Hedging against hyperinflation scenario

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alexfoo39
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Hedging against hyperinflation scenario

Post by alexfoo39 » Thu Apr 18, 2019 10:00 am

Venezuela - a cup of coffee used to cost 4.50 Bolivars. It's now* > millions per cup.

Question: How does one hedge against hyperinflation scenario in his own country, assuming that he holds 50/50, or 3-fund portfolio?
Last edited by alexfoo39 on Fri Apr 19, 2019 1:28 am, edited 1 time in total.

TM90
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Re: Hedging against hyperinflation scenario

Post by TM90 » Thu Apr 18, 2019 10:03 am

I invest globally, also diversified over currencies but most of it is in the almighty dollar.

Valuethinker
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Re: Hedging against hyperinflation scenario

Post by Valuethinker » Thu Apr 18, 2019 10:07 am

alexfoo39 wrote:
Thu Apr 18, 2019 10:00 am
Venezuela - a cup of coffee used to cost 4.50 Bolivars. It's not > millions per cup.

Question: How does one hedge against hyperinflation scenario in his own country, assuming that he holds 50/50, or 3-fund portfolio?
US TIPS hedge against US inflation (in a tax exempt account). Also US ibonds.

If your country uses another currency, then the depreciation of that currency against the USD will more or less reflect the hyperinflation, so by holding USD assets which are protected against US inflation (TIPS) you will be more or less protected against inflation in your home currency. The same would be true of other inflation linked bonds however the US dollar is the currency numeraire of the world, so probably the best choice.

Other assets that might hedge inflation:

- necessities such as pharmaceuticals, hygiene products etc
- gold
- real estate (as long as rent controls are not imposed and you are able to collect the rent)

Generally any fixed rate debt (against an existing asset) is an inflation hedge

Unfortunately due to the way taxation works inflation linked bonds don't tend to be a great hyperinflation hedge in a taxable account.

BTW it is not correct that stocks hedge inflation*. Rather stocks are very risky, and pay high real returns (and have the volatility that goes with that). Thus, over a long enough period of time, you will tend to outperform inflation in stocks. But note that in the 1968-1981 period in the US, the period of the highest peacetime inflation in American history, you did not do so. Stocks probably do better when inflation is falling (and interest rates are dropping) than when inflation is rising.

* Did a stock portfolio hedge the 1924 Weimar inflation? I have not seen any information on that. But I think the point is moot, because in 1933 Hitler was appointed Reichschancellor - and "German stock market performance 1933-1945" is somewhat besides the point - because if the Party walked in and wanted your assets, you signed them over.

bhsince87
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Re: Hedging against hyperinflation scenario

Post by bhsince87 » Thu Apr 18, 2019 10:29 am

Stock up on guns, ammo, food, alcohol, drugs, any consumer good. Hoarders win in this situation.

From what I've read in real cases, gold and silver are OK, but mostly for black market deals. Small silver coins and gold jewelry are preferable.

Owning land is good too.

Learn a barterable, useful skill, such as auto mechanic, appliance repair, healthcare, etc.

Last ditch, join the military. They tend to get food and shelter until the end.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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Re: Hedging against hyperinflation scenario

Post by KlangFool » Thu Apr 18, 2019 10:31 am

alexfoo39 wrote:
Thu Apr 18, 2019 10:00 am
Venezuela - a cup of coffee used to cost 4.50 Bolivars. It's not > millions per cup.

Question: How does one hedge against hyperinflation scenario in his own country, assuming that he holds 50/50, or 3-fund portfolio?
alexfoo39,

1) Do not pre-pay or pay off the 30 years fixed-rate mortgage.

2) Buy some gold coins/gold jewelry.

KlangFool

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Re: Hedging against hyperinflation scenario

Post by Stormbringer » Thu Apr 18, 2019 12:40 pm

Valuethinker wrote:
Thu Apr 18, 2019 10:07 am
US TIPS hedge against US inflation (in a tax exempt account). Also US ibonds.
These are a hedge against inflation, but begin to fail under Venezuelan levels of inflation. The problem is with the lag between the time inflation is measured and the time when the interest rate is adjusted. If there a large amount of inflation during that gap, the adjustment will reflect prices as they were a month or two ago, and prices could be double or triple that today.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Hedging against hyperinflation scenario

Post by Ben Mathew » Thu Apr 18, 2019 1:24 pm

Stormbringer wrote:
Thu Apr 18, 2019 12:40 pm
Valuethinker wrote:
Thu Apr 18, 2019 10:07 am
US TIPS hedge against US inflation (in a tax exempt account). Also US ibonds.
These are a hedge against inflation, but begin to fail under Venezuelan levels of inflation. The problem is with the lag between the time inflation is measured and the time when the interest rate is adjusted. If there a large amount of inflation during that gap, the adjustment will reflect prices as they were a month or two ago, and prices could be double or triple that today.
Interesting detail. If the bonds are of sufficiently long term, presumably the value will catch up eventually after the episode of hyperinflation is over. This should be an argument for holding longer term TIPS, or at least a mix of maturities.

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Re: Hedging against hyperinflation scenario

Post by henrikk » Thu Apr 18, 2019 1:55 pm

alexfoo39 wrote:
Thu Apr 18, 2019 10:00 am
Venezuela - a cup of coffee used to cost 4.50 Bolivars. It's not > millions per cup.

