Have Fun Staying Poor

By Jack Raines

What Happened? 

The article above was published only four days ago. Two days later, the latest CPI report showed that inflation rate skyrocketed by 6.2% YoY. What are you doing J-Pow?

Bitcoin is at an all-time high. Stocks are at all-time highs. Used cars are at all-time highs. Energy is at all-time highs. Pixelated JPEGs are at all-time highs. Maybe there's something to this whole inflation thing.

First, inflation wasn't happening. Then it was low. Then it was transitory. Now?

Hardcore COPE by MSNBC. I guess if you move the goal post far enough, you can make anything sound good.

Hot take: 6% inflation is actually a bad thing.

So what does 6% inflation mean?

• 6% inflation means that the Goldman Sachs 29% pay increase is actually only 23%

• 6% inflation also means that all of the IB analysts who did not receive a pay raise received a 6% pay cut

• 6% inflation means that a $45,000 Tesla now costs $47,700, or the old price plus one month's rent

• 6% inflation means that Bitcoin's 292% one year gain is actually 286%

Winners

Who wins during rampant inflation? BlackRock and Nanci Pelosi, among others. Why? Because two asset classes outperform during high inflation: real estate and stocks. Nick Maggiulli wrote a great piece about investing when inflation is high, and he highlighted returns from different asset classes when inflation exceeds 4%:

The results make sense: companies and real estate both have value. Money is just a method for denominating that value and exchanging those assets. If the value of this money drops, the nominal value of those assets will increase.

To think about this another way: goods that you purchase everyday become more expensive. You pay more for those goods. The companies that produce those goods now make more money. The companies are more valuable. Stocks go up.

In real estate, inflation drives rent prices up. Landlords make more money. Real estate is worth more.

If you are a massive financial institution *BlackRock* buying every piece of real estate on the market or a Congresswoman *Pelosi* insider trading, you will be fine when inflation runs hot.

Good luck to everyone else.

Losers

Who loses during periods of prolonged inflation? Anyone who doesn't own real estate or stocks. Who doesn't own real estate or stocks? Half of America. Inflation makes assets moon and the value of the dollar tank. Guess what happens if you get paid in dollars but don't own any assets?

Have fun staying poor.

This graph shows how the values of different assets change as inflation increases.

If you are dollar heavy and asset light, you're ngmi.

"We're Only Taxing the Rich"

Every time higher taxes are proposed, politicians make sure to highlight that the middle class won't pay a dime more:

That may technically be true, but inflation is a shadow tax that does more damage to the lower and middle classes than anything else. I mentioned in the last section that real estate and stocks tend to perform well during inflation, while cash is trash.

Guess who can't afford real estate and stocks?

The lower class.

Guess who still has to deal with higher costs from inflation?

The lower class.

Guess who actually gets screwed by inflation?

The lower class.

Inflation is not visible on your paystub, but it hits your wallet hard. Groceries are more expensive. Gas is more expensive. Rent is more expensive. When you're generating the same income, but everything that you buy costs more, you are 100% getting taxed.

Is Bitcoin an Inflation Hedge?

Things that we know about Bitcoin:

• Its price has increased by 292% in the last year

• Its supply is capped at 21 million coins

• It is decentralized

Things that we don't know about Bitcoin:

• Whether or not it is an inflation hedge

I know, I know. 40% of all dollars in existence were printed in the last 18 months. Decentralization. Only 21 million coins. Fiat is going to 0. Some tweet like this from Michael Saylor:

All of that sounds good, but we still have no idea if Bitcoin is an inflation hedge. While it's up 292% year over year (or 286% adjusted for inflation), Bitcoin actually dropped about 5% when the inflation numbers came out earlier this week. Narrative violation.

If price movement confirms that something is an inflation hedge, then is GameStop an inflation hedge?

AMC?

Tesla?

CumRocket Coin?

Doge?

Used 2016 Toyota 4Runners?

None of Bitcoin's unique characteristics (i.e. scarce supply) guarantee that it will outperform during a period of prolonged inflation. In fact, Bitcoin's physical counterpart, gold, actually underperformed in inflationary environments. 

Has Bitcoin been one of the greatest investments of the last decade? Without a doubt.

*Ripppsss blunt*

Here's my question: Is Bitcoin going up because it is an inflation hedge, or is it going up because everyone thinks that it is an inflation hedge? And if everyone thinks that it is an inflation hedge, will that manifest destiny and make it an inflation hedge?

We may never know if Bitcoin is actually an inflation hedge, but I do know that people will keep buying it because they think it's an inflation hedge. Which makes me think that maybe I should buy it, because I think that other people think it's an inflation hedge.

I'm ngmi.

Is This Transitory?

No one knows. When the Chairman of the Federal Reserve misses his inflation forecast, do you really think CNBC anchors and large Twitter accounts can predict what's coming next?

No.

Supply chains are a mess, consumer demand is hot, and there is a lot of money floating around right now. We're also coming out of a pandemic, so inflation is going to look pretty bad when the starting point is zero. There are too many variables at play for anyone to know for sure.

Consensus seems to be that hyperinflation is inevitable, so I would say there's a pretty good chance that inflation peaked last month.

Or maybe it jumps 10% in November. No one knows, especially me.

For more: subscribe to Exec Sum here and follow Jack Raines on Twitter