3 posts categorized "inflation"


Buffet's Secret Motive

Buffet’s Secret Agenda


A short while ago when the Oracle Of Omaha purchased the remaining 77% stake in Burlington Northern Railroad, Buffet commented that the move was “an all-in wager on the economic future of the United States.”


I do hope so.


But look a little deeper and there is probably a backup bet in there (only in high finance could such a thing as a “backup bet” exist!)


Buffet may be worried about increased environmental regulation which could drive up the cost of fossil fuels.  (If that happens it’s more attractive to move people and stuff by rail.)  He may also be worried about inflation (and who isn’t besides the boys at the Fed?)  Inflation means higher oil prices (because as the value of the dollar goes down the price of “stuff” goes up.)  Higher oil again means railroads get more attractive.


There may be yet another reason and that is this new administration will increase economic incentives for environmentally friendly companies (there’s about $8 billion in the stimulus bill already for high speed rails, but to build high speed rails it’s nice if you already have the easements.  Now Buffet does.)    


Let’s all hope Buffet is right.  Let’s hope he makes money off his railroad because the economy starts humming again and people and businesses are buying more goods and raw materials and those goods and raw materials somehow need to get to the people and the businesses buying them.  (How’s that for a run on sentence?)


But this railroad purchase once again shows Buffet’s brilliance.  Even if he is wrong about the economy he may win again through tighter regulation, higher oil prices, and environmental incentives. 


The ULTIMATE Inflation Hedge

In the financial world nothing is better than a good old fashion hedge.  Hedges are those financial moves you take just in case, oh I don’t know the market loses 40% of its value in one year.  Hedging usually consists of only limiting your downside risk; not eliminating it altogether.  Rare indeed is the chance to bet on both teams at the same time, but they do exist.  Permit me to outline one.


If I were to sum it up in two words I would say “silver coins.”  Silver coins, like all precious metals, are an inflation hedge.  Their price tag increases with inflation in two ways.  One happens because when inflation takes hold, dollars become worth less and less.   It takes more dollars to buy an ounce of silver than it did last month.  So the price rises.  But the value of the silver isn’t really going up; it’s more that the value of the dollar is going down. 


The other way silver climbs in price is through good old supply and demand.  When demand goes up prices usually go up, unless the economy can easily resupply the item.  We’re probably mining silver as fast as we can (and if we are not, what are we waiting for?)  So the problem cannot be solved on the supply side.  When people fear inflation (whether they are right or not) they usually try to convert their soon-to-be worth-less dollars into something with “intrinsic value.”  In short they purchase gold and silver.  So silver can provide the double whammy (whatever a whammy is) payoff by offering a return from both greater demand and plummeting dollars. 


But gold and real estate can do this as well, so why is silver the ULTIMATE inflation hedge?  It has to do with something that I rarely concern myself with in the investment world: price.  Price, except in a few cases, means almost nothing in the investment world.  What matters is value.  A stock priced at one penny could be a rip off, a $40 million home could be a bargain.  But the current price of silver (again forget for a moment about value) is such that it has a great investment hedge.  The reason? 


It can be given as a gift.


Say I buy a $15 silver coin right now (www.apmex.com allows modest investors to buy small amounts of coins.)   (No I don’t work for them.  No I’ve never had dinner with the CEO.  No I am not an affiliate.)  If inflation increases then my coin does well for reasons previously stated above.  But suppose it doesn’t?  Suppose the price of the silver coin drops to $10?  Most people would say I have two options:  sell it or hold it and hope it goes back up.  But the silver coin offers a third option.  Give it away.


A silver coin is an ideal gift for sons, daughters, graduates, newlyweds, nieces, nephews, anyone really.  If your speculation in silver goes the wrong way you’ve still saved yourself the time and trouble of shopping for a gift.  No need to tell the IRS either since gifts under $13,000 are exempt from reporting.  (And if you are giving your friends gifts over $13,000… let’s be friends!)


What do inflation and swing flu have in common?


Inflation is a bit like swine flu.  There’s a lot of talk about it but no real solutions as to what average Joes and Janes can do about it.  When it comes to swine flu you can’t follow Joe Biden’s advice and not interact with crowds (damn hermits have the upper hand again!)  And when it comes to inflation you can’t vote out Ben Bernanke (Fed Reserve Chairs, with their immense amount of power are appointed.  A scary thought for another blog.)  My advice for swine flu?  Dammit Jim I’m a financial author not a doctor.  But I do have some simple steps to protect your pocket book from the seemingly inevitable rise in the cost of goods.  As prices go up, your dollars get less and less valuable since more dollars are needed to purchase that IPod. 


At the end of it all there are three basic ways to protect yourself from inflation.  You can buy real estate, you can buy precious metals, or you can buy an investment that comes with some sort of inflation protection built in (and there ain’t many of these.)  Let’s forget real estate.  If you can afford to buy it you would have done so already.  Real estate’s pricey, even in a down market, so I don’t consider that a “simple” solution to inflation.  Let’s also forget gold for the moment.  Indeed it is the precious metal everyone thinks about, but at $1000 an ounce, that’s not really simple either (though we’re getting closer.)  Instead consider owning a few silver coins (maybe selling for around $15 as I write this.)  Historically silver has done a bit better than gold and it requires less of a commitment.  While stocks have beaten precious metals over the long term, silver has never gone to zero (I’m looking at you GM). Worst case you can give your niece a coin or two for her birthday (now that’s a hedge.)  Where does one buy small quantities of silver coins?  Your local jeweler is happy to rip you off, so check his prices against www.apmex.com, which is happy to fulfill small orders.


Another rarely mentioned investment that’s essentially inflation proof is the I bond.  These are the new generation of savings bonds like grandma used to give.  You can buy them at your local bank for as little as $50, no commission, no fees.  They pay an interest rate AND an inflation adjusted rate, so the value of these bonds rises with the inflation tide. 


You won’t get rich buying a few silver coins or an I Bond every month.  But you won’t go broke either.  Those who didn’t read this may not be able to make the same claim.