Question: How does one hedge against hyperinflation scenario in his own country, assuming that he holds 50/50, or 3-fund portfolio?
You can't. The best you can do is own hard assets (e.g. land) and wait it out. Even that may not work since hyper-inflation is often followed by political changes that result in involuntary ownership transfer of hard assets.

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Re: Hedging against hyperinflation scenario

Post by pward » Thu Apr 18, 2019 2:03 pm

TIPS, unhedged foreign stock, unhedged foreign bonds, and hard assets will all help hedge against hyperinflation. Though, hyperinflation is virtually impossible in developed countries that do not have any debt denominated in a foreign currency, which the U.S. does not. The odds of true hyperinflation in the U.S. are very close to 0.

I think we do however risk high inflation, as eventually the deficit will get out of control and the least painful way for a government to deal with a deficit problem is to inflate it away... and the U.S. already has a history of 2 large dollar devaluations in the last 100 years. But that will not cause hyperinflation, it will be more along the lines of the 70s style inflation. All the above assets will also protect against this case, and I personally have a gold allocation to protect against this case specifically.

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Re: Hedging against hyperinflation scenario

Post by DonIce » Thu Apr 18, 2019 2:17 pm

Ben Mathew wrote:
Thu Apr 18, 2019 1:24 pm
Interesting detail. If the bonds are of sufficiently long term, presumably the value will catch up eventually after the episode of hyperinflation is over. This should be an argument for holding longer term TIPS, or at least a mix of maturities.
A lot of wrong assumptions I think about what hyperinflation is. We're not talking about garden variety high inflation like the US in the 70s. Hyperinflation, where prices can rise orders of magnitude within months, is something else entirely. Hyperinflation only occurs in situations where there is a complete breakdown of the society and economy. That is, hyperinflation is a symptom of the complete collapse of the economy, it is not the cause. Usually there is mass starvation, violence, and upheaval, and the period of hyperinflation almost never ends until there is a forceful takeover of government by some new faction. In the cases that revolution is averted, the damage done to society nevertheless leads to major upheaval in the following decade or two if it didn't happen during the hyper-inflationary period itself.

In such scenarios, it is absurd to imagine that inflation-indexed bonds from the period preceding the upheaval should be relied upon to be honored by whatever new regime arises after the period of upheaval.

The primary goal for any individual in a scenario of hyperinflation is to survive until it is over. The best "hedge" against this scenario is to maximize the chance that the individual can successfully escape from the country/region of hyperinflation as quickly and safely as possible.

Ownership of significant real assets (land, factories, real estate, etc) is more likely to end in expropriation or execution, not in financial stability or gain. Ownership of digital assets (financial instruments, stock certificates, bank accounts, etc) is unreliable because communication infrastructure will not likely be maintained and prior agreements are unlikely to be honored by other individuals who are desperate to survive by any means necessary. Gold and silver coins are likely to be perceived as a sign of wealth and a symbol that the holder can be blamed for the economic woes of ordinary people, likely resulting in being murdered or robbed. Instead, keep a stash of ordinary gold and diamond jewelry, and only ever display or trade an amount of such jewelry as it would have been reasonable for an average person to own for personal wear. Dispose of these only emotionally, so you are perceived to be an ordinary person disposing of a family heirloom in order to survive, thereby being seen as a fellow victim and inspiring sympathy, rather than being seen as rich and inspiring envy. Wedding rings, necklaces, earrings, etc. More importantly, keep a supply of food, medical supplies, and weapons (in countries where it is legal). Most importantly, keep a maximum of mobility, make sure that the people that you view as mandatory to evacuate with you (i.e. spouse and children) are onboard with the plan and know what to do, and if possible maintain a reliable escape route (for example, if you live on the coast, a boat that can be relied on getting you to other countries outside of the affected area).

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Re: Hedging against hyperinflation scenario

Post by pward » Thu Apr 18, 2019 2:22 pm

Valuethinker wrote:
Thu Apr 18, 2019 10:07 am

* Did a stock portfolio hedge the 1924 Weimar inflation? I have not seen any information on that.

In the Weimar hyperinflation stocks did rise, but did not keep up with inflation. They increased in nominal terms, but in real terms there was a substantial loss. Gold, hard assets (including in some cases rocks), foreign stocks, and foreign bonds, and foreign currencies were really the only things that brought them any protection. Matter of fact, the government was forced to keep printing money because as quick as they could print it it was leaving the country as people were immediately trading it for goods or for foreign assets. The money became both worthless and extremely scarce at the same time. Some small banks had to create their own temporary currencies just to prevent society from coming to a complete stop in their local communities. Ray Dalio does a great really in depth case study into the Weimar hyperinflation in the Navigating Debt Crisis book. You can download the ebook free on the Bridgewater site if you want to read more. It's simply fascinating.

