How do baby boomers protect their life savings from the ravages of inflation? Our recent interview with Chuck Butler got the attention of many readers. We reviewed how gold and foreign currencies performed during the high inflation Carter years. During a five-year period beginning 1/1/77, we experienced almost 60% inflation. That destroyed a lot of wealth held by seniors and savers. We concluded:
Preservation of capital (not losing money) is no longer the entire goal. We must preserve the buying power of our life savings!
Our handy Inflation calculator confirms the market didn’t offer much inflation protection at all. Just to keep up with inflation, the S&P should have climbed to $165.29.Readers asked about the stock market. One might think that the stock market would also rise with inflation. On January 1, 1977, the S&P 500 was $103.80. Five years later it closed at $117.30.
The Department of Energy historical gas pump prices reports the 1977 average pump price of $.62/gal more than doubled, rising to $1.31 over the next five years. The oil industry had no problem staying ahead of inflation. Their profits were so high, Congress instituted a “Windfall Profits Tax”. Of course, the consumer never saw a dime, the money went into the treasury to support government spending.
Our interview with Chuck discussed how metals and various currencies help offset inflation. Readers asked for more, what stocks and industries historically perform well in a high inflationary environment?
It’s time to talk with a member of our panel of experts, Tim Plaehn, Editor of “The Dividend Hunter”, a publication I highly recommend. Tim is in the trenches every day looking for industries and investments that will provide true income and growth for his subscribers.
DENNIS: Tim, thank you so much for your time helping to educate our readers. In the past, we have discussed how inflation can destroy the buying power of a stock portfolio. Readers are asking for help. They want to know what industries and companies have historically performed well (and poorly) during inflationary times.
During my first career, GE was a client of mine. Jack Welch used to preach that passing through price increases was a recipe for disaster. He contended that you never caught up. In times of high inflation, you had to be ahead of the price increase curve.
It was a constant challenge for all my clients. What industries seem to have the most luck keeping ahead of the inflation game?
TIM: Thank you for inviting me.
With higher inflation, costs of primary assets and commodities go up. So, think real estate and commodity producers.
You want to look for companies where the selling prices of their goods or services will go up faster than the cost of production and stay ahead of inflation. I agree with Jack Welch, merely passing through cost increases generally does not work well. Some industries can up their retail price and the consumer will still pay it. The Carter years were a good example, people cut back on recreational driving but they still needed gas to get to work.
Higher inflation also means higher interest rates, and there will be winners and losers in a higher rate environment.
DENNIS: Based on the Carter year data, index fund investors would have lost a lot of ground. What do you look for in individual companies to help offset inflation?
TIM: The big winners will be commodity producers, especially if they have low fixed or production costs so that higher sales prices mostly fall to the bottom line.
In the U.S., oil and gas producers will be big winners. As will the energy midstream companies that provide pipeline, storage, terminal, and other services to the energy sector.
Let me elaborate on the fixed cost issue for a minute using an oil well. Once the well is drilled, let’s say it costs the oil company $40/bbl. to get the oil out of the ground. If oil is selling for $50/bbl. their profit is $10. If the price jumps to $75/bbl., their cost does not change and their profit jumps to $35/bbl. Almost 100% of the price increase goes straight to profit.
Commodity producers have high fixed costs. If they can increase prices it has dramatic increases on their profit.
DENNIS: You focus on income investing. If a company’s dividend does not beat the rate of inflation, you also look for stock appreciation to stay ahead of the inflation curve.
I had clients in the oil industry. A saber would rattle is some part of the world and the pump price would jump by a dime or more the next morning.
I know you also look at associated industries like pipelines, service companies, etc. As a general rule, are they able to beat inflation? Are there any special characteristics you would look for?
TIM: The pipeline and midstream services companies with already built out pipeline and terminal networks will benefit most for the reasons I mentioned earlier. The cost of the assets has been paid and in a higher inflation environment will be irreplaceable.
Interstate pipeline rates are federally regulated. The pipeline companies are allowed to increase rates to match inflation, so revenue will grow with inflation while costs remain fixed. A nice mix for increasing profits and dividends.
What do I look for? Existing networks with a known fixed cost and a mechanism for easily passing along inflationary price increases.
DENNIS: Gold prices actually rose ahead of inflation and started coming down in anticipation of inflation receding. The high for gold during the 5-year period occurred in year 4. Is that pretty common in other industries also?
