The Best Inflation Hedge Ever Created (Not What You're Expecting)

Endlessly pushing the 'transitory' propaganda... The Federal Reserve's big lie is like the devil's best trick... Two sources of double-whammy upside... The best inflation hedge ever created (not what you're expecting)...

I (Dan Ferris) want to start today's Digest with a simple question...

Are you worried about inflation?

Now, I know... In reality, that's a much more "simple" question for me to ask than for you to answer right off the bat.

Most people just don't talk (or care) about inflation much until it starts creeping higher. And frankly, it's a complicated topic to grasp... so some folks just choose to ignore it altogether.

My colleague and Digest editor Corey McLaughlin touched on inflation just yesterday...

But before that, was it on your radar at all? Or were you more concerned with speculating on call options... trying to find the next great "meme stock" like AMC Entertainment (AMC)... or figuring out how to get a "pet rock" non-fungible token at a discount? (I'm really not kidding about the last one... It's the "latest craze," apparently.)

Here's the thing... If you're not worried about inflation, you'll want to read today's essay.

By the time you're finished reading, I hope you'll see exactly why inflation presents a huge, ongoing risk to investors... And more important, I'll help you figure out some of the steps you can take right now to protect yourself and your wealth from this looming threat.

You see, my colleagues and I have been talking more about inflation in the Digest recently because it's our duty to give you the best tools to succeed as an investor. It's similar to what our company's founder, Porter Stansberry, has said many times over the years...

These warnings are what we would want you to do for us if our roles were reversed.

It's easy to see why inflation is capturing headlines again today after years in the shadows...

On Wednesday, the U.S. Bureau of Labor Statistics reported the Consumer Price Index ("CPI") data for July... It came in at 5.4% over the 12-month period. That's the same increase that the BLS reported in June.

Remember, the CPI is the Federal Reserve's official inflation gauge. These recent readings are the highest since the index hit 5.6% in July 2008... And before that, you would need to go back another 18 years to see it that high again.

The Fed wants you to believe inflation is "transitory"... That word appeared eight times in the Federal Open Market Committee's minutes from the June meeting. (That's the most recent available minutes on the Fed's website. It hasn't published the July version yet.)

The buzzword has clearly made the rounds behind the scenes at the Fed... It's like how Disney's (DIS) marketing folks probably sit around talking about the style of Mickey Mouse's clothing. Nothing is left to chance – whether it's a cartoon character's fashion sense or a quasi-government institution's "big lie"...

You might be familiar with the idea of the big lie... It's often attributed to Nazi propaganda chief Joseph Goebbels, but it really came from his boss, Adolf Hitler, in the latter's book, Mein Kampf. The idea is simply that if you repeat a big enough lie often enough, people will believe it.

So in other words... if the Fed's members say the word "transitory" every time they get a question about inflation, maybe they're hoping enough people will start to believe it and brush it off as insignificant and temporary.

But the thing is, believing this big lie could cause mass destruction in our economy. It has done so in the past... and I promise it'll do so again in the future.

That's because, despite what the Fed wants you to believe, inflation is real and dangerous. And worse, it's constantly happening. You must do something about it right now.

Now, about that big lie...

I spoke with Dr. Lawrence Lindsey on the current episode of our Stansberry Investor Hour podcast. (And by the way, as we mentioned yesterday... Stansberry NewsWire editor C. Scott Garliss also chatted recently with Lindsey. You'll get to hear much more of his thoughts in an exclusive, two-part interview in the Digest next Monday and Tuesday.)

Lindsey served as a member of the Fed's board of governors for more than five years in the 1990s. And during our interview, he shed some light on his former employer when telling me that...

What really drives public policy is institutional self-interest, not necessarily individuals. And the Fed acts to preserve itself and expand its power... I think it matters less who the chair[person of the Fed] is, and more what the institution thinks it should do.

Well, these days, the institution... the chairperson... the night janitor... or whoever else is connected to the Fed... thinks there's no way the central bank can allow the idea that rampant inflation has already taken hold in the U.S. to go unchallenged.