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Re: Hedging against hyperinflation scenario

Post by Ben Mathew » Thu Apr 18, 2019 3:15 pm

DonIce wrote:
Thu Apr 18, 2019 2:17 pm
Ben Mathew wrote:
Thu Apr 18, 2019 1:24 pm
Interesting detail. If the bonds are of sufficiently long term, presumably the value will catch up eventually after the episode of hyperinflation is over. This should be an argument for holding longer term TIPS, or at least a mix of maturities.
A lot of wrong assumptions I think about what hyperinflation is. We're not talking about garden variety high inflation like the US in the 70s. Hyperinflation, where prices can rise orders of magnitude within months, is something else entirely. Hyperinflation only occurs in situations where there is a complete breakdown of the society and economy. That is, hyperinflation is a symptom of the complete collapse of the economy, it is not the cause. Usually there is mass starvation, violence, and upheaval, and the period of hyperinflation almost never ends until there is a forceful takeover of government by some new faction. In the cases that revolution is averted, the damage done to society nevertheless leads to major upheaval in the following decade or two if it didn't happen during the hyper-inflationary period itself.

In such scenarios, it is absurd to imagine that inflation-indexed bonds from the period preceding the upheaval should be relied upon to be honored by whatever new regime arises after the period of upheaval.

The primary goal for any individual in a scenario of hyperinflation is to survive until it is over. The best "hedge" against this scenario is to maximize the chance that the individual can successfully escape from the country/region of hyperinflation as quickly and safely as possible.

Ownership of significant real assets (land, factories, real estate, etc) is more likely to end in expropriation or execution, not in financial stability or gain. Ownership of digital assets (financial instruments, stock certificates, bank accounts, etc) is unreliable because communication infrastructure will not likely be maintained and prior agreements are unlikely to be honored by other individuals who are desperate to survive by any means necessary. Gold and silver coins are likely to be perceived as a sign of wealth and a symbol that the holder can be blamed for the economic woes of ordinary people, likely resulting in being murdered or robbed. Instead, keep a stash of ordinary gold and diamond jewelry, and only ever display or trade an amount of such jewelry as it would have been reasonable for an average person to own for personal wear. Dispose of these only emotionally, so you are perceived to be an ordinary person disposing of a family heirloom in order to survive, thereby being seen as a fellow victim and inspiring sympathy, rather than being seen as rich and inspiring envy. Wedding rings, necklaces, earrings, etc. More importantly, keep a supply of food, medical supplies, and weapons (in countries where it is legal). Most importantly, keep a maximum of mobility, make sure that the people that you view as mandatory to evacuate with you (i.e. spouse and children) are onboard with the plan and know what to do, and if possible maintain a reliable escape route (for example, if you live on the coast, a boat that can be relied on getting you to other countries outside of the affected area).
There is a lot of truth to what you say, but you are considering only the most extreme scenarios accompanying hyperinflations. You can have hyperinflation without wholesale expropriations and executions. Zimbabwe and Venezuela have both in recent times undergone (Venezuela, still undergoing) hyperinflation. While their economy collapsed, as far as I know, someone holding a significant diversified global stock portfolio in a Zimbabwean or Venezuelan brokerage account would not have lost it. I may be wrong, but I haven't heard of wholesale confiscations of brokerage accounts by the governments there. The value of people's bank balances and nominal bonds, on the other hand, will have been wiped out. So there are steps you can take to protect yourself in a hyperinflation. Single currency nominal assets is bad. Globally diversified real assets is good. The jewelry and guns and boats and an escape plan and so on would be useful, but they are not the only consideration.

Unless hyperinflation results in the U.S. becoming a dictatorship, there is a good chance that a democratically elected U.S. government will honor its obligations to its bondholders. TIPS may not be 100% secure in a hyperinflation, but they would be vastly better than bonds. Governments have some process and continuity built into it. If the bureaucracy keeps cranking, you might get your money back with TIPS.
Last edited by Ben Mathew on Thu Apr 18, 2019 3:52 pm, edited 1 time in total.

BrklynMike
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Re: Hedging against hyperinflation scenario

Post by BrklynMike » Thu Apr 18, 2019 3:21 pm

Read Ray Dalio's new book, Big Debt Crises. It's free online.
"In a world of uncertainty, one should focus more on the consequences than the probabilities." - Benjamin Graham

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Re: Hedging against hyperinflation scenario

Post by Valuethinker » Thu Apr 18, 2019 5:13 pm

Stormbringer wrote:
Thu Apr 18, 2019 12:40 pm
Valuethinker wrote:
Thu Apr 18, 2019 10:07 am
US TIPS hedge against US inflation (in a tax exempt account). Also US ibonds.
These are a hedge against inflation, but begin to fail under Venezuelan levels of inflation. The problem is with the lag between the time inflation is measured and the time when the interest rate is adjusted. If there a large amount of inflation during that gap, the adjustment will reflect prices as they were a month or two ago, and prices could be double or triple that today.
Good point.

Thank you.

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Re: Hedging against hyperinflation scenario

Post by Valuethinker » Thu Apr 18, 2019 5:14 pm

pward wrote:
Thu Apr 18, 2019 2:22 pm
Valuethinker wrote:
Thu Apr 18, 2019 10:07 am

* Did a stock portfolio hedge the 1924 Weimar inflation? I have not seen any information on that.

