Hedging against inflation?

[matty77]

Just wondering what peoples thoughts are on hedging against inflation, or protecting yourself against it.

Obviously any money sitting in the bank right now is loosing its real value pretty quickly so how would people safely hedge against this if we get increased inflation in Australia or the US?

 

[Dona Ferentes]

Inflation linked bonds... such as ILB ?

 

[qldfrog]

Inflation linked bonds... such as ILB ?

has not been great, I did put some serious money there thinking as they are cpi indexed, it should be a smoother ride than fixed rate bonds..
But not at all, they are as bad..in that regards..hard to understand but this is what it is
In theory yes, but not working when I tried with cpi indexed aus. gov. bonds

 

[JohnDe]

Mining and food, for me.

The weird ways companies are coping with inflation

Consumers are barely yet aware of what is hitting them

Inflation is making up for lost time. A word that many thought had gone the way of peroxide hair and trench coats in the early 1980s is now back on almost every ceo’s lips as they run through a barrage of compounding shocks—war, commodity crisis, supply-chain disruption and labour shortages—in their companies’ first-quarter results. From December to March, almost three-quarters of firms in the s&p 500 mentioned inflation in earnings calls, according to FactSet, a data gatherer. Such is the novelty, it runs the risk of making such turgid occasions almost riveting.

In rich countries, producer prices are surging at their fastest rate in 40 years. That sounds bad. On the ground some say it feels awful. Thierry Piéton, chief financial officer of Renault, said the French carmaker initially predicted raw-material costs would double this year. Now it thinks they will triple. Elon Musk says Tesla’s suppliers are requesting 20-30% increases in parts for electric cars compared to this time last year. Others talk of five-fold increases in the costs of sending containers between Europe and Asia, a dearth of truck drivers in America, and a scramble for everything from corn syrup to coffee beans and lithium.

Amid such a maelstrom, the perils of getting inflation wrong are obvious. You only need to look at Netflix, trying to raise prices in the midst of a brutally expensive streaming war, to get a sense of the risks involved. Yet in general, some of the world’s best-known companies are coping. After years of negligible increases, they have managed to push up prices without alienating their consumers. How long they can continue to do so is one of the biggest questions in business today.

In some cases, as Mark Schneider, boss of Nestlé, the world’s biggest food company, puts it, the public understands that “something has to give.” War, after all, is on the tv, and the pandemic is still fresh in people’s minds. Inflation is less alien by the day. In other cases, pricing is done more sneakily: offering premium products to those who are still able to splash out, or cutting costs for those for whom affordability is the overriding concern. Many of the biggest firms do both.

The immediate advantage goes to those with the strongest brands and market shares. That gives them more flexibility to raise prices. Coca-Cola, with almost half of the world’s $180bn fizzy-drinks market, used price and volume increases to deliver bumper earnings, which one analyst described as a “masterclass in pricing power.” Nestlé, which has barely increased prices for years, raised them by 5.2% year on year in the first quarter, its biggest increase since 2008. There may be more to come, it reckons. Mr Musk said Tesla’s price increases were high enough to cover the full amount of cost increases he expects this year. Yet still the vehicles continue to fly out the door.

Such firms benefit from another factor associated with brand power: premiumisation, or their ability to raise the cost of already pricey products. The trend appears to be holding fast. In Nestlé’s case there are, as yet, few signs that well-heeled consumers are trading down from, say, Nespresso pods to Starbucks capsules to (heaven forbid) spoonfuls of Nescafé.

Pet owners are the most bounteous. Nestlé’s Purina pet-care division, with telltale products like “Fancy Feast”, achieved the largest price increases across all categories during the quarter. Parents are far more parsimonious; they are much less willing to pay a high price for baby formula—though Kimberly-Clark, another consumer-goods company, has high hopes for premiumisation of nappies in China. As Michael Hsu, its ceo, put it, “the value per baby is less than half of what it is in developed markets like the United States”. Consumers in rich countries are also better able to cope with price rises than those in poorer ones. Firms like Coca-Cola offer better-packaged premium products in America and Europe, and more value-conscious ones in emerging markets.

So much for the haves. What about the have-nots? If firms can’t raise prices, why not shrink the products they sell instead. This tactic, baptised in Britain in 2013 as shrinkflation, dates back a lot further. Hershey’s, an American confectioner, proudly recalls how in the 1950s it responded to fluctuations in cocoa-bean prices by regularly changing the weight of the bar, rather than the five-cent price. No one admits to shrinkflation these days. But they are rebranding it in ways that are cool, thrifty—and in some cases even environmentally virtuous.

