market does not know.
The OP asked a question. Do you have something to contribute on that?
Ok fine.
thethinker wrote: Mon Mar 29, 2021 7:39 am I suspect many here have a version of the 3 fund portfolio. Are there any specific tilts or alternations to this portfolio which would help reduce risk in an environment of United States high inflation?
I have an energy/utilities tilt. It's not in anticipation of high inflation, but it probably won't suck if that happens. I will also be buying some VWEHX in a month once I'm allowed to according to the stuff I wrote down.

Some would say that ex-US stocks help reduce the risk of high inflation in the US. That certainly seemed to be the case in the 70s.

If it isn't obvious yet, I would not expect gold to provide inflation protection. It just might, for other reasons that happen at the same time. But I wouldn't count on it doing so purely because "inflation". DB2 made an interesting point that I haven't really looked into it yet. But be aware that ex-US stocks do well when the dollar is weak.

Fixed (low) rate debt is helpful in times of high inflation. Also real property (edit: and other hard assets bought when they cost less). Probably at least a part of the reason for the SFH price bonkersness.

Some would say ex-US developed or emerging markets debt would help. Some would say holding foreign currency (I dunno which ones, and I don't think anyone really does) would help.

Think about the effect of high inflation in the US. It makes the dollar worth less and it makes goods and services (and housing) cost more. Then think about what assets would benefit from a price increase in US goods and services (and housing... so realize that most people will have less to spend on the stuff that now costs more) or a decrease in the value of the dollar.

Hope this helps. Sorry for the side bits I put in your thread. I like responding to things I think are interesting or making people explain themselves if they're willing to.

I also like pirates (the fictional kind, not the poor desperate Somalian kind). Aaaaar!
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Post Reply