A Four-Step Plan to Play Inflation

The Weekend Edition is pulled from the daily Stansberry Digest.

 Five cyclical trends are at – or creeping closer to – major inflection points...

At the top of the list, I believe the Great Bull Market that started in March 2009 is drawing toward a close... Plus, the growth/value cycle, the emerging markets/U.S. stock cycle, and the commodities/stocks cycle are all reaching their turning points.

But in today's essay, I will outline how to prepare for the last trend hitting a crucial moment – and the biggest issue looming over us right now... inflation.

It's here. And it's going to get worse before it gets better.

I've recommended many times that investors should hold a truly diversified portfolio to protect their capital in any market environment. The basic elements of this are:

  • Stocks
  • Plenty of cash
  • Gold and silver
  • Maybe a little bitcoin

First, let's discuss the last three components of that list...

Then I have several thoughts about the kind of stocks you want to own in preparation for whatever lies ahead.

Cash is the ultimate diversifier among all your portfolio assets...

The 2008 financial crisis taught us not to trust anything priced in dollars as a hedge against dollar-denominated assets... The dollars themselves are the only real hedge.

Cash is like oxygen... Nobody thinks about it until they don't have enough of it. Then they can't think about anything else.

Too many folks sell out their entire portfolios at the wrong moment when a downturn hits.

Holding plenty of cash gives you the confidence you need to avoid such a catastrophic loss. Cash is a great medium of exchange. It's real money.

You can count on cash to maintain value over short periods of time. But it's a lousy long-term store of value...

For that, we turn to gold. The precious metal has been an excellent long-term store of value for thousands of years... And that's unlikely to change for thousands more.

Gold appears to be underperforming as inflation has risen significantly over the past year. However, long term, it has been roughly a 50-bagger since 1971 when it was officially detached from the U.S. dollar.

I also recommend holding some silver. Like gold, it has been around for thousands of years. And since its 1971 low, it has been a 17-bagger. Silver has also soared to two breathtaking cyclical spikes, one in 1980 and another in 2011.

It wouldn't surprise me if we saw another spike within the next decade.

Bitcoin is new ‒ less than 14 years old. It has been a good store of value in its short life – as long as you are able to hold on through extreme volatility... But it is a terrible currency.

A currency needs short-term price stability ‒ and bitcoin does not have that...

If you need to set aside $500 to make a payment next week, you don't want to put it in bitcoin. If you have $500 that you'd like to see grow in value over the next 10 years, though, bitcoin is a good choice.

Holding plenty of cash ‒ and some gold, silver, and bitcoin ‒ will prepare you well for inflation and for a bear market. Whether you're ready for the other inflection points that I've listed above depends on what stocks you own...

So now, let's talk stocks...

I don't recommend selling all of your stocks just because you think we're in a massive bubble. You should hang onto great businesses.

For example, in Extreme Value, Mike Barrett and I have recommended stocks like Costco Wholesale (COST) and Starbucks (SBUX). Their share prices might not go up in a bear market... But remember when the prices of Walmart (WMT) and McDonald's (MCD) went up in 2008, while nearly every other stock fell?

Costco and Starbucks have that kind of potential. They're two of the greatest businesses in the world. They might end up surprising you with how well they can perform in a bear market.

Costco has an affluent customer base that might prove more resilient in a market downturn. Starbucks' coffee is expensive, but when people can't afford to take a vacation or replace an aging vehicle, they might be OK with spending a few dollars on their favorite caffeinated drinks.

You can't predict when a bear market will begin... And it's unlikely most people will even know they're in one until long after it has begun.

That's why I say prepare, don't predict. So much money has been lost anticipating downturns that never arrived.

So, while I don't recommend selling great businesses, I do recommend unloading the speculative garbage you may have accumulated over the past couple years as the S&P 500 Index more than doubled off its COVID-19-induced bottom.

Of the five cyclical trends listed above, inflation is the most dangerous...

Bear markets are painful, but they don't last forever. And they'll wind up being the greatest buying opportunities of your investing career.

Inflation is more of a problem, however... It can inflict severe damage on stocks and bonds, and it can last much longer than the average bear market.

Perhaps worst of all, it is the only one of the five trends that never really goes away. Your dollars lose a little bit of value every year, even when inflation is low.

Gold, silver, and bitcoin will protect you against inflation over time. The value of your cash will suffer, but that won't stop it from doing its job ‒ allowing you to scoop up bargains in a bear market.