So it perpetuates the big lie... It drops the "transitory" bomb every chance it gets.

The Fed has a little problem, though... The transitory narrative doesn't square with the unrelenting reality of the historical CPI data.

Even if you believe the CPI is a flawed measure that's manipulated in the name of institutional self-interest, you must admit that the institution doesn't seem to be in control lately... As I said earlier, this "official" number is at a 13-year high right now. A better inflation gauge would probably look even scarier.

You also must admit once you see what I'm about to show you that inflation is an unrelenting force... And it has gone in one direction – up – ever since "The Day They Killed the Dollar," as Gold Stock Analyst editor John Doody called it recently (which was a big part of the discussion in yesterday's Digest).

For starters, take a look at how the CPI has taken off in the shorter term. It all started soon after the COVID-19 lockdown recession ended in the spring of 2020...

(By the way, the CPI is based on the index average from 1982 to 1984, which was set to 100. So a CPI reading of 100 would mean that inflation is at the same level as it was in 1984. But as you can see from the chart above, it's much higher than that today.)

Now, in the next chart, you'll see CPI data going all the way back to August 15, 1971...

As you know from yesterday's Digest, that's "The Day They Killed the Dollar." It's when President Richard Nixon ended the Bretton Woods Agreement, cutting the U.S. dollar's final tie to gold.

Ever since then, inflation (according to the CPI) has gone up and to the right. Take a look...

If that were a stock chart, everybody and their Uber drivers would buy shares and never sell... And every technical analyst on the planet would proclaim it as the most relentless, reliable trend of the past 50 years.

The long-term chart of relentless inflation reminds me of the devil...

His greatest trick was convincing everyone he doesn't exist.

That's what the propagandists in the Fed and the government have done... They've conned us all into believing that the unrelenting, undeniable presence of the most diabolical of economic forces is not worth a nod.

Check out any inflation calculator on the Internet... It will show you cumulative inflation since 1971 of about 574%. That means it now takes $6.74 to buy what only cost $1 back then.

Inflation has been the norm since 1971... And even worse, it's here to stay as long as the U.S. dollar remains untethered to anything of real value like gold.

The CPI – the most widely reported inflation gauge in the world – has gone up, up, and up for half a century with just two notable reversals. But as you can see above, they're both just small blips on the long-term chart...

1. A drop for most of 2009
2. A tiny, brief dip in 2015

Otherwise, the CPI has grown month after month for decades. So it's totally uncontroversial to say that we've experienced plenty of inflation since the day the U.S. dollar died.

Still, over the past decade or two, it has become normal to talk about low inflation...

The reason for that – propaganda aside for a moment – is that although inflation (CPI growth) is rarely negative, it has frequently been low enough that most investors have learned not to think much about it. They've just put it out of their minds.

When you chart monthly CPI growth, you get a much different picture...

As you can see, CPI growth peaked around 13.8% in 1980. That was just before hawkish Federal Reserve policy under then-Fed Chair Paul Volcker sent interest rates soaring, crushing inflation. And in recent decades, it has been little more than an afterthought...

That's why anybody who started investing within the past 30 years or so has been conditioned not to worry much about inflation. That's what the market has taught them...

Folks who look at a chart of CPI growth falling year after year for decades see low inflation as normal. (It's sort of like how people in 2006 said home prices could never fall... which they preceded to do for six years after that.)

The evidence seems to be everywhere about why folks shouldn't have worried about inflation...

For example, bonds perform poorly during times of high inflation. That's because depreciating currency values clobber fixed interest payments.

But with low inflation as the norm, bonds have excelled for the past 40 years.

Just look at the yield on the 10-year U.S. Treasury note since 1990. Remember, bond yields fall as prices rise... So the following chart shows us that 10-year Treasurys have relentlessly risen in value for investors as CPI inflation rates have fallen in that span. Take a look...

