Consumer Price Inflation has Spooked Investors Everywhere

What not to do with your money now…

It has been the worst June in 77 years, says Bloomberg. In June of 1930, the Dow lost 18%. So far, it is down 9.4% this month. Since this is the last day of the month, we presume that is where it will stay.

The rest of the news is not much better. Oil closed over $140 a barrel on Friday. OPEC’s president says it could go to $170 by the end of the year.

And the New York Times says the number of people who can’t pay their mortgages continues to grow. There were 2.6 million of them six months ago. Now, the figure has risen to 3 million.

The combination of ’30s-style asset deflation and ’70s-style consumer price inflation has spooked investors everywhere.

“Falling prices grip stock markets around the world,” reports the Financial Times.

Where can you turn for relief, the paper asks? “Nowhere,” is the answer it gives.


All the world’s stock markets have taken losses, most of them bigger losses than those on Wall Street. Property prices, too, are headed down in most places. So, don’t bother to diversify. It barely matters where you look – asset prices are sinking.

“Diversification no longer works,” writes Tony Jackson in the Financial Times. Mr. Jackson says rising inflation rates are playing hell with all sorts of investments. Bonds, equities, real estate – anything that produces a fairly steady stream of income – is vulnerable, because the money you receive, whether as dividends, rent or interest, becomes less and less valuable. Result: big drop in assets prices.

So, how do you protect yourself? You already know the answer, dear reader. But let’s look at the possibilities to make sure we haven’t missed something.

Let’s begin with real estate. Over the long run, property usually stays even with inflation. But the trouble now is that this bout with inflation begins when property prices are already high…and coming down. Real estate prices are adjusting downward after a record bull market. Inflation just makes the correction worse, since wherever prices end up in nominal terms, they’ll be even lower in real terms.

The same could be said of stocks, but with slightly less conviction. U.S. stocks fell heavily last week. But they’re still down less than 15% from their all-time high. You could even argue that they’re cheap; that is, if you take current super-low bond yields into account. But as inflation rates go up, so do bond yields – normally. Then, stocks go down with bond prices. Why? Because when bond prices go down, yields go up, making bonds more attractive than stocks.

Of course, not all stocks will do badly. If we are replaying the ’70s, we’ll find that oil stocks provide a return above inflation. Gold stocks too could produce spectacular rates of return for a few years. But most stocks will probably go down.

Bonds are always vulnerable to inflation. Remember the ‘bond vigilantes’? These were the guys who dumped bonds as soon as they caught a whiff of higher inflation in the air. These fellows went to sleep during the Reagan Era. Paul Volcker had inflation under control; bonds were in a long-term bull market; the vigilantes had nothing to do. Once in the land of nod, they stayed asleep for the next 20 years. Only recently have they begun to stretch and yawn.

But real yields are still so low; the vigilantes still have not completely wiped the sleep from their eyes. In the United States, for example, the real yield on a 10-year T-Note is MINUS 2%. And last week, the yield on the 10-year T-note fell below 4%. We don’t know what to make of it. But as inflation increases, that yield is going to rise – meaning, the value of bonds will go down.

No, dear reader, bonds are no country for old men, at least not for old men with money. Not when inflation is going up.

How about treasury bonds linked to inflation, or TIPS as they are called? Nope. Don’t even think about it. For one thing, when the bond market goes down, inflation-adjusted bonds go down too. Because there are two parts to the value of these bonds – there’s the regular part, which acts like any other bond, and there’s the inflation-adjusted part, designed to offset the loss from inflation. The inflation- adjustment only offsets inflation, not the loss from the bond market.

And even the inflation-adjustment is no sure thing. The people who decide how much inflation compensation you get are the same people who have to pay you for it. It is a bit like letting the undertakers decide when you are ready to die; the conflict of interest may be good for their business, but it might be bad for you. What is good from the government’s point of view is a low official inflation number. Billions and billions of dollars depend on the CPI calculation- everything from tax rate adjustments, Social Security payments, to monetary and fiscal policies. In a better world, perhaps we would have honest inflation numbers. But in a better world, we wouldn’t need them.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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3 Comments on "Consumer Price Inflation has Spooked Investors Everywhere"

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“Diversification no longer works,” writes Tony Jackson in the Financial Times…Result: big drop in assets prices.” Why are you quoting this idiot? Diversification is not about the return on investment because that component no one can ever be sure of ex-ante – it will affect returns but only as an indirect influence through the adjustment of portfolio volatility. Diversifying one’s portfolio is about minimizing risk exposure so that your investment outperforms, on average, a designated index over time. When markets recede, and in the case of globalization everybody tumbles, your portfolio is also sure to take a hit. If your… Read more »

Bill: the mystery is why, this time round, your “Fed punishers” have chosen to use oil, but not US treasury bonds to fight the US Govt’s rubbery inflation rate and phoney low cash rate. Why aren’t the Chinese and Japanese, big holders of US bonds, playing the game and offloading their stash? There’d be a lot less collateral damage for the rest of the world if US bond prices nosedived instead of oil prices going through the roof.

The USD is the world’s reserve currency. China,Japan, the UAE, Russia and India are all long USD in their foreign reserve accounts. The implications of any one of these major entities undertaking a drastic short position on the USD would be immense. The value of the greenback would certainly be subject to free fall we’ve yet to experience. If such an unprecendented move occurs with even one of those major palyers then (1) the remaining holders of USD would be pretty vexed about their worthless pile of Benjamin Franklins and (2) a significantly depreciated USD would devastate exporters who, despite… Read more »
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