Why Commodities, Real Estate, and TIPS Benefit from High Inflation

In the first quarter of 2024, the United States surpassed the historic milestone of paying more than $1 trillion in interest payments. As a result of an unprecedented increase in the money supply of $5 trillion since 2020, the United States experienced an equally rapid rise in inflation not seen since the 1980s.

Likewise, the Federal Reserve then embarked on the fastest rate hike since the 1980s, forcing it to pay more interest. At the same time, in October 2023, the United States Government had already recorded a budget deficit of $1.7 trillion, representing 6.3% of gross domestic product (GDP).

With inflation looking more resilient than expected, Friday's core Personal Consumption Expenditures (PCE) index rose to 2.8% annually in March (vs. 2.6% expected), leaving the Federal Reserve in a predicament The 10-year and 2-year Treasury spread has been increasing steadily.

Interrelated, the Federal Reserve is less likely to cut interest rates despite historic interest payments and inflation if there is sustained lower demand for Treasuries. So the central bank has to balance huge budget deficits and reignite inflation.

“The huge fiscal spending, the trillions needed each year for the green economy, the remilitarization of the world and the restructuring of global trade are all inflationary factors.”

JPMorgan Chase CEO Jamie Dimon in the April letter to the bank's annual shareholders.

For investors, this means restructuring asset portfolios that benefit from inflationary pressures. Here's what to look for in three types of asset categories.

Raw Materials

As the manipulated money supply loses value, manifesting in inflation, tangible assets with intrinsic value appreciate. SPDR Gold Trust (P:) (NYSE:) and iShares Silver Trust (NYSE:) are up, up 12.9% and 13.8% year to date, respectively.

(BTC) is even scarcer than precious metals. Although Bitcoin is a digital asset, it is physically based on an extensive computing network of energy and hardware assets. Furthermore, more than 93% of Bitcoin's firmly fixed supply of 21 million BTC has already been mined.

After completing the fourth halving, Bitcoin's inflation rate is now at 0.85%, significantly below the Federal Reserve's ideal target for the USD of 2%. So far this year, Bitcoin (BTC) has dramatically outperformed both gold and silver with a return of 51%.

Agricultural commodities and farmland assets perform well in the middle ground between precious metals and Bitcoin. The Invesco DB Agricultural Fund (NYSE 🙂 has returned 25.3% so far this year.

Real estate

Just as intrinsic agricultural products increase in dollar-denominated value, housing construction materials also increase. Having limited supply amid mass immigration leads to higher rents, which landlords can adjust for higher inflation.

Real estate investment trusts (REITs) with short-term leases, 1 to 2 years, do particularly well as they can keep up with the rate of inflation. For investors, this meshes well with regulatory requirements for REITs to pay out 90% of taxable profits to shareholders as dividends.

This is because they do not have to pay corporate income tax. For example, Arbor Realty Trust (NYSE:) offers a dividend yield of 13.72% with an annual payout of $1.72 per share. With exposure to 1,000 shares of ABR at $12.84 per share (appreciating 23% in one year), investors would receive an annual payout of $1,720 with very low risk.

Finally, because REITs can diversify your real estate portfolio, they withstand the swings of the market and the Federal Reserve's monetary policies regardless of their direction.

Treasury Inflation Protected Securities (TIPS)

TIPS can adjust their interest and principal payments based on movements in the consumer price index (CPI) for investors seeking the safest inflation hedge available. Although this guarantees the original value of the bond at maturity, TIPS do not gain value as expected of stocks.

Additionally, if newly issued TIPS have better yields aligned with rising interest rates, older TIPS will underperform traditional long-term Treasuries. For example, the iShares 0-5 Year TIPS Bond ETF (NYSE 🙂 returned 0.87% year to date, and an annual dividend payment of $1 per share, with a dividend yield of 1% .

Likewise, the minimized wealth-building potential of TIPS is the cost of their inflation-protected coverage. In an era of rapid monetary erosion, AI generative content infrastructure and raw materials stocks, such as Nvidia (NASDAQ 🙂 and AMD (NASDAQ 🙂), are better-balanced hedges.

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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please review our website policy before making financial decisions.

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