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Utopia Talk / Politics / Stagflation protection
Nimatzo
iChihuaha
Tue Jun 01 07:06:25
So, some people have predicted we are heading here (nhill, jergul), an effect I wasn't aware of before. I have done googling and I am curious.

What measure are there to take to protect yourself from stagflation. Let us get away with the dooms day preping early and assume the world isn't ending this year.
Rugian
Member
Tue Jun 01 07:19:25
You'll are making a lot of moves based on what is essentially a single data point.

Do you guys usually make financial decisions on one month's worth of economic indicators?
Nimatzo
iChihuaha
Tue Jun 01 07:25:38
You are making a lot of assumptions based on what is essentially a single post.

Do you usually read so much into 6 lines of text?

What a stupid question, of course you do, I know you my friend. Do you feel better now that you have made your meaningless comment? Great. Now that that is settled, do you have anything relevant and on topic?
Rugian
Member
Tue Jun 01 07:52:01
Someone woke up on the wrong side of the bed today.
nhill
Member
Tue Jun 01 08:13:51
Stagflation isn’t based on one month of economic indicators. It’s been a projection for Q3 2021 since December, and there’s yet to be any trend to provide counter evidence.

Stagflation is very simple. It’s a lack of economic growth and inflation at the same time.

We’d already be in stagflation if it wasn’t for the pandemic making Q1/Q2 YoY comps look so good right now. But earnings reports are slowing, insider selling is increasing, and all inflation measures are increasing more than predicted by economists.

It’s a slam dunk from a macro perspective, which is pretty rare in the field.

Stock market is frothy (overvalued), but the pandemic winners propping up the market are smoked. Most down 30-60% from the top.

There’s been institutional rotations to value/defensive stocks for months now.

So yeah, stagflation is happening and this month’s indicators aren’t that relevant other than continued confirmation of an increasingly obvious trend.

Now I can answer your question on how to combat it in your portfolio by looking at stagflation back tests:

Utilities
Energy (bit overvalued now though)
REITs
Low Beta Stocks (eg the ones in $SPLV)
Quality Stocks (eg the ones in $QUAL)
Growth Stocks actually don’t look bad coming into this environment because of their massive correction.
Oil (bit overvalued like energy)
Rare Earth Materials
Municipal Bonds
Long Duration Treasuries (20 yr US bonds my preference)
Investment Grade Debt ($LQD for example)

I’m writing this out on my phone. Well provide more details and sources later. Along with a hand crafted portfolio I made with other macro experts.

Not investment advice.
nhill
Member
Tue Jun 01 17:05:28
The biggest problem with stagflation this time around, and why it's so concerning is this: most of the stagflation safe havens are already overvalued.

REITs? Real Estate market is bonkers. It's probably a fair investment but is scary for institutional investors that have to hedge tops.

Energy? Oil is already expensive. WTI Crude is ~$65. At OPEC, Russian and Saudi Arabia have already said they find ~$45-$55 the ideal price. And they definitely have the supplies to get it to that price.

Treasuries? Already pretty low for the 20 yr at 2.2%. It can, of course, go back to ~1%, but overall not much appreciation potential (treasuries appreciate as the yield curve breaks down).

So you're pretty much looking at Low Beta, Quality, and some Growth stocks. Munis & investment grade debt on the FI side (& direct inflation hedges like $IVOL).

And you have to look at things like Rare Earths, Precious Metals, and Natural Gas for commodities. Yet most commodities are overpriced right now. I bet lumber is going to decrease in value by at least 25% from here. Oil I already covered.

So while this won't be the first time the market enters stagflation, it is one of the more concerning times due to lack of quality safe haven assets.

I've posted it before, but if you want an example of a quality stagflation resistant portfolio, this is what I built with some fellow macro experts in my network:

http://das...nAtJ7UhWkJjbX3eA_9AIYiybtmBwAA

It's heavily weighted into equities and really shouldn't be according to pros. The more traditional allocation is 60/30/10 equity/fixed income/commodities. But I have an appetite for risk most hedge funds can't afford.
nhill
Member
Tue Jun 01 17:08:31
The key with my Alpha Stagflation portfolio is the fully diversified 4.132% dividend yield. It's not designed to appreciate heavily on a capital basis (that's the whole point of low beta).

So you can ride out the stagflation while still earning steady dividends, and then when the economy recovers you can experience a bit of capital appreciation before changing your macro bent.
nhill
Member
Tue Jun 01 17:11:39
Note that I do include a decent allocation of capital to REITs and Energy stocks despite my doubts about their appreciation potential. That's what makes it so hard to construct a high alpha portfolio for the upcoming stagflation conditions. The REITs/Energy are more or less there for the yield.
nhill
Member
Tue Jun 01 17:12:09
(and diversification, naturally.)
Nimatzo
iChihuaha
Wed Jun 02 04:58:11
What is the common thing, or perhaps what differentiates these safer assets during stagflation from the unsafe. I understand scarce minerals have utility and that energy is needed for everything, so these things are generally stable regardless of economic cycle (?) but beyond that. What makes these things safer?
Cloud Strife
Member
Wed Jun 02 08:50:07
Safer assets are secured on the downside.