But the tricky part is preparing your equity portfolio for inflation...

You could take the easy route by adding a gold stock fund to your equities. You could do this with the other equity cycles I listed, too.

You could buy value stock, commodity, and emerging-markets funds... And you could also target specific commodities and specific emerging-market countries this way.

But I have found a much better way to prepare you for inflation, help you outperform the S&P 500 and Nasdaq Composite indexes in a bear market, and exploit the commodities/stocks and value/growth inflection points.

This better way also provides a small amount of emerging-markets exposure.

I found this method of investing by looking over the Extreme Value model portfolio and selecting 10 stocks that could help investors prepare for an extended bout of higher inflation... in addition to exploiting the other cyclical inflection points.

I call this better way of preparing for inflation the "10-Stock Inflation-Protection Portfolio"...

I can't share the names of those 10 stocks with you here out of respect for my subscribers. But I can tell you a little bit about them.

The 10-Stock Inflation-Protection Portfolio contains my No. 1 recommendation of the last four years, which I also believe is the best gold stock on the planet. It's a royalty-like business run by the best management team in its industry.

Unlike mining companies, this business has tiny capital-spending requirements. It doesn't have to build mines or employ armies of unionized workers. When I first recommended this stock, I told readers it had 20-bagger potential. It has doubled since then, so it still has 10-bagger potential ahead...

I've also included a small royalty company that you've probably never heard of, which I believe will one day rival royalty giants like Franco-Nevada and Wheaton Precious Metals...

It could even become larger than both, because it invests in a market that's five times the size of the gold market. And it's run by the best capital allocators in the royalty space...

Furthermore, this company's mines don't produce gold. Instead, they contain the essential building blocks of the modern world. Without them, we'd live in caves.

In addition to these traditional inflation plays, I've included four infrastructure-related stocks that serve industries like power generation, road construction, energy, and homebuilding... They're also essential pieces of modern life as we know it.

Finally, I've included a business that is like a royalty on the commercial-insurance industry. Most people don't think of insurance stocks when they think of inflation protection, but it makes sense.

Hard assets like real estate, factories, and product inventories all have to be insured. As their replacement cost rises, so do the premiums required to keep them covered... Whether there's a bear market or not, this company's clients still need insurance. And once again, it's selling an essential component of modern living.

Like I said before, you could find a few safe funds to invest in...

You could buy gold and silver bullion funds... or put together a few mining funds. In this case, you'd probably do OK if inflation stayed high... But you'd get burned if it didn't.

Likewise, you could put together a basket of value, commodity, and emerging-market funds to take advantage of the cyclical moment we've reached. Of course, if those trends don't play out as I expect, you might not make much money at all.

Or you could assemble a portfolio of some of the greatest businesses in the world... They've done very well – some for several decades, one for 125 years – and have generated excellent shareholder returns through all kinds of economic environments.

I don't make predictions, but I've done a decent job of alerting Extreme Value readers to big changes in the market. In April 2008, I told them to short Lehman Brothers... and to avoid bank stocks.

Five months later, we were in the depths of the great financial crisis, Lehman was bankrupt, and Extreme Value readers made a quick 82% profit. From 2008 to 2012, 465 banks failed, compared with just 10 in the five years before 2008.

My Spidey-sense tells me we're at a similar crossroads in the financial markets today.

And to get through the next several years with your capital and sanity intact ‒ and then make money on top of that achievement ‒ you will need to take the specific steps I've outlined today...

  • Sell speculative garbage stocks and hold plenty of cash.
  • Hold gold, silver, and a little bitcoin.
  • Find stocks that are more likely to thrive if higher inflation persists and a bear market materializes... but are unlikely to perform poorly if neither of those risks happens.
  • Understand which stocks are likely to soar as value, commodity, and emerging-market stocks outperform the S&P 500... but are unlikely to perform poorly if the trends don't emerge.

Whether you're a longtime Extreme Value reader or not, I suggest you act on the four steps above as soon as possible... because what happens next is going to be an absolute disaster if you're not prepared.

Good investing,

Dan Ferris

Editor's note: Inflation is at levels not seen in decades. That's why Dan just released his "inflation protection" gameplan to Extreme Value subscribers. In it, he names 10 stocks he believes are perfect ways to capitalize on inflationary pressures... with huge bear market upside potential. He even names one specific gold play that you can't ignore today... Click here for all the details.