At the virtual Berkshire Hathaway annual shareholder’s meeting that took place Saturday, Warren Buffett brought up the subject of inflation. Although expressing mild concern, Buffett’s general attitude was one of:
“Oh well, we’ll just deal with it.”
Buffett said Berkshire sees signs of inflation on the supply side with higher commodities and labor costs – a development happening across the board. Take home building, for example, where builders are dealing with increased lumber costs, shortages of labor, and rising wages across the country.
However, despite increased costs, Berkshire, corporations, and vendors, in general, are dealing with the situation by passing the rising costs on to consumers who seem to be unfazed by rising prices due to stimulus-fueled demand. In addition, retailers see consumers with stimulus-filled wallets buy up inventory sometimes faster than they can secure new inventory.
People like Warren Buffett accept inflation as a fact of life right now because passing surging costs onto consumers don’t seem to impact demand because of trillions of dollars in stimulus money burning holes in consumer pockets.
But what happens when the stimulus money runs dry?
It’s the same question Wall Street investors should be asking themselves. What’s going to happen when the stimulus-fueled stock market boom cools down once the checks stop coming in the mail?
When the stimulus effect wears off, there will be a day of reckoning in the markets and in pocketbooks when consumers can no longer afford the rising costs of everyday goods like diapers, donuts, and toilet paper.
This stimulus environment is unique in that the response to inflation – both in stores and in the markets – has not been typical. Historically, with inflation, demand for goods and services decline – dragging down corporate bottom lines and stock prices.
So far, inflation has not had that effect on the markets that we usually see, but it’s only a matter of time before we see the real impact once stimulus money runs dry. Inflation will mean eroding buying power for consumers, and declining stock prices will mean declining portfolios for investors.
- Are you prepared for inflation?
- Is your portfolio prepared for inflation?
- Will you be prepared for the erosive effects of inflation as your income and buying power are diminished?
- Do you have additional sources of income to supplement a reduction in real income?
Why are the ultra-wealthy always prepared for inflation? Just as they don’t work for their money but let their money work for them, smart investors don’t let inflation control them; they control it. They leverage inflation to the advantage of their portfolios and finances. How?
At the root of inflation is rising prices for goods and services. If you can ride the inflation wave by leveraging an asset that generates income that keeps pace with inflation without a decline in demand, wouldn’t that be the ideal hedge?
It turns out those assets exist, and it’s those assets that the ultra-wealthy and savvy investors flock to as a hedge against the eroding effects of inflation. The ideal asset is one that non-only cash flows but one where its underlying value appreciates with inflation.
Why is real estate an ideal inflation hedge?
Besides the price of gas, the government listed medical care, housing, and shelter as other driving factors for accelerating inflation. Real estate is an essential commodity and is ideal for shielding a portfolio from inflation because people will always need housing. Because rents collected from real estate are expected to rise in an inflationary environment, and because the asset’s underlying value is expected to grow, this makes real estate an ideal asset for protecting an investment portfolio.
With income and growth in lockstep with inflation, a portfolio generously allocated to cash-flowing real estate will be best prepared to absorb the impact of the erosive effects of inflation.
Moreover, passive cash flow from real estate is ideal for absorbing and supplementing the impact of the diminishing buying power of the wages from your day job.
Inflation is here, but there’s no reason to let it keep you up at night. Harnessing its power and allocating your portfolio to assets that will leverage inflation will best prepare you for its negative effects on the economy.