In the Weimar hyperinflation stocks did rise, but did not keep up with inflation. They increased in nominal terms, but in real terms there was a substantial loss. Gold, hard assets (including in some cases rocks), foreign stocks, and foreign bonds, and foreign currencies were really the only things that brought them any protection. Matter of fact, the government was forced to keep printing money because as quick as they could print it it was leaving the country as people were immediately trading it for goods or for foreign assets. The money became both worthless and extremely scarce at the same time. Some small banks had to create their own temporary currencies just to prevent society from coming to a complete stop in their local communities. Ray Dalio does a great really in depth case study into the Weimar hyperinflation in the Navigating Debt Crisis book. You can download the ebook free on the Bridgewater site if you want to read more. It's simply fascinating.
Thank you

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Re: Hedging against hyperinflation scenario

Post by yangtui » Thu Apr 18, 2019 5:28 pm

bhsince87 wrote:
Thu Apr 18, 2019 10:29 am
Last ditch, join the military. They tend to get food and shelter until the end.
+1

get a job with the federal government and join the national guard. that would probably be a decent hedge.

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Re: Hedging against hyperinflation scenario

Post by columbia » Thu Apr 18, 2019 5:29 pm

I see no scenario where owning ex-US stocks will make a difference in a hyperinflation situation. Thinking they would seems completely disconnected from the US role in and influence on the global economy.

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Re: Hedging against hyperinflation scenario

Post by dknightd » Thu Apr 18, 2019 5:35 pm

My thinking is to invest globally. Then if hyperinflation hits your country you have oversee's investments to help balance things out. But really it is all paper or electronic wealth. Probably the best thing to do is know your neighbors, and have them owe you a favor.

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Re: Hedging against hyperinflation scenario

Post by pward » Thu Apr 18, 2019 5:47 pm

columbia wrote:
Thu Apr 18, 2019 5:29 pm
I see no scenario where owning ex-US stocks will make a difference in a hyperinflation situation. Thinking they would seems completely disconnected from the US role in and influence on the global economy.
America being the global reserve and trade currency would definitely impact the entire world, especially since all these countries are holding our debt. Still as our currency went down, unhedged foreign holdings would have a price difference to a USD holder equivalent to what our currency went down relative to theirs. Obviously, their stocks, bonds, and currencies might be going down at that period of time as well so it is not as good as holding hard assets like gold. But since so many people on this board are violently opposed to gold, I guess it's the best protection that they will be able to get. I personally have a gold allocation.

Although, to be completely honest, I'm not sure it's possible for the U.S. to go into a true hyperinflation. There has never been a developed country that had a hyperinflation when all of their debt was denominated in their own currency. We could have a dollar devaluation and/or a period of high inflation, but a hyperinflation is so close to 0 probability that one should not even bother wasting any time thinking about it. Until if/when we start assuming super large chunks of debt denominated in foreign currency, it's just not possible and there's no reason to worry.

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Re: Hedging against hyperinflation scenario

Post by runner540 » Thu Apr 18, 2019 5:57 pm

This may be close to the politics line, but if you care about preventing runaway inflation, you should support an independent central bank, free from interference of short term political interests.

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Re: Hedging against hyperinflation scenario

Post by whodidntante » Thu Apr 18, 2019 6:28 pm

Are you an American?

Hyperinflation is a symptom of economic collapse. For this to happen in the USA, something horrible would have to happen, and it would probably cause great pain for our trading partners as well, though many of them would recover. But if hyperinflation occurs and there is somewhere worth going to, take what you have left and flee.

What is more realistic is a decline in the financial superpower status of the USA, with more commodities being traded in other currencies and less foreign demand for our debt. This could push our rates up and devalue our currency and make imports and commodities more expensive. You can hedge against this scenario by:

-holding emerging market stocks, due to their high commodity exposure
-commodity price exposure through futures
-holding fixed rate long-term debt and let inflation pay off most of your house
-holding securities denominated in other currencies
-shorting the dollar

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Re: Hedging against hyperinflation scenario

Post by TomatoTomahto » Thu Apr 18, 2019 7:16 pm

bhsince87 wrote:
Thu Apr 18, 2019 10:29 am
Stock up on guns, ammo, food, alcohol, drugs, any consumer good. Hoarders win in this situation.
I have water from wells pumped using solar electric, heat and cooling from geothermal, and lots of land to grow food on. I have good friends I promised a room to, but they’d have to bring the guns and ammo, which I don’t have.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: Hedging against hyperinflation scenario

Post by Mursili » Thu Apr 18, 2019 10:23 pm

yangtui wrote:
Thu Apr 18, 2019 5:28 pm
bhsince87 wrote:
Thu Apr 18, 2019 10:29 am
Last ditch, join the military. They tend to get food and shelter until the end.
+1

get a job with the federal government and join the national guard. that would probably be a decent hedge.
My uncle was a member of the national guard. That unit ended up on Bataan. "Luckily" he had already volunteered to be a paratrooper where he got shot (but lived), only to be captured in Normandy.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

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Re: Hedging against hyperinflation scenario

Post by AlohaJoe » Thu Apr 18, 2019 10:39 pm

Stormbringer wrote:
Thu Apr 18, 2019 12:40 pm
Valuethinker wrote:
Thu Apr 18, 2019 10:07 am
US TIPS hedge against US inflation (in a tax exempt account). Also US ibonds.
These are a hedge against inflation, but begin to fail under Venezuelan levels of inflation.
Yep, TIPS don't work very well in that kind of situation. (Plus you have to wonder if an government under that kind of strain would just default on TIPS.)

