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Protect Your Wealth from Inflation

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Paul Tudor Jones says inflation isn’t transitory … everyday prices have skyrocketed year-over-year … a new hedge position from Eric Fry to protect your wealth

I think to me the No. 1 issue facing Main Street investors is inflation, and it’s pretty clear to me that inflation is not transitory.

It’s probably the single biggest threat to certainly financial markets and I think to society just in general.

That comes from billionaire hedge fund manager, Paul Tudor Jones, who famously predicted and made a fortune off the October 1987 Black Monday crash.

He made the comments on Wednesday, speaking to CNBC. And while much of the inflation talk has focused on supply chain bottlenecks, Jones pointed toward another, longer lasting factor in the equation:

“Inflation can be much worse than what we fear. We have the demand side of the equation … and that is $3.5 trillion greater than what it normally would have … just sitting in liquid deposits,” Jones said.

“They can go into stocks, or crypto, or real state, or be consumed, so that’s a huge amount of dry powder just sitting waiting to be utilized at some point, which is why inflation is not going away.”

The longtime trader said price pressures will continue to rise in the coming months.

***You don’t have to look to the government’s inflation data to verify this, just look to your monthly bills

We’ve all seen the CPI numbers. But broad figures like that don’t always capture what shoppers are feeling in their own budgets.

Last week, Fortune published a story comparing the costs of goods and services today to those costs one year ago. See if the below better reflects your personal inflation experience:

  • Bacon: +19.3% over the past year
  • Ground beef: +10.8%
  • Pork ribs: +19.2%
  • Chicken: +7.5%
  • Fresh fish: +10.7%
  • Eggs: +12.6%
  • Apples: +7.8%
  • Carbonated drinks: +5.3%
  • Peanut butter: +6.2%
  • Food from vending machines: +6%
  • Beer (retail, not at a restaurant or bar): +1.6%
  • Gasoline: +42.1%
  • Propane, kerosene, and firewood: +27.6%
  • Natural gas: +20.6%
  • Rental cars: +42.9%
  • Living room, kitchen, and dining room furniture: +13.7%
  • Washer and dryer: +19.1%
  • Women’s dresses: +9.5%
  • Children’s shoes: +11.9%
  • New cars: +8.8%
  • Used cars: +24.4%
  • TVs: +12.7%
  • Hotel rooms: +17.5%
  • Haircuts: +5%

Let’s add another huge one…rent.

From CNBC, earlier this week:

Demand for single-family rental homes is showing no sign of easing up, and that is pushing rents through the roof, especially for the highest-priced properties…

Nationally, rents rose 9.3% in August, year over year, up from a 2.2% year-over-year increase in August 2020, according to CoreLogic.

For the first time since before the pandemic hit, all major metropolitan housing markets covered by CoreLogic showed positive rent growth.

That 9.3% average number masks many higher-price markets. For example, in Las Vegas, rents are up 15%. In Phoenix, 19%. And in Miami, they’re up a whopping 21%…again, in just one year.

***If these numbers surprise you, it’s likely due to the gradual, sometimes-imperceptible nature of inflation

It doesn’t feel too bad from week to week, or month to month. But over longer periods, inflation’s ravaging effects become more glaring.

Our macro specialist, Eric Fry, noted this in his latest issue of Investment Report:

Inflation is not irrelevant, simply because its adverse effects are often stealthy and gradual. These qualities make it even more dangerous… like a hungry cat that stealthily and gradually stalks a bird.

The cat never becomes a non-threat, no matter how slowly it might approach its prey.

Gradual is not synonymous with irrelevant. If it were, gradual skin wrinkling would also be irrelevant… as would gradual hoarding, or gradual gambling, or gradual donut-eating…

Over time, inflation can wield a shockingly large impact. It has the power to destroy fixed income investments and also the power to crush stock market returns.

Of course, it can also inflate the value of certain assets.

For example, just yesterday, investors flush with cash flooded into bitcoin, sending the cryptocurrency to a new all-time high of more than $66,500.

Meanwhile the commodities/battery metals trade continues to create wealth. Eric saw this coming well over a year ago, and has used it to generate a slew of profitable trades for his subscribers (the most impressive of which was the 1,506% options-trade winner with copper miner, Freeport-McMoRan).

Here are some other one-year returns from the commodities/battery metals trade:

The iShares MSCI Global Metals & Mining Producers ETF (PICK) up 59%.

The Global X Copper Miners ETF (COPX) up 83%.

Copper mining giant, Freeport-McMoRan (FCX) up 121%.

The VanEck Rare Earth/Strategic Metals ETF (REMX) up 180%.

Even the CRB Index, which is a broad basket of commodities (not just metals), is up 58% over the last 12 months.

***In Eric’s latest issue of Investment Report, he detailed a handful of ways to protect your wealth from inflation

There was one in particular that caught my eye. We haven’t focused on it a great deal here in the Digest

Shorting bonds.

To walk through this, let’s begin by making sure we’re all on the same page when it comes to the impact of inflation on bonds.

Here’s Eric:

Consider the hypothetical case of an investor who purchased the 30-year Treasury bond that is currently yielding 2.01% per year. If rising inflation caused 30-year interest rates to rise to just 3.0% over the next 12 months, the value of that bond would fall 20%.

If 30-year rates doubled from 2.01% to 4.02%, our hypothetical bond investor would be nursing a loss of more than 35%! But we’re not done yet… let’s imagine that long-term interest rates returned to 6.35%, their average level of the last 45 years.

At that yield, the price of today’s 30-year bond would be down more than 55%!

Because of unfavorable math like this, the legendary interest rate expert, Jim Grant, sometimes refers to low-yielding bonds as “return-free risk.”

Given this math, as well as the state of inflation today, Eric believes shorting bonds – in other words, betting against price gains – would be a wise hedge position.

There are a handful of funds that offer investors simple, one-click ways to bet against bonds. In Eric’s latest issue of Investment Report, he highlights the ones at the top of his list.

By the way, it turns out Paul Tudor Jones views the market the same as Eric.

Back to CNBC:

The founder and chief investment officer of Tudor Investment Corporation said it’s time to double down on inflation hedges including commodities and Treasury Inflation-Protected Securities, and that investors should avoid fixed income in this inflationary and low-rate environment.

“You don’t want to own fixed income,” Jones said. “You do not want to hold that whatsoever because what (the Fed is) saying, what they’re telling you by their actions, is that they’re going to be slow and late to fight inflation and somewhere down the road, somebody will have to come in … and put the hammer down.”

When that hammer drops, look for a short position against bonds to soar.

I’ll give Eric the final word on why this trade is worth your consideration today:

The inflation rate has already reached a three-decade high. If that rate happens to tick higher over the coming months, interest rates could jump much higher than most folks would imagine.

A persistently high inflation rate is not certain, of course, just likely. So why not take out a little inflation insurance, just in case?

If an infallible psychic told you that your house would burn down in one of the next five years, would you say to yourself, “Gosh, maybe I should try to figure out which year it will be and not buy fire insurance during the other four years.”

You might actually guess correctly, in which case you would have saved yourself four years worth of insurance premiums. But you might get it wrong it, in which case you would have lost your house.

Therefore, I recommend some sort of inflation hedge, at least for now.

Have a good evening,

Jeff Remsburg