Inflation risk actions?

[dg001]

I was reading this article in WSJ, which basically compares the current economy to just before 1966 rise in inflation. Here is an extract:

A case in point: in 1966, inflation, which had run below 2% for nearly a decade, suddenly accelerated to over 3%. Some of the circumstances echo the present: unemployment had slid to 4%, taxes had been cut and federal spending for the Vietnam War and Lyndon Johnson’s “Great Society” programs was surging. Deutsche Bank economists note the budget deficit jumped by more than 2% of gross domestic product between 1965 and 1968, similar to what they project between 2016 and 2019. Except in recessions, stimulus of this size “is unprecedented outside of these two episodes,” they said.


This scared me enough that I read up a little on the 1970s inflation situation, especially given all the FIRECALC articles on "If you had retired in the early 70s"... This Fed article was pretty good, but it seems to say "Don't worry, we have learnt our lesson".

I get things are different - we are already decoupled from the gold standard, and are less at risk of energy shortages given the US's capacity. But ... I don't know if politicians have gotten smarter, and there have been suggestions in this forum of folks trying to hedge against inflation.

So my question is - what did the smart money do in the 70s to stay ahead of the curve? Conventional wisdom says it makes sense to move away from cash and into assets if inflation is nearby- but most of the folks here seems to be moving the other direction (albeit maybe just away from stocks rather than other types of assets).

Keep in mind that I am 40 and a long way from FIRE (though dreaming). Our assets are in 401K, RE, stocks and cash - in that order. But this means high unemployment in the economy is more of a worry for us, and I want to preserve what we have. What strategies would work in inflation/high unemployment leading to stagnation situation?

Thanks!

 

[DrRoy]

I think one answer is to plan for a lower WR, say below 3%. That gives you more of a safety margin.

 

[joeea]

But ... I don't know if politicians have gotten smarter

Smarter politicians? I LOL.

So my question is - what did the smart money do in the 70s to stay ahead of the curve?

I don't know what smart money did in the 70s.
I lived through the 70s, but I was far from "smart money".

What I did was change jobs rather frequently in order to keep up with inflation. I was in a domain that made it possible (IT), and I had the skills to stay in demand. I left a good solid job because they were only offering a 12% annual raise. I went to a job that offered 25% more. And I had to repeat the process several times over the next dozen years or so.

Maybe I was lucky, and maybe I was smart enough and talented enough to understand that I needed to be a flexible, lifelong learner to stay ahead in the economy.

Keep in mind that I am 40 and a long way from FIRE (though dreaming). Our assets are in 401K, RE, stocks and cash - in that order. But this means high unemployment in the economy is more of a worry for us, and I want to preserve what we have. What strategies would work in inflation/high unemployment leading to stagnation situation?

At your age, your ability to produce an income is your single most important attribute.

And even in a high unemployment situation, many folks can stay employed - if they are smart, capable, and flexible regarding what they can do and where they can do it. That's what worked for me in the 70s, at least.

Make sure you stay abreast of changing needs within your industry. Take courses. Read. Attend conferences. Pay attention to your personal brand. Network a lot.

Be the best you can be at whatever it is you do. Be the person everyone of whom everyone says "I'd like to work with him/her again some time."

 

[NW-Bound]

...So my question is - what did the smart money do in the 70s to stay ahead of the curve? Conventional wisdom says it makes sense to move away from cash and into assets if inflation is nearby- but most of the folks here seems to be moving the other direction (albeit maybe just away from stocks rather than other types of assets)...

At the leading edge of inflation advance, both stocks and bonds will get repriced. People fleeing them are hoping to escape that initial drop, then to rebuy them after they settle at the new prices. When a stock pays 2-3% dividend while CDs start to pay 4%, the stock price will be lowered so that the dividend yield comes up to be competitive with that CD.

In the long run one does not want to hold true cash, but wants to get at least some interest paid on that cash to make up for the inflation loss. Even then, after taxes on that interest, you still lose.

I was a young adult in the late 70s, did not make much money, and had a lot of things to worry about rather than inflation. But I recall reading about people buying collectibles, gold, houses, etc... It was a terrible time. There was really no place to hide.

 

[Lsbcal]

....

So my question is - what did the smart money do in the 70s to stay ahead of the curve? Conventional wisdom says it makes sense to move away from cash and into assets if inflation is nearby- but most of the folks here seems to be moving the other direction (albeit maybe just away from stocks rather than other types of assets).

...

One has to be more analytical about what is meant by increasing inflation. If it is slow and gradual then rates will respond appropriately. If it is sharp and accelerated, watch out below. But one cannot really get ahead of the markets. One's guess is just that in a sea of market guesses.

I think you are talking about unexpected inflation because the markets have inflation expectations already. Here is one Fed graph (5 year forward inflation expectations) that you did not see in the 70's: https://fred.stlouisfed.org/series/T5YIFR
For bonds some choices for higher unexpected inflation would be (1) short term bonds, (2) Ibonds, (3) TIPS.

I don't think stocks are in danger because I don't think we will see an extended period of accelerating inflation like the 1970's. The Fed learned how to snuff out inflation back then and it wasn't pretty. But the tolerance for long term inflation is just not there. Part of the inflation was brought about by the lack of economic corrective factors (inflation indexed bonds) and by politicians enjoying the fruits of higher taxes through inflation. But now tax rates are indexed to inflation (I'm assuming the new tax rates have that feature but I do not know for sure).

As to what I did in the 70's, bought a house in Silicon Valley. We needed the house anyway and it was a great hedge. I did recognize the inflation beating value of owning that home. But I had no idea the real estate would continue on as it has for decades beyond that inflationary period.

 

[samclem]

One simple and relatively low risk thing a person can do is to get a 30 year fixed mortgage today. That locks the price of a fairly large living expense. Among all the bad things that come with inflation, at least you'd be paying off that mortgage with dollars that are worth less and less every month.

If you want to go a step farther, buy some income properties to rent out. But that's a whole 'nuther kettle of fish, and requires a lot more commitment and work.

 

[joeea]

One simple and relatively low risk thing a person can do is to get a 30 year fixed mortgage today.

An excellent suggestion!

If your spidey sense tells you that high inflation or even just higher mortgage rates are around the corner, make sure you are locked in to a low fixed-rate mortgage for 30 years. Don't be in a hurry to pay it off.

 

[GravitySucks]

Yup. Margined real estate will do great in times of high inflation. of course a few years ago folks were worried about deflation where you'd not do well with real estate.

The smart money in the 70s? Gold and Silver. Specifically Gold disco medallions and Silver coke spoons. Hmmm... I bet cocaine out performed inflation too.

 

[VanWinkle]

I think one answer is to plan for a lower WR, say below 3%. That gives you more of a safety margin.

I would suggest to stay under 1%!! Your going to be DEAD for a long time you know.

 

[Hermit]

Because my pension has no COLA the best I can do is delay SS until 70 meaning I am leaning more heavily on the pension today while ith value is greater and later leaning more on the COLAed SS. The overall effect is living at a lower standard to protect againat the cost of inflation.

 

[joeea]

Because my pension has no COLA the best I can do is delay SS until 70 meaning I am leaning more heavily on the pension today while ith value is greater and later leaning more on the COLAed SS. The overall effect is living at a lower standard to protect againat the cost of inflation.

Good point! It makes sense to maximize your inflation-protected assets like Social Security when anticipating higher inflation.