The Covid – 19 global pandemic may have served as a catalyst for an inevitable recession, as there were many factors pointing towards a downturn prior to the first case of coronavirus. The recently inverted yield curve in 2019 foreshadowed a recession, but many investors were ill-prepared for the reality of the magnitude of the drop. It is impossible to accurately envision something like this, as there is no one way of predicting a black swan event. The only way to be prepared is to maintain a hedge on an event like this. The previous risk parity investment strategy of the “on paper” inverse correlation between stocks and bonds proved to be unsuccessful in times like this. With the previous volatility in the markets, and an uncertain confidence in the future, investors are hedging their bets towards a secular shift towards inflation.
GDP is often considered to be the multiplication of the number of workers in the workforce, the cumulative number of hours worked, and the collective productivity of the workers. These factors multiplied together accounts for the GDP of a country. As we continue into the future, the number of millennials entering the workforce is greater than the number of baby boomers leaving the workforce. Meaning the workforce will increase dramatically in the upcoming years. Once the labor force grows, we can expect this unanimous consensus of a secular shift towards inflation to occur. The combination between the large amount of money pushed into the market with a new generation entering the workforce means increased personal spending: pushing up prices towards inflation. Inflation can already be observed through increases in asset prices, as many assets have increased in value, such as the stock market. Numerous experts conclude that the effects of inflation will come into play somewhere between 2023-2027.
Since this secular shift towards inflation is inevitable, the important question is how to structure one’s portfolio. It is an old adage that inflation is the bond markets worst nightmare. It may not be inflation itself that causes reason for concern, but rather the expected fiscal response. When conversation surrounding a fiscal response towards inflation is discussed, a drop in the bond market can be expected, and it is best to hedge one’s investments against this. Another asset class to look into for times of inflation is gold. Gold is continually being considered as the best hedge against inflation and is a necessity in everyone’s portfolio moving forward.
With the growth of millennials entering the workforce and the increase in velocity of money and spending in the economy, inflation is a probable result. It is important to be aware of this and be prepared to have a portfolio best hedged against inflation.