Everything about the economy right now comes back to one thing: Inflation.
It’s an economic problem. It’s a political problem. And right now, it’s a huge personal problem for your wealth.
Today, we’re seeing the impact of inflation from the estimated $5 trillion fiscal stimulus created during the pandemic.
You can see the massive increase in the chart below… And you don’t need a Ph.D. in economics to notice anything unusual…
The chart above shows the M1 money supply, the widest measure of money as calculated by the government. (It includes physical cash and cash equivalents like bank account balances.)
This explosion in money reflects the impact of the stimulus checks the government handed out like party favors during the pandemic.
It also includes extended unemployment benefits… forgivable loans to businesses to avoid layoffs… and the trillions of dollars that went to shore up the banking system over the past 30 months.
While we understand the need for government assistance during a pandemic, the massive stimulus spending came at a price…
Currently, the inflation rate sits at 8.6% – a 40-year record high.
But if we use the same method used to calculate inflation 40 years ago in 1982, it would actually be around 15–16%.
For most investors, myself included, today’s inflation is a new phenomenon eating away at our capital. And it could be the start of a secular trend of higher inflation rates.
The last time we saw a general trend of higher inflation was the 1970s and 1980s. Those were tumultuous years.
The stock market had been rallying through the “go-go” 1960s. It peaked in 1968 and saw a brutal decline, including the 1973–1974 bear market of as much as 48%. By 1980, it had provided investors with no real return for 12 years.
That’s because inflation increased from 6% to over 14% throughout the 1970s.
It made long-term investments more uncertain… So investors were unwilling to pay the premiums for stocks as they did in the 1960s.
As I detailed Monday, this trend in inflation will create a New Reality in Money.
The pain ahead will come in the form of a real and persistent loss of purchasing power… So traditional retirement vehicles like cash, stocks, and bonds won’t be enough to overcome persistent real inflation rates of 15% per year.
For most Americans, it means they will see a gradual – and then sudden – decline in their quality of life. Families that could afford two new cars will have to do with one used car.
Young families that have yet to buy their first home could be priced out of the market for the balance of the decade. Families at the very lowest economic rung will face financial ruin… forced to rely on the charity of friends, neighbors, and family.
Retirement dates will be postponed. Family vacations will become staycations. And many families will be forced to take on multiple jobs to make ends meet.
This was the reality of the 1970s and early ‘80s, and it’s already happening now.
Our New Financial Reality
Cash is the universal asset class because everyone needs it. And we like it because it provides optionality (choices).
Whether for an emergency, a bear-market buying opportunity, or something else, you need cash on hand.
But if you’re holding cash in a bank, you’ve earned little to no interest over the past decade.
While you might get a return in the 1–2% range due to rising rates… 15% real inflation means you’re losing purchasing power… Big time.
It’s a big reason life has gotten harder for many… even when the economy is doing well.
Then we get to bonds…
Bonds are a loan you make to a government or corporation. Over the past decade, these bond yields have barely outpaced inflation.
So with inflation now skyrocketing, bond yields no longer offer much protection. For instance, the 10-year Treasury currently has a 3% yield.
Would you lock up your money with Uncle Sam for 10 years at 2.8% if real inflation is running at 15% or higher?
No, because you’d still be losing purchasing power.
The bond market is where you’re supposed to go for safety when you retire. Instead, it can now cost you a retirement – and there’s no way to get ahead.
Next up is stocks…
When inflation is high, stocks generally don’t fare well. We can see this in the chart below, which compares the annualized inflation rate to the S&P 500 price-to-earnings (P/E) multiple. As inflation rises, stock valuations decrease.
When inflation is high, you need to be in very specific companies that have pricing power no matter where the market goes.
The point is, it doesn’t matter where you are in life. You’re losing out to inflation if you’re near retirement or are a retiree largely invested in cash, stocks, and bonds.
A New Allocation Model for a New Reality
According to a Philadelphia Federal Reserve survey, economists predict an average inflation rate of 3.4% over the next five years…
That’s more than double the 1.5% average recorded five years before the pandemic.
And a report by Trading Economics found that most investors expect inflation to run above 6% over the next year.
So, economists and investors believe inflation will remain high in the short term.
Now, we don’t expect inflation to run red-hot forever. When the global supply chain returns to normal and Covid lockdowns end in China, prices will come down.
But even if the Fed miraculously achieves its target inflation rate of 2%, that’s still reduces your purchasing power over the next decade by more than 18%.
That means we need to revamp our asset allocation model to prepare for this New Reality of Money.
I based this model on conversations with ultra-high net worth individuals in my network.
This is how they invest their money to outpace today’s inflationary environment.
The New Reality allocation model will focus on stocks that will flourish in the New Reality of Money… fixed-income ideas that will outpace inflation… and cryptocurrencies like bitcoin and Ethereum that we believe will become staple assets among global institutions.
We’ll also expand our exposure to alternative assets, including high-end real estate, collectibles, and certain industrial and precious metals.
