In a recent interview with Chuck Butler, we concluded, short of dumping the FED and a ballot box revolution, inflation is here to stay.

Individual investors can control where/how we invest to protect our life savings. Chuck summed up his feeling about a market fraught with risk:

“I recently had some bonds mature. These maturities brought me into a ‘Cash Rich’ position. I don’t like that, especially during inflationary times … BUT… There’s nothing out there that I see as valuable/safe to invest in… I’ve already got my allocation of Gold & Silver, so that’s not an option.

The dilemma? Cash will lose value because of inflation. …. A market correction is inevitable and could be HUGE. Stocks and bonds will lose value!”

Protecting our wealth is the top priority. Bonds & CDs (negative real interest rates) are guaranteed losers. Chuck discusses diversification:

“I was brought up learning how to diversify one’s investment portfolio.

Diversification helps; however, it doesn’t ensure that you’ll walk away from the crash without losses…[The goal is to]…avoid catastrophic losses.”

Investopedia adds:

“Diversification means strength through variety. If each component of a portfolio does the same thing, then the portfolio is no stronger than any one component…. If each piece does something different, then the whole can be greater than the sum of its parts.”

Something different? When something causes one investment type to fall, unlike dominoes in unison, you want some to do nothing while others may rise. When oil prices rise, so do oil company profits, while airlines and truckers see their profits fall.

It’s more than the old saying about keeping all your eggs in one basket.

Beware of broker BS

I fear many brokers tell their clients they are safely diversified, yet they are not. I’ve seen my fill of fancy computer reports proclaiming diversification, that is nothing more than owning several mutual funds (generally fee-based, managed by the brokerage firm) all denominated in US dollars. It is very rare to see any gold or assets that will protect against real inflation.

Real inflation was 15% last year. If your broker proudly proclaims an 8% return, you lost buying power. Don’t get hoodwinked!

Immediately after Chuck’s interview, I received the WHVP newsletter, “The Swiss View: How to handle inflation?” I contacted Managing Partner Urs Vrijhof-Droese for an interview. He provides a great global view on diversification and inflation.

DENNIS: Urs, you really nailed it. You described various types of inflation, the causes, and conclude it is not going away anytime soon. Chuck Butler said historically the Fed raises rates to cool a hot economy, something we have not really experienced.

You concluded:

“Governments, as well as the central banks, state that the economy is recovering and strong. At the same time, they are not truly willing to move into a more restrictive policy. This shows us that either they are not truthful or not complying with their duties.”

Urs, can you elaborate on that, please?

URS: The past two years have been crazy.

Governments shut down whole economies and at the same time, with the help of central banks, started to become even more expansionary. Once economies started to open up again, we experienced a high demand facing too little supply.

The U.S. government further boosted demand through stimulus checks, spending programs, and unemployment compensation that was so high it made it unattractive to go back to work.

This mainly benefited big companies. While the S&P 500 gained 26%, the Russell 2000 gained 4.4%. You recently outlined how the top ten stocks are supporting the indexes. The rest are not doing well.

While inflation spiked, the FED didn’t react properly or timely. I see the reason as twofold. Politicians are more interested in their re-election than inflation. The FED is owned by the big banks who have much to lose with a real market correction.

It’s different in other countries. Great Britain began reacting to inflation last year. Recently the Bank of England raised interest rates by 0.25 percent for the second time since December 2021. If you invested $100 into British pounds on December 15, 2021, on February 2, 2022, it would have been worth $102.35. That is 2.25% in just 49 days. Switzerland is also different, having inflation of 0.6% in 2021.

With what we see happening in the U.S. we feel it is important that investors take their inflation protection into their own hands. The world understands the FED is talking, but dragging their feet….

DENNIS: You mention quality stocks, concluding, “there is not much potential in US markets anymore.” Please explain.

URS: Quality is always important. However, quality must come at a reasonable price. We feel that currently, the U.S. market is too expensive. One of many examples is the Buffett Indicator, which compares the total market cap of the U.S. in relation to the Gross National Product; it currently stands at about 182.9%. The indicator rates a ratio above 142% as significantly overvalued.

Good companies, overpriced, is not always quality!

There are other international markets with more attractive valuations; particularly now with the Fed announcing a series of interest rate hikes starting this March; time is of the essence.

We believe today’s focus is diversification into other markets if you have not done so already. We caution investors to NOT just buy some mutual funds in the US. International experts are available to assist you with diversification into other geographical regions and currencies.

DENNIS: I’m glad you mentioned currencies. Many fear that inflation will destroy the buying power of the USD.

If an investor had multiple accounts, well diversified in quality international stocks – yet held all those investments in USD, aren’t they missing a major point? All their currency eggs would still be in one basket.

Isn’t your real challenge to not only find quality stocks, but also hold those stocks in currencies that will hold/increase their value?

URS: Indeed, the foreign currency is essential. A diversified international investor must consider much more than just the companies’ return on equity.

The foreign exchange effect can have a major impact on the investment as well. It requires a lot of time and work to understand and follow different currencies.

You must find solid companies at a fair price, solid currencies to maximize your return, while mitigating risk. While we are discussing the USD, we still must diversify among a basket of world currencies so no single currency dropping clobbers your portfolio.

Inflation is one part; the other part is how governments and central banks deal with it. That is eventually one of the ways of what makes the difference in the currency. Consequently, when finding an investment opportunity abroad, it is important to check the currency’s situation compared with your domestic currency. Fortunately, most of our clients exited the Russian Ruble months ago.

Bottom line, find solid companies at a fair price, select a strong currency and diversify. It reduces the overall risk for a catastrophic loss to your portfolio. We are very leery of the USD today.

DENNIS: I loved your “stay focused and calm” advice. Chuck mentioned he has an ample investment in precious metals. What do you recommend to your clients regarding precious metals?

URS: With investing, you lose if you panic. If you did your due diligence properly, it makes it much easier to stay focused while others are panicking. You may find some great buying opportunities arise.

Precious metals took a hit during the crash in 2020. I read articles stating that precious metals, gold in particular, lost its status as a safe haven. I shook my head; they were wrong because they didn’t do their homework; investigating the reasons behind the sell-off. The reason was easy to find. Speculators were faced with margin calls; they had to sell their precious metals because it was the only investment left with gains. We are investors, not speculators. Let the speculators panic, while we remain under emotional control.

We recommend our clients have a certain portion of their total wealth in precious metals. This depends on our clients’ individual situation as well as the global developments. Currently, with the war in Ukraine, precious metals did appreciate quite a bit.

If you own precious metals, keep the position as a hedge. Remember you bought it to hedge against inflation and that threat still looms! However, if you are not invested yet, it’s better to build your position in multiple steps. Hope inflation never gets so high you are forced to sell.

DENNIS: One final question. You believe in global diversification. I assume that US investments should be part of, but not all, of a well well-diversified portfolio. Your thoughts??

URS: Dennis, thanks for inviting me to share my thoughts.

We strongly believe in global diversification. Diversification is not only to have your wealth in several baskets but also to have your wealth in different geographical areas and managed by different people. Investors must understand what they know and what they do not know. Specialization is key.

Generally, our clients keep the major portion of their wealth at home, in their home currency. We strongly encourage our clients to NOT have all their wealth with one asset manager in one country. Be wary of any money manager who wants to manage it all!

Disclaimer:WHVP is an international wealth management firm for US clients. I have no financial arrangement with them of any kind, although I am one of their clients.As a matter of policy, I do not endorse any wealth management firms as everyone has different needs; one size does not fit all.

Dennis here. I agree with Urs, “It is important that investors take their inflation protection into their own hands.” The Fed isn’t going to help!