Inflation is your FRIEND | Passive Investing Strategies That BEAT Inflation

Inflation is your friend. As a matter of fact, right now, we are in one of the best times to create massive multi-generational wealth since 2008. 

Life-long fortunes are going to be made in this period that we are in right now because after all, at the end of the day, in the midst of chaos, there is always massive opportunity. 

How is inflation your friend exactly? 

To understand that you need to first understand the Federal Reserve, what they’re doing right now, and what their goals are in the midst of this economy. 

Let’s set the scene a little bit. So far, we’ve seen inflation hit highs that it hasn’t reached for over 40 years, just recently and now the Federal Reserve has come out and said the alarming metric that core inflation, which is an adjusted, more specific calculation of inflation, has also reached those levels of 40-year highs. What this means to you and me is that the Federal Reserve does not have inflation under control at all whatsoever. 

In fact, we’re even seeing numbers that look like the economy is doing well in the midst of all this, which if you’re the Federal Reserve, is bad news.

Things like employment going up rather than unemployment going up which the Federal Reserve would prefer because that would help fight inflation. What all this means is several things for you as a smart investor. 

First, it means that the Federal Reserve is likely going to continue increasing rates rapidly and aggressively, and what you’ll likely see is that the rate increases are even more aggressive than we have seen to date with some of the recent economic numbers coming out. I’m even willing to bet that the Federal Reserve will raise rates instead of 75 basis points, or 0.75% of a rate. 

I would wage you to guess that the Federal Reserve would even go so high as a full percentage point for each raise, or even higher up to 1.25% for each raise.  So you can imagine how fast rates will ramp up if they increase the rate hike so significantly. 

The second thing this means is massively important, and that is that the Federal Reserve has shown their hand that what they truly want is a US recession and that they need that in order to get inflation under control. So at this very moment, their goal is to financially engineer an economic recession. Why? Because recessions bring down inflation significantly and the number one lever that the Federal Reserve uses is the rate adjustment, hiking those rates like we just talked about. 

So if they can keep hiking interest rates and slow down the movement of money and affordability in the market, then they can effectively slowly engineer the recession that they need to fight and quell the raging inflation we’re dealing with and that is, even though recession will absolutely harm many American families in many ways. 

But there’s a good point here. The only thing worse than a recession for low-income and middle-income families is inflation for low-income and middle-income families. Because affordability gets so far out of whack for these individuals, it makes it extremely hard to meet basic ends in daily life. 

So how the hell is inflation your friend? The answer lies in understanding one of the effects of FED policies, and some would argue even one of the goals of the FED’s policies, that is to take all asset values and lower them dramatically. 

Physical Asset

But here’s the thing, interest rates affect most extremely financial assets. That means things like stocks, bonds, and even debt. 

Basically, it’s assets that you can show on a spreadsheet or on a chart, but they miss something very important and that is what physical assets have or financial assets. 

You can’t physically touch, you can’t touch debt with your hand, and you can’t touch stock with your physical hand. But physical assets, things like your car or things with four walls in a roof or other physical assets are different in their effects of the FED policies. That’s why we’ve seen things like the stock market get absolutely demolished in the middle of these turbulent rate hikes and with more and more interest rate hikes coming in the future like we just talked about, and likely the hikes being even more aggressive, I’m willing to bet that the stock market will continue to get crushed for a period of time here. 

So back to physical assets, but wait a second. What about physical assets as we mentioned? 

Let’s take a second and dive in on physical assets. While these physical assets, or assets, are things that you can own and you can touch with your own two hands, the pricing on physical assets has gone through the roof. 

So, while stocks have tanked in the middle of this environment, physical assets have gone absolutely crazy. Let’s take a minute and look at the example of the car markets. 

Cars have gotten extremely expensive for a period of time. Even the used car markets were so insanely expensive that people couldn’t afford to actually afford cars even on the used market. But something interesting to know is while those that were in the market to purchase a car, we’re having a really hard time finding those that owned the cars were seeing their assets, cars raising value significantly and seeing their assets go up. 

Look, in my case my family, we got completely lucky during the pandemic at the beginning, we needed a car very badly. We had another kid on the way. We needed to go for a larger car. So we bought a Tesla when no one was even leaving their houses. 

