Elon Musk’s Strategy to Hedge Against Inflation? Own Physical Things Rather Than USD.
Always welcome advice as inflation soars in America.
Image: Getty Images
The news came as a bombshell to some, while it was an obvious confirmation to others. Inflation reached 8.6% in America in May 2022. The 8.3% in April 2022 was not a peak as some had hoped. The situation is even worse than you might imagine, as the two items that American consumers cannot live without are up even more:
Over 12 months, energy prices have increased by +34.6%, and food prices by +10.1%. The situation is, therefore, more than alarming, which explains why the Fed’s announcements at the end of the FOMC meeting on June 14 and 15, 2022 will probably be worse than expected.
The markets were expecting a 50 basis point rate hike at the end of the FOMC Meeting, but the Fed could go as far as to announce a 75 basis point hike, or even a 100 basis point hike.
Under these conditions, keeping U.S. dollars in your bank account or your hands means losing a little more purchasing power every month. You have to invest to protect the fruits of your labor.
Questioned on this subject as early as March 2022 by some on Twitter, Elon Musk had already given his vision of things. Proof that the current inflation figures are not surprising.
For Elon Musk, the strategy to follow to avoid high inflation is simple:
For those who were still wondering, Elon Musk still believes in Bitcoin, Ethereum, and Doge. Bitcoin is of course one of the 5 assets I’m highlighting as a hedge against inflation. But to take advantage of it you’ll need to redefine your time horizon in the right way, to take the only view that’s right with Bitcoin: the long view.
That being said, Elon Musk also says that you need to focus on physical things in a high inflation environment. You might ask what examples of investing in physical things Elon Musk is talking about.
At the top of the list of these investments, you have real estate.
Real Estate
Real estate is always an excellent hedge against inflation. You bought a property to live in or to rent. To take advantage of the leverage, you made a fixed-rate loan. With the low rates we have seen for several years, as well as the flood of liquidity in the market, banks were open to this type of project.Your property will increase in value due to inflation. Then, your wages will eventually rise due to inflation, provided that it lasts long enough and leaves companies no choice but to act on it. With a fixed-rate loan, you’ll have more salary but still, have the same monthly payments. You’ll be a winner.
Even better, if you rent the property, the rents will increase, and you will have more money to pay back your loan whose amount will not change. Real estate is still an excellent hedge against inflation. However, it is necessary to take care to well select the good that you are going to buy.
Fine Art
For decades, art has been considered by the ultra-rich as an excellent way to protect wealth from inflation. You won’t be surprised to learn that art has beaten the S&P 500 in terms of returns over the past 25 years.The problem with this type of investment is that it is reserved for an elite group of ultra-rich people, and it requires knowledge that you probably won’t get for several years. Plus, you have to love it to fully invest in it and then make the profits that some people do.
Wine, Jewelry, Luxury watches
In a context of high inflation, everything that is rare increases in value. The wine market, for example, the jewelry market, or luxury watches. But here again, you will enter markets reserved for insiders that require a lot of knowledge, and above all, rather important basic means.Gold, Commodities, Stock Values
Gold and commodities are also still performing well in high inflation environments. Energy prices have risen by more than 34% year-on-year in America. And this rise is not expected to stop anytime soon. The resumption of consumption in China after weeks of strict containment will push the price of oil toward $180 in the coming months.Investing in the stock market in companies that will benefit from higher energy prices in the coming months is a good idea. At least it’s something you should consider. Also, some ETFs allow you to have exposure to commodities that you should look into.
Finally, a word on stock values.
Past research shows that value stocks tend to perform better than growth stocks during periods of high inflation. Value stocks are companies that have strong earnings relative to their current share price. They are also known to have robust cash flows, which investors typically value when prices are rising.
The banking and insurance industries will benefit greatly from persistent inflation and rising interest rates in the months ahead. The energy sector will also benefit from this inflation with the uncertainty related to the war in Ukraine.
For the more adventurous investor, there are also opportunities in the tech world, which has suffered a major crash since the beginning of 2022. Some companies have lost more than 50% of their value on the stock market. Not all of these companies are equal, and some of them represent great opportunities at this price level, provided you are clear-sighted and patient.
Focus on companies that have pricing power on their side. These companies will be able to pass on price increases to their customers without them abandoning them.
For Elon Musk, the strategy with the equity market comes down to two steps:
- Buy stock in several companies that make products & services that *you* believe in.
- Only sell if you think their products & services are trending worse. Don’t panic when the market does.
Final Thoughts
When panic grips the financial markets as it is now, and high inflation looks set to persist, you need to keep a cool head. This is where inspiration from financial and entrepreneurial figures can be helpful.While you don’t have to follow what Elon Musk says, you at least owe it to yourself to study what he says and see if it can serve your interests in protecting your money from high inflation. That’s what this article is all about. It’s up to you now.
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