An analysis of this lag effect found that
At about 25 percent inflation, the real return on the lagged adjusted TIPS falls to only about 90 percent of the real return target of 3 percent. At higher inflation rates, such as 100 percent and above, the real returns of the lagged adjusted TIPS falls dramatically, becoming negative if monthly inflation reaches approximately 22 percent (annual rate of 264 percent ignoring compounding and 987 percent with compounding).

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Re: Hedging against hyperinflation scenario

Post by TomCat96 » Fri Apr 19, 2019 1:08 am

Stormbringer wrote:
Thu Apr 18, 2019 12:40 pm
Valuethinker wrote:
Thu Apr 18, 2019 10:07 am
US TIPS hedge against US inflation (in a tax exempt account). Also US ibonds.
These are a hedge against inflation, but begin to fail under Venezuelan levels of inflation. The problem is with the lag between the time inflation is measured and the time when the interest rate is adjusted. If there a large amount of inflation during that gap, the adjustment will reflect prices as they were a month or two ago, and prices could be double or triple that today.
+1

But to honest, it goes further than that. Much further.
Like DonIce wrote too, the set of assumptions you might in crafting a boglehead portfolio completely fail under a hyperinflation scenario, as such a scenario is symptomatic of something far greater.

The collapse of Venezuela is a perfect example. There were numerous articles detailing the hyperinflation occurring within Venezuela when it started. In particular what I noted was the "official estimates" of the actual inflation in Venezuela were always far below the actual reality.

Here in the US, inflation is computed by a weighted basket of goods from the consumer price index. The federal reserve uses a computation called personal consumption expenditures, detailed here. https://www.federalreserve.gov/faqs/economy_14419.htm

Both of these numbers can be used and manipulated for particular agendas. In the case of Venezuela, there was no potential to be manipulated...the official numbers were outright lies.

Here on bogleheads, the idea that a government body can lie at all is in the province of conspiracy theory. That is a shame. For those of us with immigrant backgrounds whose families come from war-torn strife, the possibility of that is no mere possibility. Lies by the sovereign in power are an inevitability as economic collapse is under way.

My point is that under a true hyperinflationary collapse, your holdings in TIPS bear the risk that the counterparty paying out the TIPs compensation gets to decide what level the inflation is.

Insofar as protecting your wealth from hyperinflation is concerned, it's not that you should be seeking to protect your wealth from a single isolated factor known as "hyperinflation". You are really trying to protect your assets in the wake of unimaginable levels of civil strife and the breakdown of society. Not even the great depression may be an adequate comparison.

Both my father and mother's family lost the entirety of their generational wealth because of civil strife in Asia. Postulating what they could have done to protect their assets is a game of what-if I like to play every now and then. At the level of dysfunction both their families experienced, there is no particular asset mix that would have protected them. Indeed, not only did hyperinflation occur, rule of law itself broke down including individual property rights.

What would have had to occur for both their families to preserve their wealth was to completely move it out of their respective countries.
Land is seized, Gold is confiscated. A person is lucky if they can escape with their life.

Keeping assets internationally would have adequately hedged against these risks, assuming the holder of the international assets was not itself located in the sovereign nation(s) in turmoil.

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Re: Hedging against hyperinflation scenario

Post by long_gamma » Fri Apr 19, 2019 4:02 am

Best hedge against hyperinflation is to buy call options on the market and commodities assuming counter-party is viable.

It is perfect trifecta because price increases, volatility increases and skew flips to call side from put side (for equities) all beneficial for call option. Add to this increase in vol. is increase in interest rate. This double convexity takes out all the banks and short vol. players
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Re: Hedging against hyperinflation scenario

Post by pokebowl » Fri Apr 19, 2019 6:18 am

alexfoo39 wrote:
Thu Apr 18, 2019 10:00 am

Question: How does one hedge against hyperinflation scenario in his own country, assuming that he holds 50/50, or 3-fund portfolio?
Traditional investments will not protect you in a true economic collapse scenario. Which I view a Venezuela-style hyperinflation scenario to be. If you are looking what to invest in such conditions it would be your own health. Assuming you were unable to flee the impacted country and have to deal with the resulting internal civil unrest, owning land and having access to resources and the means to protect it are what will get you by.

Should you want to protect your "wealth", you'd have to store it in physical mediums that would still hold value to others in whatever new currency takes shape. During the world wars, this was done with gold coins, jewels, diamonds, and art work.
Nullius in verba.

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Re: Hedging against hyperinflation scenario

Post by AlohaJoe » Fri Apr 19, 2019 8:04 am

pokebowl wrote:
Fri Apr 19, 2019 6:18 am
alexfoo39 wrote:
Thu Apr 18, 2019 10:00 am

Question: How does one hedge against hyperinflation scenario in his own country, assuming that he holds 50/50, or 3-fund portfolio?
Traditional investments will not protect you in a true economic collapse scenario.
This seems a strange claim to make, especially since traditional assets have done perfectly fine in every hyperinflation that has even happened in world history.

Has the S&P 500 or 10 year Treasuries or EAFE been affected by Venezuela's crisis? Nope. Nor were they affected by Zimbabwe's hyperinflation or Hungary's hyperinflation or Japan's post-war hyperinflation.

I don't see why you'd want to store it in physical mediums when world history makes it clear that all you need to do is hold normal assets like stocks and bonds but without a home bias.