Renault, whose executives describe Dacia, a subsidiary making its cheapest cars, as an “everyday-low-price sort of brand”—somewhat like a soap powder—is hot on the trend. It is slashing the number of different parts across its models; that means more leverage with suppliers since fewer parts are bought but in larger volumes. Likewise, there’s plenty of talk among snack producers about reducing packaging sizes of cheap products, not just to cut costs but to save on waste. Coca-Cola is selling drinks by the cupful in India. In Latin America it is expanding its use of refillable bottles. In America’s south-west, it is piloting a scheme for use of returnable glass bottles. Rather like hotels asking guests to use fewer towels to spare the environment, it will surely be good for the bottom line, too.

Elastoplast
The good news is that consumers have, by and large, taken the inflationary shock in their stride so far. As chief executives have repeated in recent weeks, the sensitivity of shoppers to rising prices, or what they (and economists) call price elasticity, is not as bad as they had feared. But it is still only early days. Many consumers may not know yet how convulsive an inflationary environment can be. If prices continue to increase, and outpace growth in incomes, eventually the shock will sink in. Then the biggest question will not be how price-elastic people are, but whether spending snaps altogether. ■

The weird ways companies are coping with inflation

Consumers are barely yet aware of what is hitting them

www.economist.com

 

[Value Collector]

Just wondering what peoples thoughts are on hedging against inflation, or protecting yourself against it.

Obviously any money sitting in the bank right now is loosing its real value pretty quickly so how would people safely hedge against this if we get increased inflation in Australia or the US?

Anything where your assets are linked to actual real world things rather than currency.

Eg, Real estate, shares of companies that own real things, commodities etc.

For example, if you own a mine that holds 20 years supply of Iron Ore, copper or some other vital product, then as you mine that over the twenty years the price of the products sold will rise with inflation, as would the price of the corn you produced if you owned a farm, the rent you charge if you own and apartment building, etc etc.

Trading businesses like Woolworths are also sheltered, because as the price baked beans rises, so does their sale price and profit margins.

The price of everything from Coke, Big Macs, rent, plane tickets, theme parks tickets, net flex subscription, pharmaceuticals, concrete, bread etc etc etc will rise, so if you own the a piece of the companies making or trading those things you will be fine, but if you are stock piling cash waiting to buy those products in later years, you will find your purchasing power decreases.

 

[over9k]

Buy whatever's driving the inflation

 

[divs4ever]

Anything where your assets are linked to actual real world things rather than currency.

Eg, Real estate, shares of companies that own real things, commodities etc.

For example, if you own a mine that holds 20 years supply of Iron Ore, copper or some other vital product, then as you mine that over the twenty years the price of the products sold will rise with inflation, as would the price of the corn you produced if you owned a farm, the rent you charge if you own and apartment building, etc etc.

Trading businesses like Woolworths are also sheltered, because as the price baked beans rises, so does their sale price and profit margins.

The price of everything from Coke, Big Macs, rent, plane tickets, theme parks tickets, net flex subscription, pharmaceuticals, concrete, bread etc etc etc will rise, so if you own the a piece of the companies making or trading those things you will be fine, but if you are stock piling cash waiting to buy those products in later years, you will find your purchasing power decreases.

am not so sure of that ( this time ) our quasi-Communist overlords are liable to apply price-caps , rationing and or some other restrictions on a free-market economy ( like rent freezes )

but as a holder of WOW and COL ( and several miners ) i really do hope you are correct

 

[divs4ever]

has not been great, I did put some serious money there thinking as they are cpi indexed, it should be a smoother ride than fixed rate bonds..
But not at all, they are as bad..in that regards..hard to understand but this is what it is
In theory yes, but not working when I tried with cpi indexed aus. gov. bonds

remember CPI is a trailing index , so you will lose LESS than fixed rate , BUT the inflation will have to ( officially ) happen first for your returns to rise

 

[qldfrog]

remember CPI is a trailing index , so you will lose LESS than fixed rate , BUT the inflation will have to ( officially ) happen first for your returns to rise

Yes but isn't the market looking forward?
Anyway, i keep these
Sadly, we do not have access to ibonds as US residents do in the states.i would be maxed there

 

[3 hound]

You guys are overreacting, this inflation is transitory.

