Last year, when the Fed lowered interest rates, everyone knew that inflation is coming, but the Fed said that we shouldn't worry because inflation is just a little above 2.4%. But if we take a look at what's happening, prices have risen dramatically since then. I don't just mean asset prices like houses, stocks, etc. but rather consumer prices as well.
Inflation in the US has jumped to the highest rate since 2008 because as the economy is recovering from the pandemic, people are getting back to work which means people are spending more than ever.
The consumer prices index rose at an annual rate of 5% in May, up from 4.2% in April and the highest since August 2008 While most people are getting hurt as a result of inflation, some people are making money out of it because every problem presents an opportunity.
The question, is there a way to profit out of this inflation? The answer is simple - YES!
So let's take a look at different ways rich people are making millions out of this inflation. By the way, this is not financial advice, and everything that's said in this video is for educational and entertainment purposes.
1.Hold Real Assets
What most people don't understand about currency is that it's another commodity in the market, and its price is determined by demand and supply, among many different factors.
Imagine a hypothetical example where you have 10 dollars in the entire economy on one side and ten houses on the other.
In this hypothetical example, a single house will cost 1 dollar. But if we pour extra 10 dollars into this market, there will be 20 dollars but still 10 houses which will raise house prices where a single house will cost 2 dollars.
That's a simple way to understand inflation.
Last year, when the economy was on the brink of collapse, the Fed decided to throw trillions of dollars into the economy to prevent a depression by distributing stimulus checks and buying corporate bonds.
22 percent of US dollars that are in the market currently have been printed in 2020. Anyone with a basic degree in economics understood \\ that inflation is on its way. That's why whoever could afford a house back then immediately invested in real estate instead of holding cash, especially since interest rates were at their lowest point.
It doesn't matter what the real rate of inflation is, whether it's 2.4 or 3.4 percent. Because house prices grew by 15 and by some estimates even by 18 to 20 percent. This means real estate investors didn't just beat inflation but rather also profited enormously. But the smartest investor didn't just buy houses but took mortgages because leverage turns good deals into great deals, especially since interest rates were at rock bottom.
2. Debt
Many of you might have a really negative opinion about debt, but debt can be really good, especially when there is inflation. If a dollar today worth more than a dollar
tomorrow. That means if I borrow a dollar today and return it tomorrow, I have made a profit.
The median house price today is around 350K dollars, but 20 years ago, it was less than half of that at around 150K dollars. Because every year, the real value of the dollar falls, which means the same 150K dollar 20 years ago, today worth 350K.
That's why when the Fed lowered interest rates and started buying corporate bonds, guess who started borrowing all that money?
World's largest companies such as Amazon, Facebook, Microsoft, Apple, and so on, although these companies don't need that money at all. Apple is sitting on a pile of cash worth over 200 billion dollars.
But it is still borrowed money because why use your own money when you can just throw your money into the SP500 and get at least a 10 percent return and borrow money at just 1 percent. Even if you make a 5 percent rate on that borrowed money by investing it into your operation, you are still making a 4 percent profit.
On top of that, when you borrow money, you get all of these tax benefits. So you will also save on taxes. If interest rates are lower than inflation, any money you borrow is theoretically a profit.
3. Gold
What makes gold unique is that it has always been that asset that preserves wealth, especially during crises. Here it works.
The moment the future seems unpredictable, gold prices rise.nIn 2007, gold prices rose from around 600 dollars to 1K dollars because of the 2008 crash. Investors panicked and immediately started buying gold.
The US dollar might lose its value and even become worthless one day but not the gold. While the US dollar has lost over 90 percent of its value in the last 100 years, gold has kept its value since the beginning of civilization.
In 2010, investors panicked again and started buying gold aggressively to the point where gold prices hit a record 1900 dollars. But since then, the economy has stabilized, and the gold bubble burst.
When the economy seems like it's going to grow, investors usually don't buy gold and invest in assets such as stocks. That's why during predictable, stable times, gold prices often fall. But in 2019, when the US started a trade war with China, gold prices started rising again, and the pandemic made it worse. Gold prices crossed 2K dollars for the first time. If you take a look at history, gold has always been a great way to take advantage of inflation.
In 1973, a single US dollar was a lot of money, but today it barely can get you candy, but gold prices have risen from around 100 in 1973 dollars to 1800 dollars. But I am not a big fan of gold because it's a passive asset. It just sits there and shines while stocks or real estate produces something like rental income.
It's an active asset that actually provides a service or a product. Why do stocks keep rising? Because the companies behind them keep growing.
Apple sells much more iPhones today than it did 10 years ago. That's why it worth a lot more today than it did 10 years ago.
4. Crypto
I was skeptical about including it in this list. However, since a lot of people have profited from inflation by buying crypto, I had to talk about it, but it's very risky. If you are a long-term subscriber, you know my opinion on crypto.
The technology behind it is undoubtedly great, and it has great potential, but because it is still at its early stage, it's very risky and unpredictable in the short run. One reason bitcoin rose so dramatically in the last 12 months is because the Fed started printing trillions of dollars, as we have mentioned before. After buying stocks, houses, investors were like, bitcoin is like digital gold, so let's buy bitcoin as well.
A lot of people who were not interested in bitcoin prior to the pandemic don't really remember that the price of bitcoin was just around 8K dollars. Before the trade war, the bitcoin price was just 3600 dollars.
If you were interested in bitcoin when most people didn't care, you could have earned a fortune, but people usually get excited about something when it's all over the news. But the smartest people got into it before the masses and have grown their wealth by 10 to 20 times since then.
5. Stocks
This is my favorite option. Stock prices might not have risen as much as crypto by a few thousand percent, but they are much more stable and less risky. From July 2020 to July 2021, the SP500 grew by 40 percent.
That's an astronomical return, especially since you are investing in the entire US economy. When you buy a stock, you are buying a share in a business. That's why they are also called shares. Whenever there is too much cash in the economy, the value of that business grows, so you are growing together with inflation.
On top of that, that money is usually spent on basic needs and wants, which means businesses grow faster, so you are not just beating inflation but rather profiting from it. Just imagine for a moment how much of that stimulus checks were spent on amazon or apple products.
If you also count the fact that, these companies have taken billions of dollars in loans for almost free and grew exponentially. And now people are getting back to work, the economy is reopening, people are spending more, and these businesses are about to grow even faster.
The key is to keep your money invested in assets that are hedged against inflation. Wealthy people don't usually hold much cash. Usually, they keep a tiny percentage of their net worth liquid for emergency cases.
Take the world's richest people. They are so rich because they own a certain percentage of the businesses they have built. As their businesses grow, so does their wealth. Even if you have a few thousand dollars, you still can profit from inflation following one of the tips we have discussed.
If you have enjoyed this video, you will most definitely enjoy this custom playlist that I have created specifically for you that has our most popular videos on business, investing, and the stock market that can potentially change your life.
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