Bond yields bounce around more than the CPI because it involves an actively traded market... And over the short term, most securities prices experience plenty of random movements. But the relentless fall of interest rates (and corresponding rise of bond prices) is a clear indication that investors have worried less and less about inflation over the past several decades.

As far as I'm concerned, though, a 13-year high in the CPI amid massive money-printing antics from the federal government puts all of that behind us...

You should definitely not swallow the Fed's propaganda about inflation being a "transitory" phenomenon. It has always been here. It will always be here. So with that said, you better figure out what to do about it before it hits your portfolio over the head and robs it.

In the May 28 Digest, I might have seemed to waffle as I considered other views on inflation. But make no mistake... I'm like that kid in the 1999 movie The Sixth Sense. He saw dead people that nobody else saw. And I see inflation, even if the bond market doesn't.

Of course, we're not economists and philosophers around here. Our beat is actionable advice, not pontification. So let's get to exactly what it all means for you...

What can investors do about inflation?

I bet many Digest readers have already made one of the best anti-inflation bets of all...

During our Investor Hour interview, Lindsey was discussing the inevitable outcome of the real economic ideas behind his new novel, Currency War – with inflation being the primary one. And as he told me...

Long-term bonds are only going to go one way, and that's down in price, up in yield.

So with that in mind, you should sell short bonds, right? Well, sort of...

Shorting bonds is complicated and costly. And frankly, it's probably a bad idea for 99.99% of everybody reading today's Digest.

But you can short bonds easily by simply getting a mortgage loan and buying a home. By taking on debt, you're effectively "short debt"... You effectively owe less and less over time as the value of the debt falls in inflation-adjusted terms.

Lindsey mentioned getting a mortgage and buying a home as his No. 1 way to fight inflation. He emphasized the double-whammy upside of borrowing at low fixed rates and buying a home...

First, by borrowing for the long term at low fixed rates, you get the use of current dollars. But as inflation pushes the currency value down over time, you're paying it back "in confetti" as Lindsey put it – meaning dollars of lower and lower value.

As Lindsey said, taking on fixed-rate mortgage debt right now "puts you on the same side as the government." By that, he means the government is also loading up with debt, giving the Fed a growing incentive to keep interest rates low for as long as possible.

And secondly, Lindsey noted that home prices tend to track inflation over the long term (the drop in home prices from 2006 to 2012 notwithstanding). So the value of your home will tend to protect you from the drop in the value of the currency.

Lindsey also shared another inflation-fighting trade with double-whammy upside...

Own mining stocks.

In terms of the first whammy... as metals prices rise, mining companies' profit margins go up. And the second whammy is that rising metals prices raise the value of these companies' mine reserves.

My generally conservative nature prompts me to add a word of caution here...

First, nobody can really see underground until the digging starts. So there's always some risk about what's down there.

Second, mining is a capital-intensive, competitive, low-margin, highly cyclical business. And generally, only two kinds of folks buy these types of stocks – contrarians and victims.

The contrarians pick up shares of mining companies at bargain prices and hold them through the tough times. On the other hand, the victims buy after they've already appreciated... and therefore, they lose money instead of reaping the rewards.

So if you're going to explore this space for potential opportunities, you must do some homework to understand each mining stock before you buy. You could also follow a great guide like John in Gold Stock Analyst. Just tread lightly... and as always, don't invest more than you're comfortable losing.

Other than that, what do I think you should do to combat inflation today?

Regular Digest readers have heard me say, 'Prepare, don't predict' many times...

Putting money at risk based on your ability to predict the future is a fool's errand. Learning to prepare your portfolio for a potentially wide range of outcomes (including inflation) is a much better idea.

A well-prepared portfolio includes gold and silver. I've said that countless times. But remember, gold and silver shouldn't replace any portion of your equity portfolio... You hold gold and silver to preserve the purchasing power of your savings over long stretches of time.

Gold is perhaps the single oldest vehicle through which humans have preserved value over time. The precious metal has been around for 5,000 to 6,000 years... And the "Lindy effect" suggests it will be around for at least 5,000 to 6,000 more years.