 

[divs4ever]

Yes but isn't the market looking forward?
Anyway, i keep these
Sadly, we do not have access to ibonds as US residents do in the states.i would be maxed there

the market looks forward , but bonds ( and 'official ' data ) NORMALLY move on historic data ( and sadly , not instantly )

now the exception are variable interest rates working on BBSW which can be forward looking but also can be based on FEAR ( the willingness on banks to lend to each other )

and THAT was the little glitch that triggered Repo Madness ( some banks were unwilling to lend to another even at 10% per month , yes technically it is overnight , secured , but i believe there is a grace period given if in stress )

could you imagine how housing market would go if a house mortgage was 120% a year , 17.5% was bad enough ( when i had one )

currently i have trivial exposure to interest rate securities , i have used REITs to ( inadequately ) to fill that gap

i also avoided ( where possible ) currency hedged products , i have seen where currency hedging has gone wrong

am wondering if that bear market will arrive and maybe there will be some corporate bonds that look attractive ( like they were in 2011 to 2016 )

 

[divs4ever]

You guys are overreacting, this inflation is transitory.

but transitory to WHERE ??

transitory means they are going SOMEWHERE ie not seen as stable ( or fixed )

having lived through the 1970's as a young adult i have seen what high interest rates are , now sure if you have a FAT salary those debt obligations can be repaid quickly and inflation works for you ( if you buy the right assets )

now i don't foresee rates going negative ( for long ) otherwise savings will vanish from banks, bonds etc

 

[wayneL]

Buy whatever's driving the inflation

Central banks?

 

[3 hound]

now i don't foresee rates going negative ( for long ) otherwise savings will vanish from banks, bonds etc

Explain this, I do not even get what negative interest rates means, sounds like it supposed to mean the lender pays you to borrow their money instead of charging you.?

but transitory to WHERE ??

Channeling my inner economist - things will get worse then they will get better.

 

[sptrawler]

Explain this, I do not even get what negative interest rates means, sounds like it supposed to mean the lender pays you to borrow their money instead of charging you.?

Yes, interest rates can be negative. Some countries have already implemented a negative official interest rate. These countries include Switzerland, Sweden, Denmark and Japan, along with the euro area.10 Sept 2021

An interest rate is defined as the price paid to borrow money. Negative interest rates mean that borrowers are credited with interest when they borrow money instead of being charged it.
Negative interest rates are an unconventional policy and can be used by central banks to stimulate their nation’s economy. When economic times are tough, people tend to hold onto their money and not spend it; however, this can further weaken the economy.

With negative interest rates, cash deposited at a bank yields a storage charge instead of the opportunity to each income from interest.

 

[over9k]

Central banks?

Energy.

 

[3 hound]

Yes, interest rates can be negative. Some countries have already implemented a negative official interest rate. These countries include Switzerland, Sweden, Denmark and Japan, along with the euro area.10 Sept 2021

An interest rate is defined as the price paid to borrow money. Negative interest rates mean that borrowers are credited with interest when they borrow money instead of being charged it.
Negative interest rates are an unconventional policy and can be used by central banks to stimulate their nation’s economy. When economic times are tough, people tend to hold onto their money and not spend it; however, this can further weaken the economy.

With negative interest rates, cash deposited at a bank yields a storage charge instead of the opportunity to each income from interest.

Something is amiss.. if I have no money I can borrow a million and get the million to keep + the interest the bank pay me to keep the free million.

Why don't I borrow all the money on the planet then and get paid (interest) to do so, gotta be a catch here.

 

[qldfrog]

Something is amiss.. if I have no money I can borrow a million and get the million to keep + the interest the bank pay me to keep the free million.

Why don't I borrow all the money on the planet then and get paid (interest) to do so, gotta be a catch here.

Yes catch is you still oay 2pc interest..only the big boys aka banks etc can play that game
do not worry, you..aka we as peons remain the suckers and at best get the crumbs

 

[3 hound]

Yes catch is you still oay 2pc interest

But it's negative interest they pay me??

 

[over9k]

The loans are still calculated on your ability to repay them through income. So you'd borrow 100k and have to repay 99k over 10 years for example. You still have a $9900 loan repayment. In the meantime, you have a big pile of cash you can do stuff with.

Make sense?