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Re: Hedging against hyperinflation scenario

Post by JoMoney » Fri Apr 19, 2019 8:16 am

The problem with trying to hedge against an economic extreme in your home country, is there would likely be capital controls put into place to prevent the flow of funds out of the country during the crisis... which leads to foreign retaliatory measures preventing moving money back in, possible confiscation or freezing of funds as legal holds by a foreign government as recompense for debts or retaliation for capital controls, even possible confiscation by the home country.
Having U.S. currency in crisp new bills works in some places.
I would think having a stash of physical durable goods that are useful and valuable to everyone would work.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Watty
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Re: Hedging against hyperinflation scenario

Post by Watty » Fri Apr 19, 2019 8:32 am

There are so many ways that things can play out that diversification would be the key to surviving economic upheaval.

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Re: Hedging against hyperinflation scenario

Post by -ryan- » Fri Apr 19, 2019 8:40 am

JoMoney wrote:
Fri Apr 19, 2019 8:16 am
The problem with trying to hedge against an economic extreme in your home country, is there would likely be capital controls put into place to prevent the flow of funds out of the country during the crisis... which leads to foreign retaliatory measures preventing moving money back in, possible confiscation or freezing of funds as legal holds by a foreign government as recompense for debts or retaliation for capital controls, even possible confiscation by the home country.
Having U.S. currency in crisp new bills works in some places.
I would think having a stash of physical durable goods that are useful and valuable to everyone would work.
This has always been my assumption and the main reason I don't buy the scenario of holding international assets in order to hedge against a financial catastrophe in the US. That doesn't mean don't hold international assets, but it does mean many of us are holding them under some sort of false pretense that when our country starts falling apart around us we are going to be alright because we had 30% in an international total market index fund.

Several people in this thread have said made some great points, but we need to remember that if our economy does collapse our 'wealth' will likely be the last thing on our minds. I personally am more concerned about the physical safety of my friends and family in this type of scenario, and success will be based more on what relationships we have and our ability to protect and feed ourselves.

Furthermore, if you really believe that this is a likely scenario (hyperinflation, economic collapse, etc.) the time to act is now. If I believed these were likely possibilities I would personally be exploring other countries and working on immigration status right now rather than waiting it out. But I don't personally believe we will see these scenarios play out in my lifetime so I am comfortable here.

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Re: Hedging against hyperinflation scenario

Post by goodenyou » Fri Apr 19, 2019 8:41 am

The medium of exchange in your scenario will be brute force and survivor skills. I doubt Warren Buffett, Bill Gates and Mark Z will have an advantage in the zombie apocalypse. MMA and marksmanship skills will be at a premium. You could possibly sell your dried food made from those creepy ovens that are sold on TV. 30 year old lasagna may be bartered for some ammo.
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Re: Hedging against hyperinflation scenario

Post by ResearchMed » Fri Apr 19, 2019 9:06 am

goodenyou wrote:
Fri Apr 19, 2019 8:41 am
The medium of exchange in your scenario will be brute force and survivor skills. I doubt Warren Buffett, Bill Gates and Mark Z will have an advantage in the zombie apocalypse. MMA and marksmanship skills will be at a premium. You could possibly sell your dried food made from those creepy ovens that are sold on TV. 30 year old lasagna may be bartered for some ammo.
For the ultra-mega wealthy, there are already "survival resorts" (my terminology) like underground condos, some with swimming pools (!? gotta have that when the zombies arrive!), and filtration systems, and security.
My question about those (aside from $$$$$) is how long it is really sustainable. Will the zombies get the guards?
(And can radiation be filtered out of air...?)

But these are not options for most of us anyway, regardless of whether they'd work.

Also, we've gone way beyond "hyperinflation", although I'm not sure what resources most of us would have other than leaving the country (whichever was experiencing the problem) *before* it became obvious it was a disaster.

How would one know "in time"?

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Re: Hedging against hyperinflation scenario

Post by AlohaJoe » Fri Apr 19, 2019 9:24 am

JoMoney wrote:
Fri Apr 19, 2019 8:16 am
The problem with trying to hedge against an economic extreme in your home country, is there would likely be capital controls put into place to prevent the flow of funds out of the country during the crisis... which leads to foreign retaliatory measures preventing moving money back in, possible confiscation or freezing of funds as legal holds by a foreign government as recompense for debts or retaliation for capital controls
I'm doubtful that either of those things have ever happened. Can you point to an example of the US forbidding transfers to a country with hyperinflation as a retaliatory measure? Can you point to an example of the US seizing private citizen assets from a hyperinflation country?

As far as I can tell it didn't happen in any of the cases of hyperinflation listed on this page but it isn't exactly an easy thing to research so I might have missed something

https://3.bp.blogspot.com/-vR9WZjYKBKc/ ... lation.jpg

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Re: Hedging against hyperinflation scenario

Post by nisiprius » Fri Apr 19, 2019 9:39 am

AlohaJoe wrote:
Fri Apr 19, 2019 9:24 am
...I'm doubtful that either of those things have ever happened. Can you point to an example of the US forbidding transfers to a country with hyperinflation as a retaliatory measure?...
Something that sounds like this is happening right now with Venezuela. But only at a high bank-to-bank level, not as an everyday thing with ordinary people.

