Hold real assets instead of cash. This is Tesla Tesla Inc(NASDAQ:TSLA) CEO Elon Musk's high-level advice on how to achieve asset preservation in times of high inflation. In addition, historical data shows that after the Fed launched the first interest rate hike of the tightening cycle, gold and US stocks performed very well.
MicroStrategy CEO Michael Saylor expects inflation to stabilize at 40-year highs, while investors' flight from cash, bonds and value stocks to rare properties like Bitcoin will intensify.
Musk echoed and agreed with his prediction, saying that in times of high inflation, holding physical assets like real estate and stocks of companies you think make good products is generally better than holding dollars. And he added: "I still hold and will not sell my Bitcoin, Ethereum and Dogecoin."
But meanwhile, Musk reportedly sold his 7 homes in California for $128 million and is currently renting in Texas. In addition, it should be noted that Bitcoin, Ethereum, Dogecoin and other digital assets are not "physical assets". But from Saylor's point of view, they are private property compared to fiat currencies and are as rare as gold. The supply of Bitcoin is capped at 21 million, and no new Ether is generated.
Did you know that Ethereum will process more transactions in 2021 than Visa and Bitcoin? Ethereum Foundation's Josh Stark said ether settlement transactions were about $11.6 trillion last year, compared to $10.4 trillion and $4.6 trillion for Visa and Bitcoin, respectively.
Cash is rubbish
In any case, Musk's advice is pertinent. Inflation in the U.S. is currently as high as 7.9 percent, the real numbers could be higher, and the value of cash is disappearing. Savings account yields average only a pitiful 0.06 percent, and bond yields are not high.
All countries are selling off dollar foreign exchange reserves. De-dollarization in countries and regions such as Russia and China has been underway over the past few years, and this trend is expected to accelerate after the Russian-Ukrainian crisis and the harsh financial sanctions imposed by Western countries. In the process, the Chinese currency, the renminbi, will benefit. It was reported last week that Saudi Arabia was considering pricing its oil sold to China in renminbi.
Raising interest rates provides growth buying opportunities
Another important topic for investors this year is interest rate hikes and how they might affect investors' asset portfolios.
According to LPL Research, after the first rate hike in each tightening cycle since 1983, the S&P 500 has yielded an average of 0.7%, 6.1% and 9.2% for 3, 6 and 12 months, respectively. It's important to understand that the Fed raises interest rates to combat inflation, which is usually accompanied by stronger economic activity. This is a good time to invest in growth.
Piper Sandler makes the same point. The investment bank said in a report last week that with the end of the pandemic, we are entering a period of growth in the market cycle. Based on this prediction, value investors should move as close to growth as possible, focusing on affordable growth (GARP) companies. This strategy means emphasizing factors such as earnings growth, low sales volatility, ROE, and earning momentum. Whether you're a growth, value, or balanced investor, these elements will perform better in the fourth period, the growth phase.
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