So for starters, I recommend owning some gold to protect your savings from inflation today.

But if you were to ask me for the No. 1 best way for investors to combat inflation over long periods of time...

First, I would probably say something like, "Well, everybody's situation is different, and I can't tell you what's right for you." Then, I would say...

"The best inflation hedge ever created is equity in great businesses."

By that, I'm talking about everything from a single share of a publicly traded company to 100% of your own business (provided it's a really great one, of course).

What do I mean by great businesses?

The hallmark of a business that can fight inflation over the long term is its ability to earn high returns on the capital it employs. Shares of a business that earns high returns on capital are like a long-term bank account earning 15%, 20%, 30%, or more on your savings.

As Berkshire Hathaway (BRK-B) Vice Chairman Charlie Munger put it in a speech many years ago...

Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns.

If the business earns 6% on capital over 40 years and you hold it for that 40 years, you're not going to make much different than a 6% return even if you originally buy it at a huge discount. Conversely, if a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with a fine result.

The benchmark S&P 500 Index provides a fine example of the effect I'm talking about... For every $1 invested in the S&P 500 since the beginning of 1971 – with all dividends reinvested – you would have $166.56 today. That's a return of more than 16,500%.

Compare that with the increase in gold... It was set at $35 per ounce back then and trades for around $1,775 per ounce today. That's a roughly 5,000% increase. Gold did its job, proving to be a perfect savings vehicle over that period of time.

But gold is not an investment... It's wealth preservation.

Investing in businesses like the ones in the S&P 500 is about wealth creation... You invest capital to earn a return on it. All investment returns are based on cash flows... And gold doesn't do that. Businesses do that.

Companies that earn high returns on the capital they invest in their businesses are the best wealth creators on the planet. They're the 15%, 20%, 30%, and higher compounders... the long-term multibaggers that can make you 10, 20, or 50 times your money over time.

Over an investing lifetime of five to seven decades, your best passive investment will be owning equities in high-return businesses. You'll not only beat inflation, but you'll also have a chance to turn a modest investment into a fortune.

Nothing beats inflation like wealth creation... like getting rich.

My colleague Mike Barrett and I recently found another one of these excellent compounding vehicles...

We reported all the details on this company in the August issue of Extreme Value, which published earlier today. (If you're a subscriber, you can read our full report right here.)

This little company ranks No. 1 or No. 2 in market shares in the overwhelming majority of its product categories. Its product is required by law in most developed countries – and many developing ones, too.

It just completed the best year of its existence, with huge revenue and earnings growth... And we believe it's just the beginning of a massive growth spurt.

Plus, just like all the best inflation-beating compounders, it earns high returns on capital.

You can measure returns on capital several different ways. We use return on equity in Extreme Value...

Our newest recommendation earned an average return on equity of an incredible 47% over the past five years. I promise you, that kind of business will trounce inflation... and help you compound a fortune. That is what Munger was talking about.

Like I tell my Extreme Value subscribers, if a business were a bank account, return on equity is the interest rate you would earn on all the money you left in it... This company might not average 47% over the next couple of decades, but it's off to a great start and will likely outperform most businesses over the long haul by starting with that kind of number.

So by all means, I still recommend maintaining a truly diversified portfolio of stocks, plenty of cash, gold and silver, and a little bitcoin. But always remember this point...

That type of portfolio only includes one wealth-creation vehicle – the equity of great, high-returning businesses. So make sure the bulk of your equity portfolio is focused on that principle.

Overall, our Extreme Value model portfolio is full of great businesses...

In fact, I just put together a brand-new presentation about another one of our current recommendations...

This is the smallest company I've recommended in Extreme Value in seven years. Its market cap is currently less than $300 million. But it won't stay that way for long...

This company checks all the boxes that Mike and I look for in a great business. And our research has led us to believe that this stock could triple (or more) over the next two years.

If you're not already an Extreme Value subscriber, I'd encourage you to take some time to learn all the details about this opportunity... You can watch my full presentation right here.

