ASSET INFLATION

 “I remember the $0.05 hamburger and a $0.40-per-hour minimum wage, so I’ve seen a tremendous amount of inflation in my lifetime. Did it ruin the investment climate? I think not.” – As a hamburger rises in price, so does the price of the shares of the company that sells the hamburger. Inflation raises the prices of both commodities and assets, and shares in a company represent ownership in the company’s assets. Inflation is the friend of people who own assets. Inflation is also the enemy of the people who own cash or bonds. Why? When the Federal Reserve prints money and circulates it into the economy, interest rates go down. This drives up the prices of financial assets such as stocks and real estate. But the Fed’s printing of more money also means that our dollars buy less and less, which means that things cost more and more. Fifty years ago a hamburger cost $0.40, now it costs $7; and a house that cost $50,000 in 1965 now costs $500,000; and the Dow Jones Industrial Average, which stood at 910 points in 1965, now stands at 17,000. If you hang on to cash, it will buy less and less every year. If you bought twenty-year bonds in 1996 and cashed them in 2016, the cash you got back bought less than it did when you bought the bonds. Inflation really helps the banking and insurance industries. Since that $50,000 house is now a $500,000 house, people have to borrow $450,000 more from the bank. And there will be a hell of a lot more bank fees for a loan that size than for a $50,000 loan. The property insurance company is also going to earn a whole lot more on insuring a $500,000 property than it ever earned insuring our $50,000 property. In the example above, both the bank and the insurance company saw inflation cause a 1,000% rise in business, but neither institution had to add any more employees or increase the size of its operating plant. Now you know why Charlie and Warren are so big on insurance companies and banks: not only are they the perfect hedge against inflation, they actually benefit from it. For banks and insurance companies, inflation truly is the gift that keeps on giving.

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