This was the peak fear moment of the early pandemic, but we had to buy a car, so we did it. We bought a Tesla, and it worked great for our family, but something interesting happened. We bought our Tesla at a point where prices were a lot lower, whereas as a matter of fact, people were so afraid that prices were kind of going down. It was a good buying opportunity and we just kind of jumped in mostly out of need.

But shortly thereafter, something weird happened. Price of all used cars went through the roof with my car as an example as well, because we bought used. 

So by the time it all shook out, the price we paid and the value of the car at its peak, we made 40% on the purchase of that car. That is insane. But while that’s great for our family, there’s something interesting to point out and that is, that we didn’t sell the car. 

We didn’t sell the car off and tried to make 40% and get the cash at hand. Why didn’t we do that? Think about it, because we would’ve been back in the car market buying another car, which means just because we sold at a higher price cuz our car went up in value, we would’ve then had to buy a different car at a very high market price. 

So it didn’t really benefit us other than patting ourselves on the back and feeling good that we accidentally made a purchase at a really good time by no fault of our own. But the reason I talk about this example is that let’s take the idea of the used car market where you buy a car and then it goes up significantly in value due to inflation and the benefactors are the ones that own an asset while it rises in value during inflationary times. 

Real Estate

Let’s take that idea and let’s apply it to something different that we talk about all the time. My favorite subject is real estate. Now imagine we could buy an asset like a car purchase, and that car ride inflation up while inflation was going up and pushing up physical asset values. But what if in my car example, my car also paid me rent? What if I was making income on that car and what if I could get a loan on that car after the fact to then go buy more cars that were going up in asset value, that were paying me additional income along the way? and sure there might be things like Touro and other things where you rent your car out for a short period of time, like a short-term car rental. I know those exist, but they don’t have all the advantages that real estate has. 

So in the world of real estate, inflationary times are actually a godsend if you know how to navigate the market correctly. Now, we have discussed and understand that hard physical assets during inflationary times are likely to increase in value. We’ve already talked about that. 

But now let’s take it a step further and find an additional advantage that real estate has during inflationary times. If you recall, we talked about financial assets having big problems during inflation. 

Things like stocks, bonds, and what was that last one? It was debt. 

Debt during inflationary times has a difficult place in the market. Why? Because the holder of the debt, the lender, the bank, or whoever holds the note that someone is paying on the lender has a problem because if they lend out, let’s say $100,000 and inflation is 8%, then after one year the lender has lost 8% of the value of their loan because that a hundred thousand dollars was eroded away by that 8% inflation. 

Now if you take that over several years, like the Federal Reserve raising rates for over a year and not really accomplishing, getting inflation under control, many estimates are that we have at least one two maybe three years of inflation still ahead. That will be with the things we’re dealing with. On a more extreme level, it’s only getting more extreme.

So, if that’s the case, we do have real estate where you can lock in your debt for your purchase money. For example, let’s use simple math and round numbers. Let’s say there’s a property worth $1 million that you want to purchase and you can get a loan for $750,000 for that purchase. So if you fast forward, let’s say you have an investment property, want to purchase for $1 million and let’s say you can get a loan on that property for $500,000. 

Again, just for round numbers, that million-dollar property and that $500,000 loan would be day one. Now, if that property continues to go up in value like we’re seeing so rapidly right now for hard assets, let’s say it goes up in value by 10%. Your value one year from the purchase price would be $1.1 million. You made $100,000 on your investment, a 10% return in one year just by investing at the right time. But your debt does something interesting. 

Also, let’s say inflation for this example is 10%. That means that your debt one year later would’ve eroded the value by 10%, which means your debt, even though it might still be right around 500,000, the value of that debt one year later would be equivalent to 450,000. 

So purchasing real estate with debt at this phase in an inflationary market, every local market’s gonna be different. But generally speaking, if you buy a million-dollar property and it goes up 10% in value, you gain 10% value right there, but you also erode and inflated your way out of the debt attached to that property as well. 

So you’re seeing a bigger spread of equity, you’re seeing a bigger spread of overall value, and you as the investor are making the right move in that case for these simple reasons. This is why Saint is going so heavy into hard assets right now, and we are looking at so many properties that we have great deals on because we also have good acquisition channels. So if you mix all that together, good market timing, good acquisition channels, and you have the ability to move into an investment space that you understand well, you can crush it and make generational wealth with the opportunity that we have in front of us. Again, inflation is your friend if you know how to use it to your advantage. At this stage with all the inflation going on, you’ve got to know how to add streams of income as well. Protect and diversify your investments.