Of course, I know most of my readers can’t afford to invest millions of dollars in watches and fine art like the wealthy. So I’ve designed this model to give exposure to these asset classes for a fraction of the costs through fractional investing. (Paid-up Palm Beach Letter subscribers can read more on our fractional platforms right here.)
This New Reality model is the biggest change I’ve made to our core investment strategy at PBRG since I added bitcoin to our portfolio in 2016.
I believe it strikes the right balance of growth, value, income, and asymmetric opportunities to help the not-yet-rich become wealthy.
It also simplifies our previous asset allocation model into three broad classes: Equities, Fixed Income, and Alternatives.
Here’s how that’s broken down…
Equities (50%): We’ll look for blue-chip stocks with above-average dividends or growth stocks with high upside potential.
Fixed Income (20%): We’ll look to identify reliable assets with inflation-beating yields, including real estate (more on this below).
Alternatives (30%): These are a mix of asymmetric ideas with huge potential upside (i.e., cryptos, private deals, etc.) and financial safe havens that offer long-term outperformance. (i.e., collectibles, precious metals, art, trophy real estate, etc.)
Our old asset allocation model has nine asset classes. So by shrinking it to three, we’re cutting the complexity of our portfolio down by two-thirds… while still maintaining plenty of diversity and flexibility.
In addition, we’re also elevating our Alternatives asset class to hold a larger weight than fixed income. We believe alternatives offer a better way to protect your purchasing power and a higher risk-adjusted return in this market environment.
We also made the model broad enough to allow you to tailor it to your circumstances. I want you to be able to look at a potential investment and easily consider how it fits into your overall investment portfolio.
That said, take a moment and reflect on your goals as an investor…
If you’re in the latter half of your life and are more concerned with preserving your capital and avoiding risky investments, consider allocating more to fixed income and alternatives than equities.
If you have a longer time horizon and can afford to take on more risk, consider allocating less to fixed income in favor of equities and alternatives.
As I mentioned yesterday, our asset allocation model has helped us achieve 147.8% average annual returns since I took over the Palm Beach Letter in June 2016.
With this simplified version, it will be easier to track and consider how any new position fits into your overall investment plan.
A Fresh Start in a New Reality
Friends, if you haven’t been able to catch up financially, it’s not your fault.
It’s not your fault Congress has spent like a drunken sailor… It’s not your fault the Fed has inflated the monetary supply by trillions of dollars… It’s not your fault that Wall Street has misled you.
It’s not your fault that prices are going up… It’s not your fault that the markets are tanking… And it’s not your fault that America is going in the wrong direction.
But it will be your fault if you don’t begin to prepare yourself now for the New Reality of Money.
I want you to view this current market sell-off the same way the ultra-wealthy are viewing it: A chance for an “in-game” reset.
We saw a similar reset during the 1994–95 downturn. In my opinion, it was the single best buying opportunity of the entire decade…
If you dared to buy blue-chip stocks back then, you would’ve made a killing over the following five years. The risk/reward ratio was fantastic.
Remember, the market fell 9% overall in 1994.
The sell-off hit world-class companies hard. Pepsi, General Electric, and IBM fell 27%, 16%, and 14%, respectively.
There was no fundamental reason for the sell-off. They were high-quality companies with high-quality earnings. They made billions in revenue.
If you recognized these were world-class assets… you could’ve made a fortune buying them when everyone thought they were toxic.
Less than five years after they sold off, Pepsi, General Electric, and IBM saw gains of 217%, 345%, and 564%, respectively.
If you missed the beginning of this current bull market, these in-game resets give you a rare chance to start over and capture all the upside as the secular bull market resumes.
You just need the right strategies to position yourself to come out of this downturn wealthier than you went in.
My research suggests we will be in a secular (long-term) bull market in stocks until 2028, so there’s still plenty of upside to capture.
I know that’s an outrageous prediction, especially given all the volatility this year.
And I realize this isn’t the message you might want to hear.
Your portfolio’s down… food prices are climbing because of inflation… and watching the news each night is terrifying. Again, that’s not your fault.
But if you don’t position yourself now to deal with this New Reality of Money, it will be your fault.
I’ve given you the game plan. I’ve shown you what the ultra-wealthy are doing. And I will continue to share the simple steps you can take to protect and grow your wealth.
Let The Game Come to You!
P.S. If you want to stay afloat and profit in today’s market, you need to prepare for the New Reality of Money… and that includes rethinking the way you invest.
So once you’ve adapted your strategy as I’ve outlined above, consider this…
Despite record-high inflation, there’s a market catalyst on the horizon that could return 21 years of S&P 500 returns in as little as 12 weeks… and it could happen as soon as this month.
That’s why next Wednesday, July 20 at 8 p.m. ET, I’m holding an urgent event explaining all the details… and it’s absolutely free to attend.
This catalyst is a rare opportunity to recapture any gains you’ve lost in the market this year… and position yourself to make much, much more.
So click here to reserve your spot… and you’ll even get a free list of stocks to play this catalyst just for showing up.
I hope to see you then.