Let’s say I pulled a Doc Brown and was able to offer you the following headline six-and-a-half months ahead of time at the start of the year: Kn

Hedging Inflation is Harder Than it Sounds

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2021-07-21 02:00:04

Let’s say I pulled a Doc Brown and was able to offer you the following headline six-and-a-half months ahead of time at the start of the year:

Knowing nothing else, the textbooks would tell you to short bonds and buy gold. And if you’re truly anti-establishment, you should buy some bitcoin too because the government is printing so much money that fiat currencies will be worthless.

The reason this seems off to many investors is the fact that inflation is by far your biggest risk as a bond investor. When you own a bond or bond fund, you receive periodic fixed payments. Those fixed payments are worth less to you over time when inflation rises.

It’s actually still up marginally on the year (7% or so as of this writing) but it was up well over 100% in 2021 through mid-April and is now in the midst of a 50% crash.

Markets could be telling us inflation is transitory. We could be experiencing a short-term boost in prices from a combination of supply constraints, pent-up demand from the pandemic and fiscal stimulus money floating around.