The swelling

In the last few days bonds have sold off in Canada, the US, Britain and Europe. As prices fall, yields rise. In this nation, the return on a five-year Canada bond is back to where it was in February of 2020. Yes, that’s when we were all still naïve and invincible. Meh.

The US 10-year Treasury returned above 1.5%, which is a big deal. It will be a lot closer to 2% by year’s end, many believe. And consumer prices are going up. Everywhere. For everything. Inflation is a thing, even though central bankers have tried to downplay it as ‘transitory’. Investors aren’t so sure. They want yield, just in case. They also know if prices and wages swell that CBs will respond.

Energy prices are flying higher. Oil flirted with eighty bucks a barrel this week – a huge jump in the past month and a 7-year high. Natgas popped. There are shortages of stuff everywhere. Last weekend I stared at a giant empty shelf in Home Depot where a nice selection of blinds usually lives. “Just forget it,” said the unhelpful saleslady as she walked past in resplendent orange bib vest. “We haven’t had them for a month, and it will be another month. At least.”

“Just look around the store,” she added. And I did. It was a little spooky.

In the UK there’s a gas crisis as fuel shortages cause drivers to queue for miles. There is also a truck operator shortage there. And in Canada, too, where we’re down 18,000 drivers, says the industry. The media’s full of stories about food inflation. Farmers can’t get labour to harvest since immigration quotas have been reduced. Agricultural costs have ramped up.

We know all about housing. Prices are out of control. Toronto just matched Vancouver at $1.1 million for the average property and $1.8 million for a detached ($1.46 mill in the burbs). Rents dropped last year and have roared back. If it were not for politically-motivated pandemic controls, monthlies would be much higher. Now mortgage rates are ticking up. TD started that. Doing a reno? Good luck having new kitchen appliances delivered. A year for a decent stove.

It seems the supply chain remains seriously screwed up. The car guys can’t get chips to build enough new units. The dealership nearby currently has an inventory less than half normal levels. For many models the waiting list is months long. A lack of new cars has pushed used vehicle prices to all-time highs. That’s propelled the cost of rentals to shocking levels. The dominoes are falling.

On Wednesday the central bank in NZ doubled its rate, from a quarter to a half point and said more increases are coming. South Korea and Norway did the same. The US moves in a few months. The reason: inflation. Higher prices in these places flow from the same circumstances as here – rising energy costs, transport issues, housing price escalation and supply chain woes. The CB says it wants mortgages to become more costly, so a 30% year/year real estate surge can be halted. Over in Britain inflation’s at a 13-year high.

So emerging from the virus phase of our lives we face record levels of public and household debt. Rising prices and costs. Stagnant wages. Asset inflation. Real estate stupidity. And government deficits which will result in lower Covid benefits and higher taxes. Financial markets have been watching all of this with many investors vacillating between enthusiasm over what the reopening trade’s doing for equities and fear central bankers got it all wrong.

How to invest in a time of inflation

Of course you won’t know who’s right until it’s over. So the question is simple: how do you protect yourself, your family and your net worth?

Traditionally people have socked cash into commodities to escape the ravages of a declining currency. Gold. Real estate. There are two problems, however. First, gold has done nothing during post-Covid augmented. Investors have shunned it for better-performing assets, and bullion is further eclipsed as interest rates begin to climb. After all, it pays nothing. No interest. No dividends. So if you really want exposure to PMs, get an ETF for the sector or the entire TSX.

As for real estate, the performance has been outsized. But so has the debt associated with it. Money is not so much being created as it is being borrowed from the future. Properties have responded to record-low mortgage rates, but all that is about to change. There’s only one direction for the cost of money to travel, so if CBs hike in the next few years as most economists expect, real estate is highly vulnerable. Of course, if you’re buying it now, the risk is far greater. So invest in a bunch of REITs instead, where debt is less an issue.

And what of safe little havens like guaranteed investment certificates or government bonds? Bad idea. GICs have been losing money since the pandemic arrived and now with inflation topping 4%, the performance is even worse. Bonds fall in value as yields increase, so the fixed-income portion of your portfolio should be light on government issues and combined with some corporate and provincial debt. You still need this shock absorber.

So augment the FI 40% hunk of your accounts with rate reset preferred shares. Not only are they currently throwing off a dividend close to 4%, they come with a dividend tax credit and (best of all) jump in value as interest rates rise. This is more than enough to offset the drag of bonds, while your portfolio’s still shielded from equity market shocks.

And speaking of stocks, you need some. Get exposure in a diversified way through low-cost, high-liquidity ETFs. Remember that most big companies can deal with inflation by passing through higher costs to consumers and clients. Banks do better when rates go up. Commodity and energy companies get immediate pass-through to end users. The tech giants dislike rising rates but the changed consumer habits caused by Covid have baked in growth. Even in an environment of rising inflation, higher bond yields and swelling rates there are compelling reasons to stay invested.

Or, just sell your car. Big bucks.

About the picture: “I wanted to thank you so much for posting the story (September 23) about my Husky, Baylee, and her hip surgeries!” writes Jane. “It resulted in a massive increase in traffic to my Etsy shop and about $700 worth of sales! I am very very grateful – thank you!  I am also immensely enjoying your blog – as a writer, I must say, it must be a tremendous amount of work to write so frequently.  MANY thanks again – the response to this has been incredibly heart-warming and I am thrilled.”