TIM: Oil is a fascinating commodity to study. There is natural depletion of producing wells, plus demand grows every year. Against that oil companies must make massive capital investments that can take up to a decade to pay off.
When the price of oil crashed in 2014 and 2015, what followed was three years of under-investment by the oil companies. Unless the world goes into a global recession that reduces energy demand, oil is behind the long-term curve to have enough supply to meet demand.
There is a lag factor also. The oil companies don’t start investing until they feel sure the demand is real. There are times production costs can exceed $50-$60 a bbl. or more. It then takes a few years for the investment to be made, wells drilled and production to start. During that time prices generally continue to rise.
My prediction is that when oil prices next start to go up, they could go up in a hurry and stay up. The last oil price boom started in 2002 and lasted for 12 years. I don’t believe that U.S. fracking producers can make up for the three years of underinvestment.
DENNIS: One final question. It appears the only way our government can pay for the unsustainable debt and unfunded promises is with highly depreciated dollars. Most every pundit today says inflation is inevitable, but have given up predicting when it will happen. Ten years ago, had you told me about all the QE programs and doubling our national debt, I would have thought high inflation would have been here long before now.
I feel investors are foolhardy thinking they can time the market, getting in and out ahead of the crowd. What do you recommend investors do today to have some reasonable assurance that they are protecting their life savings against inflation and still provide some income?
TIM: Besides a gold allocation, fixed income investments that adjust to higher rates will give peace of mind, protect capital and provide a growing return on investment. Remember that higher inflation (and possibly mad levels of government debt) will lead to higher interest rates. As we have previously discussed, traditional bond funds will be value destroyers.
Income investments that will provide positive returns are money market mutual funds and bond ladder strategies such as I recommend to my subscribers using the BulletShares investment grade bond ETFs.
Investors need income and want to limit their long-term fixed income exposure which is why ladders work well.
DENNIS: On behalf of our readers, thank you for your time.
TIM: My pleasure, any time.
Dennis here. The bulk of today’s wealth is in the hands of baby boomers and retirees, predominantly in index funds. Using the Carter year example, I’m sure many fund managers were touting their gains while their clients saw significant erosion in the buying power of the life savings.
While gold is considered the ultimate inflation hedge, we must balance the need for income. A well-rounded portfolio, including an allocation to companies and industries that do well in times of high inflation, adds a major layer of protection.
For more information, check out my website or follow me on FaceBook.
Until next time…
Dennis
I “think” a persons best bet is either a owning a successful business or working for the fed.gov or working for a monopoly.
please buy my book. stock market? no such thing, just algos out bidding one another while the PPT waits to step in should a glimmer of a real market appear.
How can you have high “inflation” (of the sort people call inflation, aka CPI inflation) with a bond market the size of Jupiter?
(facepalm.)
I hate people who are always selling their book to the rubes. No one is worse for this than the gold bugs, followed almost immediately by the “sky is falling, I’ll tell you how to profit on it” dregs.
I’ve tried both, got my ass handed to me.
We’ve had our inflation. It’s sitting there in the bond market.
When the value of hundreds of dollars worth of promises to pay (back) future loot detonates, the money supply (or all things with “moneyness”) will fall.
That’s called monetary deflation. The number of money-thingies shrinks, the ability to bid up the price of things shrinks, too.
Monetary deflation’s main symptom is falling prices. I’ll bet that the price of gold will drop, too (although it’s a small market and a fad/fashion/bull run could occur in it.)
No one knows what’s coming. Those who claim to know are full of it.
Gold Bug ads seen over time:
Inflation is coming – now is the time to buy gold.
Recession is coming – now is the time to buy gold.
The economy is stagnant – now is the time to buy gold.
R-I-I-I-I-G-H-T
Everybody is talking their own book. I get that, but I’m now cynical beyond description over it.
My own view is informed by Robert Prechter’s Socionomic Hypothesis, but Bob is tarred (in my mind) by his selling a financial forecasting service that is complete BS. He has “predicted” the Big Bear Market literally since I started reading his work in 1995. I was a long-time subscriber and thought I’d get “special insight” from such a smart guy.
It was all BS. No one knows the future. But they’re always selling their system, whatever it is, as being “special.”
We spent almost 4 months in a daily uptrend off the December 2018 low.
We are currently in a daily downtrend, inside a weekly trend pause (it could break higher or lower, no news yet) within a monthly uptrend that dates back to late 2010.