In the meantime, remember everything we've discussed in today's Digest...

Despite the Fed's best efforts to push the "transitory" narrative, inflation is – and always will be – a threat to your wealth. But you don't need to just sit idle and watch all your savings disappear...

Instead, you can take the simple steps we've discussed today. You can set aside a portion of your wealth in gold... And you can always invest in great, high-returning businesses.

Over the long haul, those preparations will help you successfully fight the threat of inflation.

New 52-week highs (as of 8/12/21): ABB (ABB), Asana (ASAN), CBOE Global Markets (CBOE), CoreSite Realty (COR), Costco Wholesale (COST), Alphabet (GOOGL), ICICI Bank (IBN), Innovative Industrial Properties (IIPR), Ingersoll Rand (IR), Johnson & Johnson (JNJ), Microsoft (MSFT), Motorola Solutions (MSI), ProShares Ultra S&P 500 Fund (SSO), TFI International (TFII), ProShares Ultra Utilities Fund (UPW), Vanguard S&P 500 Fund (VOO), and Waste Management (WM).

In today's mailbag, more feedback on Kim Iskyan's Tuesday Digest... Do you have a question or comment? As always, send us an e-mail at feedback@stansberryresearch.com.

"With regard to Kim Iskyan's troubles with Chase (I'm sorry to hear of them – my experiences with Chase have been considerably better), I have some general comments to make. Hopefully, these items will help your readers at some point.

"You will usually be better served if you shop for a mortgage at a Mortgage Brokerage, rather than at a bank. A bank may have half a dozen different mortgage programs, but a brokerage may have all of that bank's programs and several dozen more available. If a brokerage represents 200 or 300 different lending institutions (not just banks), they will be better able to fit a product to your needs. And, yes, they will probably be able to get the same rates – or even better.

"A Mortgage Broker can offer you versatility in other ways as well. As a Mortgage Loan Agent, I was once faced with a similar problem that Mr. Iskyan faced. When the delays became intolerable, I was able to call the regional rep from a different lender and ask them 'Can you work a miracle?' We didn't (quite) meet the deadline, but it turned 'not going to happen' into 'done.' I can't see how a bank could provide that kind of agility.

"As a Real Estate Investor, I am a firm believer in Contingency Clauses. These are how a Buyer (and in some cases a Seller) gets protection against things that can go wrong. For example, if an Appraisal is not obtainable within a given deadline, perhaps you could specify that a Broker's Price Opinion be substituted for the appraisal. I like to include a catch-all contingency clause in my purchase offers, in case the other contingencies aren't triggered, but I discover something is wrong with the deal; I require that one of my associates review the transaction for merits and the purchase will require their approval. (I generally include a time limit for them to perform the review.) I don't see how a contingency clause would have fixed the problem the Mr. Iskyan mentioned, but a contingency clause might have eased the hassle some.

"I also advise that when a person is shopping for a mortgage, they should seek to do business with a 'Portfolio Lender' – that is someone that lends their own funds (out of their own portfolio) and does so in order to collect the interest themselves, for their own financial benefit. Portfolio Lenders don't normally 'sell their loans' like Banks do. Actually, it isn't the loan that's sold, it's the rights to service the loan that get sold. Stories of Mortgage Servicing nightmares abound, they make the industry seem like it's laden with piranha. My mortgage servicing nightmare ended when I capitulated: I used other funds to redeem the mortgages on the properties in foreclosure, then refinanced the mortgages through a Portfolio Lender...

"On a similar note, I have learned that there are advantages to working with a small, regional bank. If I go into a branch of a national bank and request a business loan for $50,000, they'll tell me to get in line. If I make that same request at the branch of a regional or local bank, they offer me a place to sit and some refreshment. My business is more important to them than it is to a national bank.

"At least Mr. Iskyan had the resources to cope with the problem." – Paid-up subscriber Kurt S.

Good investing,

Dan Ferris
Eagle Point, Oregon
August 13, 2021