The World's Best Inflation Hedge

It's time to invest in yourself.

Jack Raines
June 09, 2022

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Some stuff I've been reading:

I recently came across Jesse Cramer's personal finance blog (his takes are much better than those of another Cramer in the financial sector). His recent piece using poker stories to explain the role that luck plays in our outcomes was fantastic. Check it out here.

Kyla Scanlon is the best of the best when it comes to explaining complex macroeconomic issues in digestible terms. Last week, she tackled a heavy question: Do we need a recession? Her latest piece does a great job of breaking down everything from the state of the labor market to the Fed's response. Check it out here.

Now to today's piece.

How Do I Hedge for Inflation?

An important question, considering we saw CPI inflation of 8.4% in April 2022. Some would tell you to buy bitcoin, thanks to its fixed supply. Others would say commodities like copper, corn, or oil will do well, while a third group, including myself, might invest their money in index funds and just let it ride.

It turns out that the best inflation hedge *is* an investment. But it isn't some asset where you park your cash and let the market gods take care of the outcome. The best inflation hedge is an investment in... yourself. Cue the Pinterest boards and cringe Google Image results.

You Can't Buy "Inflation Hedges"

When dealing with assets as inflation hedges, there are no guarantees. Obviously, if there was an "inflation hedge" that was guaranteed to work, everyone would put their money in it. If everyone put their money in a guaranteed inflation hedge, that asset's price would climb to the point that it ceased being an inflation hedge.

That's how market cycles work.

Of course, you can buy an asset that outperforms during inflation. Being long oil over the past year would have worked out quite nicely, for example! But oil prices have been skyrocketing for a number of reasons such as increased post-pandemic demand and exasperated energy supply chain issues in Europe (thanks Putin).

An asset isn't an inflation hedge just because it performs well during a period of high inflation.

There will always be assets that perform well during certain periods of inflation. There never has been, and never will be, an asset class that is guaranteed to outperform across *all* periods of high inflation.

Uncontrollable Circumstances

  • You can't control a virus that shuts the world down for more than a year, wreaks havoc on supply chains, and permanently alters how we work and communicate.
  • You can't control Russian aggression that instigates an all-out war in Ukraine.
  • You can't control a publicly-traded company's earnings.
  • You can't control interest rates.
  • You can't control quantitative easing.
  • You can't control consumer preferences.
  • You can't control the fear, greed, and speculation of market participants.

And any one of these variables could, at any point, adversely affect the price of your "inflation hedge."

It is far more prudent to focus on the variables that you can control.

What Can You Control?

Lex Fridman once said, "A good way to predict the future is to build it."

When you invest your money in external assets, price movement is determined by a million variables that you have no control over. Macroeconomic shifts, company execution, and the cumulative risk appetite of millions of other investors, for starters, are a few of these variables that could make or break your investment.

Throwing your money at external "inflation hedges" leaves the financial outcome entirely in the hands of others. Inflation hedges aren't found by investing in a market. Inflation hedges are created by becoming the market.

When you invest in yourself, you control the means of production. If you have a highly sought-after skill or ability, you set the price.

Recession or not, tech companies still need software developers and programmers. Wealthy clients still need attorneys and accountants. Marketing departments still need copywriters.

The world's best inflation hedge is having a highly sought-after skill that gives you leverage to set your own prices in the labor market.

The world doesn't stop spinning just because McChickens cost 9% more in 2022. If you have a valuable skill and your expenses are climbing, you can increase your prices to compensate. 

Those who get hurt the most by inflation are the workers that don't have leverage when negotiating their salary and pay. If you are a replaceable member of the labor force, you have to accept the market price for your work. If you are the best of the best, you can charge whatever price you want. 

Spend less time looking at crystal balls and horoscopes to predict market moves, and spend more time developing a highly-leveraged skill. Stocks and crypto might be in a bear market, but the bull market for quality talent never ends 📈📈📈

- Jack

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