That is ALL anyone knows about the future…the past and the present.
Monthly trends have not been “head-fakes” for almost 40 years…they’re quite useful. The last two times we got into monthly downtrends, stocks fell 50-80%. That we know for CERTAIN.
Last year’s decline entered a weekly downtrend, but that weekly downtrend reversed before it even threatened the monthly uptrend. So higher we went, the cans got kicked down the road, and the batshit crazy stuff in “the news” got crazier.
It ain’t over ’til it’s over. I don’t know when that will be. Neither does anyone else.
Now that we’ve experienced a Mania^2, I’m more certain than ever that the next monthly downtrend will lead to the largest market collapse in 300 years. That and $1 gets you a coffee at McDonalds.
All I know is that (1) I’m not long the market so now is not a great time to buy into it after 10 years of near-vertical rally and (2) if I was long the market I’d be sitting tight with stops to get me out if we entered the zone of a monthly downtrend. I’d be betting on Plan A, a continuation of this unsustainable system….no matter how seeing it this way makes me want to scream.
Actually,metals are a solid/long term inflation hedge short of nuke war ect.The amount of bread you buy today say for a ounce of gold in inflationary times will still buy you the same amount,till total breakdown,thenthe metals you got from multiple times of BLOATing pay off!
The metals are not an inflation hedge.
Explain to me how buying gold at any point above about $300 has been a good idea during this period of credit inflation.
Metals will pay off if, in a future time, there’s a bull market for them. No one knows if this will be so. If one wishes to own shiny coins or bars, go for it. Just don’t fool yourself into thinking that you’ve outsmarted the rest of everyone.
I like your views Naturalist. We have a similar class of ‘experts’ here in my home country, South Africa. They are known as Financial Planners (stop giggling please) yet they cannot answer me when I ask them, in their planning of my finances, the following: How do you know when I will die?
If you cannot build the TIME FACTOR into your so-called plan/calculations then it’s just worthless.
Shouldn’t there be a law against this type of witchcraft in the finance industry? I was only seven years old when it became obvious to me even as a child that you just CANNOT predict, much less SEE into the future.
Why is this blatant scam of Financial Planning, plus buy-and-hold BS allowed to go on unheeded in the 21st century anyway?
Davebee, you nailed it. “witchcraft.”
Humans haven’t changed much from the savages depicted in Mel Gibson’s Apocalypto. We still believe in magic…each and every one of us. Its form may change and terms we use to describe it might be altered, but a rose by any other name….
Once we grasp this, much becomes clearer. The downside is that we must face the fact that our existence is fraught with uncertainty and risk. We (none of us) like that. I surely don’t. But it is an inescapable part of Reality, a Reality most people willingly pay to escape (or better, enjoy the illusion of escaping it.)
Back in the late 70’s early 80’s you could logically invest in the stock market. Now it’s a fucking scam run by electronic trading and huskers like Musk and Bezos.
I was lucky to have a Comp Sci degree, and made my money in the 80’s and 90’s.
Back in the late ’70’s and early ’80’s people were afraid of the stock market. It had been the “death of capital” since the mid-1960’s.
In hindsight things are clear. We forget that lows occur BECAUSE people are fearful and capitulate. Few people are able to invest when others are capitulating, and few people take their profits and stand aside when others are gleefully “making bank” in a market.
Our psychology CREATES bull and bear markets, and it does so because it is paradoxical.
For the record, I distrust anyone who claims they were courageous when others were fearful and vice versa. I can admit my own horrendous errors in the markets these past nearly 40 years. My strong suspicion is that few others can do so.
I can show a chart, created 3/15/2009, where I believed we were either one small decline away from the low for the larger 2007-? decline or that we’d already bottomed. The latter turned out to be the case, by about a week.
If someone else can show that, I’ll be shocked. Of course, the stupid thing was that I believed what was to begin then was just a rally within a larger bear market with a long, long, long way to go. Needless to say, this was catastrophically wrong. I saw the capitulation, but I failed to heed its message.
Markets matter. The notion that they are controlled (now by “algo’s” or PPT’s or Central Bankers, etc.) is not new. People periodically think that way. But it’s irrelevant. No one is outside The Matrix. When the time comes for the markets to signal that social mood has finally entered a long-awaited bear market, All the King’s Horses and All the King’s Men….