As we continue our discussion of hyperinflation from last week, traditional financial advice will be worthless and destructive during hyperinflation.
As a matter of fact, if hyperinflation happens (we’ve been discussing the reasons why it might here), most everyone will be totally starting over financially when we come out of it. We’re going to spend a couple posts showing you the big picture of what the effects would be and then we will dig deeper and look at many specific asset classes. Pay attention to each one because most people believe they are safe by doing exactly the sort of things which will be hurt the worst.
What are the financial affects of this kind of hyperinflation?
Generally, most investments will be crushed in an environment like this. We’ll run through a few examples of what we think will happen to different asset classes if we do experience hyperinflation to some degree or another so that you can check these realities with the financial advice you might be getting elsewhere.
Most people think bonds are safe. This is common financial advice. That’s because it’s been a long time since we’ve experienced any significant inflation and we’ve never experienced hyperinflation in this country. A promise of a future stream of a certain number of US Dollars becomes worth less and less the more severe inflation is. Bondholders will lose most everything.
Stocks will be a wild ride! We’ve already said we expect stock prices to go down considerably. You will lose a lot of money in stocks. Wall Street has taught most people to think that they’re in it for the long haul, so they don’t care about the short term fluctuations. Most of these people will end up selling their stock holdings at the bottom of the market because they are so desperate for cash. Stock prices will probably get extremely low. After that, at some point, the prices of the best company’s stocks will rise dramatically. If it’s a good quality business that has staying power, they will be able to sell their goods and earn a profit at whatever the new going rate is and thus will be a good hedge against inflation.
Many other companies will go out of business and their stocks go to zero. Some companies will do very well in this environment because their businesses thrive in that environment so you should keep your stock holdings dedicated to this type. We’ll cover the types of stocks we believe will do well in this environment below.
Real Estate will fall further and eventually rise dramatically. As people are broke and desperate, real estate prices will suffer for lack of buyers. However, real estate is a real asset and so it will weather the storm and in the end be a great hedge against inflation to protect the value of your money. But the time in between now and then will be difficult and many will be unable to pay their mortgages and lose their properties which they had expected to grow well.
If you have real money on hand during this time, there will be incredible opportunities to buy cheap stocks and real estate!
We’ll discuss other holdings (such as cash in the bank) tomorrow.
Photo credit: taranoel