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Inflation outlook and possible investments to consider

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Nov 20 · 3 min read

2 min video — if inflation takes off, how do you protect your investments?

Will Biden ‘throw the kitchen sink’ at America’s economic mess in an effort to get the bad news out of the way now, so that in four years, the US economy looks better? As they say, ‘no gain without pain.’ Is the party for US equities also over? Cazenove Capital US reports that equities have been in a bull market for over 3,450 days — the longest bull market ever! With interest rates at almost 0%, the Fed has little room to stimulate the economy by cutting interest rates. The US, akin to other governments the world over, has been printing cash to massively expand the money supply, and thus potentially stoke up inflation since studies have found that, in the long term, there is a 99.1% correlation between the rate of inflation and growth in money supply.

In a recent survey by Reuters, 73% out of 160 economists believe COVID-19 to be very deflationary. Unfortunately, economists are typically like a stopped clock, i.e. only correct twice a day! Were the huge global monetary stimulus to lead to higher interest rates, then this could cause a bond and stock market correction. Alternative investments could prove to be popular as well as those often touted as ‘inflation hedges’, for example, index-linked gilts, gold, and, increasingly, Bitcoin.

What is the greatest risk once the pandemic subsides?

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When America came off the gold standard, people were uncertain as to the long-term price of gold, resulting in considerable volatility in its price. According to Forbes, “There were years, like 1975, when gold tumbled in value, falling 25%. And years, like 1979, when it soared, rising 120%. In 1973, gold’s price moved more than 3% one out of every ten days!”

Fidelity argues that Bitcoin’s volatility is similar to gold, “having an intervention resistant market, no central bank or government can step in to support or prop up markets and artificially subdue volatility.” Cash, too, is often seen as a safe place in which to shelter in troubled times, although one needs to be careful of retaining cash over long periods of time.

The decline of the purchasing power of US$

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Source: Investors

Consequentially, holding money in cash is not always a wise investment yet, in the UK, 8.2 million investors entrust their money in a cash Individual Savings Account (ISA) as opposed to only 2.4 million opening a stocks and shares ISA.

Is it now time to look at where and how your pension and savings are deployed……..?

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