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Jason Zweig’s advice on which stocks to buy during double digit inflation is ill-advised for that and especially for higher inflation

Posted by John Reed on

Jason Zweig's WSJ column Saturday was titled "An Investor's Guide to Deflating Inflation Fears."
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A more accurate title would be how common stocks and bonds did in past moderately high inflation. Who cares? What to be in and out of in inflation is quite well identified BY THE DEFINITION of inflation.
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It is a loss in purchasing power of the USD.
So you want to avoid USD-denominated assets, own assets not denominated in USD, and owe USD-denominated debt. Sufficient liquidity for routine and rainy-day expenses is also necessary.
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Zweig says T-bills had a slight negative return from 1927 to 2020 in years when inflation was above the median. He also says long-term bonds had less than 1% returns then.
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The highest inflation during that period was 1980 13.5%. We also had high inflation 1917 TO 1920 (15.6% 18.0%).
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The stock market did not exist in the Civil War or the Revolutionary War, but hyperinflation did. You can also get a reading on what stocks do in hyperinflation in Germany and Austria in the early 1920s and countries like Argentina and Venezuela more recently.
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I assure you that bonds denominated in the hyperinflated currency become worth pennies on the dollar BY DEFINITION.
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To his credit, Zweig also says GOLD has not done well against inflation. Correct. If it was a good inflation hedge, a graph of it's real (adjusted for inflation) long-term price would be a flat line. It is no such thing.
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My recollection of episodes of higher inflation was that they were initially accompanied by an increase in stock values because the ENTIRE public instantly tried to convert all their currency into goods. But after that initial phase, people were bartering for food using musical instruments and silverware and silver coins, not common stock certificates.
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You should get out of common stocks in the even of high inflation. Not that I know they will be bad. I am not sure what they will do. But I DO know that my recommended inflation hedges WILL do.
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Absent their own national inflation, well-selected foreign currencies will retain the purchasing power they had when you bought them and they are liquid. That foreign currency must be held outside of the US. If you have it INSIDE the US, the US federal government will confiscate it.
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The same is true of commodities like gold and silver although they have generally been overprices in recent decades. Running your mortgage up as high as you safely can and putting any cash-out proceeds in non-dollar denominated assets will be profitable in REAL (after adjustment for inflation) terms if we get double-digit inflation.
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Homes are also a great, albeit illiquid, hedge against inflation.
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Things that you can sell for cash now will work during inflation like cars, guns, musical instruments, business inventory, rare stamps, jewelry, precious metal coins, nickels should be good for barter.
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But mainly, you need to leave the US if we get hyperinflation. That requires a US passport and foreign currency which is IN a foreign country. That is because during US hyperinflation, other countries will not let Americans in until they prove they can support themselves there. Foreign currency proves that.
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How to Protect Your Life Savings of Hyperinflation & Depression, 2nd edition book


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