Bonds are safer because debt is highest on the list of money to be paid, should a business falter. Generally bonds have lower return, but they are always safer, more stable, and generally counter-cyclical.

Similarly utilities are secured in that they are highly predictable, always needed and have steady revenue streams.


Interestingly, there's an idea that certain raw materials including e.g. precious metals are also safe for "inherent" reasons. I don't particularly agree, but there are enough investors who do. This counter-cyclical behavior was expected, but Soros became Soros through fuckery with bonds/gold in the belief that this is not true, and there hasn't really been significant inflation since then to test the idea.

Often the above of raw materials is extended to necessities like real estate, but real estate bubbles are frequent in history, so are not generally regarded as safe without other indicators, e.g. affordable housing is more resilient than luxury housing, stable markets are more resilient than growth markets.

Perhaps, it is best to consider what is not safe.

Volatility is not safe, as the value can go down a lot.

Low income streams are not safe, as the value is not backed up by a revenue. This includes things like technology and certain discretionary spending that is cut during down times.

Purely speculative objects like art/trading cards/beanie babies/crypto which have no inherent value are both naturally volatile, and generate a zero/negative income stream. There is a significant similarity here with the precious metals class mentioned above, which is why I don't see metal as generally safe, but there has not been a case where metal has failed to track with inflation, though this is likely due to the low inflation environment we've had for a long time in modern finance.

Me, I overweight emerging markets, because I like to own factories and "relatively" slave labor, as these are obvious generators of wealth with limited downside, that also tend to avoid the speculative accelerants (at least since the railroad bubbles) that cause problems in say tech/housing.

jergul
large member
Wed Jun 02 08:58:33
Nimi
1. Pay back debt.

2. Get a buffer account (3 months family net income) so you don't need to go into new debt.

3. Max out on any tax deductable pension schemes.
Save a set amount each month. Split between interest bearing bonds/obligations and index funds.

4. Use the oilfund investment strategy. Save a fixed amount each and every month and buy either interest carrying bonds/obligations or index funds. The trick is to keep a 40-60 total balance. If stocks go up since last month, then buy weighted towards obligations/bonds to keep that at 40%, if stocks fall then buy weighted towards stocks to keep it at 60%.

5. Now what kind of index funds. Low service fees are key (think of fees as the house rake taking most of your gains). Then think sectors for index stocks. That is where nhill is giving advice :).
jergul
large member
Wed Jun 02 09:00:19
CS is suggesting what to do if you have fuck you money :D.
Nimatzo
iChihuaha
Wed Jun 02 09:51:25
Hehe I jokingly told a friend once, I have the fuck you money attitude, now I just need the money!

I am already abiding by the Jergulian checklist of sound savings. Been saving % of income monthly in funds with low fees, buffer account (of course) and paying debts, which is only the house (65%) and the cars.

I have begun to take more interest in actively managing stuff, but I realize I don't really know what I am doing. Besides some very basic stuff of not betting on 1 horse, there are no technical analysis going into anything I am doing. The only reasonable thing I have been doing for years is save monthly to buy in cheaper when the markets turn. Nothing wrong with that, it has worked ok, but who doesn't want to make even more money?
nhill
Member
Wed Jun 02 09:59:05
> What is the common thing, or perhaps what differentiates these safer assets during stagflation from the unsafe.

CS has the right of it, mostly. Safe is stuff that doesn't move much, or moves in inverse correlation to the dollar regardless of growth. The latter is a bit more complicated to tease out, which is why some slow growing assets are better in stagflation than a period of deflation + lack of growth.

And yes, as jergul pointed out, I'm referring to what actions you can take to hedge your investment risk during inflation.

His points are good for behavioral changes.
Nimatzo
iChihuaha
Wed Jun 02 11:57:00
So basically, the same things are generally safe and sound as most normal down turns and periods of instability? With whatever uncertainty that goes into ”generally” and ”normal” ;)
nhill
Member
Wed Jun 02 13:54:31
When you have a period of economic contraction it can be coupled with inflation or deflation. There are different "safe and sound" asset classes for both paradigms, e.g. consumer staples generally benefits from deflation periods in backtests.

Deflation is worse than inflation in terms of investment performance. So be happy we're stagflating and not imploding (e.g. look at what happened during the massive deflationary period around the onset of the pandemic. hint: everything was down). FYI I'm more into finance and backtests, i.e. practical knowledge. I know enough to manage portfolios successfully in different macro conditions, and I know enough about macro to make reasonably accurate predictions about future conditions. Although stagflation is an obvious one for Q3 so I can't take any credit there.

I'm sure there's economic theory explaining the correlations that perhaps Cloud Strife or Seb could illuminate. Not my area of expertise.
Habebe
Member
Wed Jun 02 15:36:11
Deflation is good for cash savers though and is easily fixed (Helicopter cash!!! *makes it rain*)
Habebe
Member
Wed Jun 02 15:42:26
Im thinking copper, rare earths and semi conductors will probably do good through either a boom or bust.

Early next year Starlink. Is supposed to go public, I definitely want in as early as possible.It already has guaranteed US military contracts and really is a quantum leap for its large niche market.I have to use satellite now through Hughes net, and Ive also used Viasat, they both suck but in the boonies its your best bet.
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