New U.S. Sanctions on Venezuela Aim To Choke Off Government's Finances
The [United States] extended sanctions to the Central Bank of Venezuela on Wednesday, cutting off the bank’s access to United States currency and limiting its ability to conduct international financial transactions in order to further squeeze the finances of the government...
I believe Venezuela is currently "de facto dollarized," and that people hold electronic bank accounts in U.S. dollars, occasionally convert them to bolivars but only on an as-needed basis because inflation is about 20% per week. Apparently, there is even a meaningful amount of physical U.S. paper money in circulation. I'm told that $1 in a PayPal account buys $0.70 in physical US bills. So--to the extent that I understand it--many Venezuelans' strategy for hyperinflation is to hold U.S. dollars and deal with the huge amounts of friction involved in black-market conversions, and the risk involved in breaking the law.

See also An Economist in Caracas, personal story from March 2019 of Gabriela Saade, 27, working in Caracas.
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Re: Hedging against hyperinflation scenario

Post by Ged » Fri Apr 19, 2019 10:08 am

My wife's family lived through a period of hyperinflation (500% in one year) in Chile. The main things that they experienced were:

1. Rapid price increases of necessities. You were especially hard hit if you needed something like insulin.
2. Black markets using currencies like USD as alternatives. Bad things would happen if you were caught. I did not hear any stories of people exchanging goods for precious metals but I imagine you could sell such in exchange for hard currencies at a high discount.
3. Military coup and necessity of one of her sisters to flee Chile. The only country that would accept her was East Germany.

The first time I visited Chile was after the coup. There was a military presence on the streets and a curfew in effect. There were currency controls as well. I gave her family all of the dollars I was carrying.

The second time I visited Chile a few years later there were a couple of times when I heard explosions going off - anti government terrorism I was told. Her sister had gotten out of East Germany and was living in France.

A plebiscite was held shortly thereafter and Chile has had a constitutional democratic government since. They have had a stable economy and are now a member of the OECD. Her sister is now back in Chile.

I think this gives a fair idea of what can happen in such a situation. It's not just government financial errors. It's a complete societal turnover.

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Re: Hedging against hyperinflation scenario

Post by Angst » Fri Apr 19, 2019 10:10 am

AlohaJoe wrote:
Thu Apr 18, 2019 10:39 pm
Stormbringer wrote:
Thu Apr 18, 2019 12:40 pm
Valuethinker wrote:
Thu Apr 18, 2019 10:07 am
US TIPS hedge against US inflation (in a tax exempt account). Also US ibonds.
These are a hedge against inflation, but begin to fail under Venezuelan levels of inflation.
Yep, TIPS don't work very well in that kind of situation. (Plus you have to wonder if an government under that kind of strain would just default on TIPS.)

An analysis of this lag effect found that
At about 25 percent inflation, the real return on the lagged adjusted TIPS falls to only about 90 percent of the real return target of 3 percent. At higher inflation rates, such as 100 percent and above, the real returns of the lagged adjusted TIPS falls dramatically, becoming negative if monthly inflation reaches approximately 22 percent (annual rate of 264 percent ignoring compounding and 987 percent with compounding).
For the sake of clarity, or just to confirm my own understanding of what's being said about how lagging inflation adjustments might affect the potential usefulness of TIPS, wouldn't this specific problem be limited to TIPS coupon payments, as opposed to the return of inflation-adjusted principal at maturity? So a (hypothetical) zero-coupon TIPS would be a lot better? And as such, since they don't exist, one would at least prefer to hold short-term (or at least, shorter-term) TIPS in this extreme scenario.

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Re: Hedging against hyperinflation scenario

Post by Flashes1 » Fri Apr 19, 2019 10:13 am

Guns are one of the best investments in periods of hyperinflation: (I) they are good for bartering, (ii) provide protection from people taking your assets, and (iii) provide a way to transfer assets into your possession via voluntary or involuntary surrender of those assets.

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Re: Hedging against hyperinflation scenario

Post by averagedude » Fri Apr 19, 2019 10:29 am

Hedging against hyperinflation:
1. Don't pay off a fixed rate mortage.
2. International stocks
3. US stocks.
4. TIPS.
5. Gold and precious metals.
6. Commodities.
7. Real estate.
Hedging against total financial collapse.
1. None, and the answer will only be known in hindsight.

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Re: Hedging against hyperinflation scenario

Post by pokebowl » Fri Apr 19, 2019 2:11 pm

AlohaJoe wrote:
Fri Apr 19, 2019 8:04 am


This seems a strange claim to make, especially since traditional assets have done perfectly fine in every hyperinflation that has even happened in world history.

Has the S&P 500 or 10 year Treasuries or EAFE been affected by Venezuela's crisis? Nope. Nor were they affected by Zimbabwe's hyperinflation or Hungary's hyperinflation or Japan's post-war hyperinflation.
Were you able to sell your S&P shares from your Venezuelan brokerage prior to capital controls kicking in? What about the Venezuelan currency in your Venezuelan bank?

You are correct if looking from the outside, it's different when it's your own host country, which is where my point focused on.
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Re: Hedging against hyperinflation scenario

Post by TN_Boy » Fri Apr 19, 2019 2:13 pm

alexfoo39 wrote:
Thu Apr 18, 2019 10:00 am
Venezuela - a cup of coffee used to cost 4.50 Bolivars. It's now* > millions per cup.

