In the 1990s movie The Shipping News, an old journalist tells Kevin Spacey how to cover the news. If there is a storm visible anywhere, he explains, you write “The storm threatens the city,” even if the storm is not near and is unlikely to strike. If, as expected, the storm never hits, you simply write the following: “City spared by the storm”.

Readers can be excused for thinking something similar to the latest stories of looming, looming, soaring, soaring and terrifying inflation. Yes, inflation expectations were up months ago and have hit 8-year highs. If they had continued, there would be cause for concern. But they did not continue. On the contrary, they have been falling for two months. The 5-year bond market inflation forecast is now lower than it was in mid-March. The market sees five-year inflation hovering around 2.6%. It’s higher than what we’ve been used to for a decade, but there’s nothing to worry about.

That can change, of course. Maybe he will be. We will see.

But with all this talk, I got to thinking about the obvious question. If severe inflation really hits, what can we do about it? How to protect our investments?

This is a particularly important question for retirees today and those planning to retire soon. When we are older, we are usually advised to keep most of our money in more “conservative” investments, that is, things like bonds, which carry less risk. A person in their 20s or 30s may not be overly concerned if their retirement savings plunge 30% into a market rout or spiraling inflation. For someone in their 60s, let alone older, this can turn into a major financial crisis.

So I went back and unearthed the information of the last and infamous inflationary spiral of the 1970s, when consumer price inflation often exceeded 10% per year. The Greek philosopher Heraclitus pointed out that no one ever crosses the same stream twice, because the second time it is not the same stream, and we are not the same person. Everything changes. There is no guarantee that the next inflationary boom, even if it does occur, will be anything like the last – any more than we should assume that it will be accompanied by epidemics of disco music and jeans. flared.

Nonetheless, the chart above shows the total returns, after adjusting for inflation, for various asset classes from December 1971 to December 1981. (I used these dates because the National Association of Real Estate Investment Trusts, or NAREIT, then begins its data series.) The data on energy stocks come from data compiled by Professor Ken French of the Tuck School of Business at Dartmouth College.

This is what happened to your purchasing power if you invested in these assets and held on for 10 years. (I excluded gold, which is another story.)

The key is that you really have does not have want to own treasury bonds. The nearly 40% loss in purchasing power over 10 years is somewhat theoretical – it is derived from the annual compound returns on 10-year Treasuries compiled by New York University’s Stern School of Business, divided by the Consumer Price Index – but nevertheless tells a story. (In Britain, where inflation was even worse, government bonds during the 1970s became known as “certificates of confiscation.” Ouch.)

Keeping them costs you money. Many.

You could argue that the danger is even greater today, simply because the yields on long-term Treasuries are so low. The Federal Reserve’s quantitative easing, bond purchases and zero interest rate policies have left Treasury yields at their lowest ever, meaning the turns would be catastrophic if inflation returns.

Corporate bonds and the S&P 500 SPX,
+ 0.18%
were also terrible investments. It should be remembered that these are real term losses over a decade, which means that investors not only lost a lot of money, they also lost a lot of time.

The actions of the public services were not excellent, but they held up better. And treasury bills – short-term papers – did even better. But again, you were pulling back when you had to move forward.

Anyone who remembers the 1970s won’t be surprised at the boom in energy companies. What is perhaps less remembered is that REITs also worked quite well. These numbers, incidentally, represented property-owning REITs and excluded mortgage REITs, which hold loans.

But there are two caveats to this. The first is that, of course, energy stocks have performed well, as one of the main drivers of inflation in the 1970s was the rise of OPEC and the two oil embargoes it carried out. imposed on the West for political reasons. Heraclitus landmark. There is no particular reason to assume that the next inflationary surge will be the same.

The second caveat is that while REITs ended up doing well, they’ve been volatile along the way. In particular, REIT prices collapsed during the OPEC-induced recession of 1972-1974. And according to FactSet, US REITs already seem quite expensive on some measures today. For example, he estimates that the expected dividend yield on the Vanguard Real Estate ETF (a reasonable benchmark for the industry) is only 2.9% – by far the lowest since its launch in 2004. By browsing NAREIT data, I can’t find a time since 1971, when the overall REIT performance was so low. During the housing bubble in 2007, moreover, the yield reached a floor of not less than 3.6%.

So REITs may offer less protection against inflation today than we hoped.

A key difference in the 1970s is that there were no “inflation-protected” treasury bills to protect investors. TIPS are in theory almost the perfect investment for retirees. They are issued by the US government and their coupons are protected against default. Meanwhile, their coupons effectively adjust to reflect changes in consumer prices.

The problem today is that TIPS, like almost everything else in the bond market, seems insanely expensive. Most TIPS are already blocking a real loss in purchasing power if you buy them today. For example, if you buy 5-year TIPS bonds and hold them for 5 years, you will end up losing 9% of your purchasing power. And 30-year TIPS bonds offer the same 9% loss, albeit spread over 30 years.

It is not very restrictive. And it shows the risks that the government’s policy responses have created for people in retirement and around them.