Financial Opinion and Insights

Hyperinflation May Be Coming!

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

No, my crystal ball isn’t back from the shop yet; but, you may not need it for this one. 

The government has been spending at unprecedented levels for the past eighteen months, by some accounts adding more debt than all previous administrations combined – from George Washington to George W. Bush.   I was surprised, though not shocked,  to hear George Will on ABC’s This Week announce that the interest payments alone on our national debt now equal the entire budget for the Defense Department.   How will all that debt be redeemed?  If history is a teacher, it’s probably a safe bet that the government will simply print the money needed.  Translation:  Inflation.  And, given the size of the debt, you might want to inject the word ‘hyper’.

How can investors position themselves for this?  Portfolio modifications might include the addition of a couple of instruments designed for an inflation environment.[i]

Two such inflation sensitive investments are Inflation-Linked Bonds, like US TIPS (Treasury Inflation-Protected Securities) and commodities.  Most investors are familiar with TIPS.  They are specifically constructed so that the principal value of the bond is adjusted according to the rate of inflation.  If inflation (CPI) rises, the principal value of the bond is adjusted upward accordingly.  Of course that is not the case with traditional fixed income bonds, as inflation rises, the fixed income stream generated just loses purchasing power and thus there is downward pressure on the principal value of the bond as well. 

Since commodities are a meaningful component of inflation, investments in that asset class also provide a high degree of sensitivity to inflation rates.  Key to the relationship between inflation and commodities is their apparent correlation, remembering that commodity prices have historically been much more volatile, with moves that are magnified by several multiples the movement in inflation. 

These two asset classes can help in the creation of an inflation-focused portfolio intended to act as buffer for the effects of inflation on other assets like fixed income bond investments.

A quick comment on stocks and inflation.  Equities can provide a reasonable return relative to inflation in periods of moderate inflation.  But when inflation accelerates beyond the moderate level, stock prices have struggled.  Ned Davis Research has quantified that in periods where inflation is rising more than 1% above the previous five year average, stock prices have averaged –2.2% per year.*

*Ned Davis Research, S&P 500 vs. Consumer Price Index, 01/31/10


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™  now in his 19th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained herein should be regarded as tax or legal advice and the reader is urged to seek competent counsel to address those issues.   The above represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a formal financial and investment plan.   For questions or comments, you can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com.

[i] Before instituting any investment strategy, you should talk with your financial advisor first be sure your financial and investment plan is up-to-date.