Question: How does one hedge against hyperinflation scenario in his own country, assuming that he holds 50/50, or 3-fund portfolio?
I like several of the answers you've gotten on the impact of true hyperinflation (versus merely high inflation like we saw in the 70s in the 70s).

But to try and answer your question ....

I think if you live in the US and the US experiences hyperinflation, there is almost nothing you can do. As others have noted, this implies an unprecedented breakdown in the US economy (worse than the great depression). There will be nowhere to hide. And if the US was hit that hard, it is difficult to see the other developed countries being in good shape. Though one could try having assets denominated in Euros, or Yen, etc.

For somebody living in a smaller country (like Venezuela, the smaller European nations, many of the African nations etc) having assets in US dollars should be an effective hyperinflation hedge, and that is what I would do. Nisprius's post talks about that. It's not a panacea -- there are obvious issues, but at least you would have some assets not becoming worthless. Wealthier people would flee the country in this situation if they could.

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Re: Hedging against hyperinflation scenario

Post by AlohaJoe » Fri Apr 19, 2019 8:42 pm

pokebowl wrote:
Fri Apr 19, 2019 2:11 pm
Were you able to sell your S&P shares from your Venezuelan brokerage prior to capital controls kicking in? What about the Venezuelan currency in your Venezuelan bank?

You are correct if looking from the outside, it's different when it's your own host country, which is where my point focused on.
I live in a country with currency controls; they've been in place for several decades. It doesn't affect my ability to sell S&P shares or anything else. It only affects my ability to transfer money out of the country.

The outside world doesn't care and certainly doesn't enact anything retaliatory. Currency controls are part of the standard World Bank advice given to non-developed economies experiencing financial crises. It would be weird if anyone saw them as something that warranted retaliation; they don't affect anyone except people living in that country which is why nobody cares. India, China, South Korea, and South Africa all have currency controls and have had them for many years; no one has retaliated against any of those countries.

Holding a foreign stock and selling it is unrelated to currency controls. I haven't heard anything about the government doing something that would prevent anyone from selling shares of an S&P fund.

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Re: Hedging against hyperinflation scenario

Post by AlohaJoe » Fri Apr 19, 2019 9:00 pm

Angst wrote:
Fri Apr 19, 2019 10:10 am
For the sake of clarity, or just to confirm my own understanding of what's being said about how lagging inflation adjustments might affect the potential usefulness of TIPS, wouldn't this specific problem be limited to TIPS coupon payments, as opposed to the return of inflation-adjusted principal at maturity? So a (hypothetical) zero-coupon TIPS would be a lot better? And as such, since they don't exist, one would at least prefer to hold short-term (or at least, shorter-term) TIPS in this extreme scenario.
I'm not sure that zero coupons entirely solves the problem (I'm not sure if Treasury adjust the principal on maturity on the day of maturity or not) but I agree they probably mitigate it a lot.

I think many people don't distinguish between true hyperinflation and US-style 1970s high inflation. With, say, hyperinflation in Yugoslavia in 1992-1994 prices doubled every 34 hours. So if Treasury did a principal adjustment at 10am and it takes 4 hours to process everything then by the time the money hits your account, you've already lost 10% of the value due to hyperinflation before you can spend it.

Though obviously, not every instance of hyperinflation is as severe as what Yugoslavia experienced.

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Re: Hedging against hyperinflation scenario

Post by wootwoot » Fri Apr 19, 2019 9:55 pm

Crypto

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Re: Hedging against hyperinflation scenario

Post by Ged » Fri Apr 19, 2019 11:29 pm

Flashes1 wrote:
Fri Apr 19, 2019 10:13 am
Guns are one of the best investments in periods of hyperinflation: (I) they are good for bartering, (ii) provide protection from people taking your assets, and (iii) provide a way to transfer assets into your possession via voluntary or involuntary surrender of those assets.
YMMV depending on local laws and how they are enforced.

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Re: Hedging against hyperinflation scenario

Post by alexfoo39 » Fri Apr 19, 2019 11:38 pm

Thank you everyone. Learned a lot =)

I'm from Malaysia. Currently I have (as some advised here) parked some assets in the U.S in the form of SP500 holding.

Anyone talking about holding a second passport or citizenship? For the sake of fleeing home country (for a while), it may be good to have an option to start a new life elsewhere.

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Re: Hedging against hyperinflation scenario

Post by Bongleur » Sat Apr 20, 2019 3:33 am

AlohaJoe wrote:
Fri Apr 19, 2019 8:04 am
I don't see why you'd want to store it in physical mediums when world history makes it clear that all you need to do is hold normal assets like stocks and bonds but without a home bias.
Cannot avoid home bias. Say I'm a Venezualan with all my assets domiciled in the USA. Every day I need to sell some, transfer them to my local bank, convert at the official exchange rate to cash, then buy my groceries. My assets are depleted same as holding assets locally. Until I can buy a plane ticket out of there.
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Re: Hedging against hyperinflation scenario

Post by happyisland » Sat Apr 20, 2019 7:19 am

I live close to Venezuela and have witnessed a lot of their hyperinflation and its effects first-hand. The only apparent way to avoid the misery of hyperinflation is to leave the country experiencing the hyperinflation, which is what virtually all of the Venezuelans with means have done. I guess this means that those of us who live in countries vulnerable to economic collapse should hedge this by having a plan in place to move to a stable economy, like the EU or US.

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