Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Changes Your Investment Risk Profile
Transcript
- Lucas: Look at the chart for the ten-year breakeven inflation rate, currently sitting at two point thirty three percent. It sounds stable, almost boring, but that number is doing heavy lifting in determining what your money is actually worth next year. Luna: Right, and when you pair that with the core PCE at 130.5, it feels less like a data point and more like a slow leak in every portfolio I see. Lucas: Exactly. Most people think of inflation as a consumer problem—groceries, gas, rent—but for investors, it’s a structural risk to the entire concept of 'safe.' We’ve spent years telling listeners that bonds are the ballast, but with the Fed funds effective rate holding at three point seven five percent, that ballast is getting lighter by the day. Luna: So we’re in this weird limbo where rates are high enough to hurt bond prices, but low enough that they don’t compensate you for the loss of purchasing power. Lucas: Precisely. And here’s the thing that trips up even sophisticated investors: their risk profile hasn’t moved, but the world around them has. If you’re holding sixty percent equities and forty percent fixed income, you might feel diversified. But if inflation stays sticky above two percent, your fixed income portion is actively shrinking in real terms every single quarter. Luna: That’s a brutal way to put it, but I think it’s accurate. You’re not just staying flat; you’re sliding backward while thinking you’re standing still. Lucas: Let’s look at the Dow, which is up over one percent this week to fifty one thousand seven hundred twenty three. On the surface, that’s bullish. But look at the NASDAQ, down one point one percent. The market is bifurcating based on who can pass inflation costs onto consumers and who can’t. Luna: So pricing power becomes the new proxy for safety. Companies that can raise prices without losing volume are the only ones offering a real hedge right now. Lucas: Yes. And that changes how we should view your equity exposure. It’s no longer just about growth versus value. It’s about pricing power versus vulnerability. Take a company like Visa, which just got Beijing’s green light for its bank card business after forty years. That’s not just expansion; that’s network effect monetization in an inflationary environment. Luna: Interesting. Because every time someone uses a card, there’s a fee, and those fees tend to adjust upward with inflation. It’s a built-in inflation shield. Lucas: It is. And that’s why your risk profile needs to shift from generic 'stock picker' to 'pricing power hunter.' When the Fed raises rates or keeps them elevated, as we saw with the interest on reserve balances hitting three point nine zero percent yesterday, capital gets expensive. Only companies with strong margins survive. Luna: So the advice isn't necessarily to sell stocks, but to be much more surgical about which ones you hold. Lucas: Correct. And this brings us to the donation segment, because keeping this analysis sharp requires resources. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many of these. Luna: Yeah, and it lets us dig into the data like this instead of just reading headlines. Lucas: Back to the portfolio. If you’re worried about inflation eroding your cash holdings, consider TIPS. Treasury Inflation-Protected Securities adjust their principal based on CPI data. With the all urban consumers CPI at 334.1, these bonds are working hard to keep pace. Luna: But aren’t TIPS volatile? I remember when oil spiked, they went crazy. Lucas: They can be, especially if you’re trading them too frequently. But for a buy and hold investor, they’re the closest thing we have to a direct offset against consumer price shocks. The key is duration. Short-term TIPS reduce interest rate risk, while still giving you that inflation adjustment. Luna: So you’re balancing the rate risk with the inflation risk. It’s a tug of war, but at least you’re pulling on both ropes. Lucas: Exactly. And let’s talk about commodities briefly. Gold futures are up six tenths of a percent to four thousand one hundred eighty dollars. It’s not mooning, but it’s creeping up. Why? Because central banks are buying, and retail investors are nervous about currency debasement. Luna: I’ve noticed gold acting less like a speculative play and more like insurance. People aren’t trying to get rich quick; they’re just trying not to lose ground. Lucas: Right. And that’s a subtle but critical shift in sentiment. When gold is used as insurance, it stabilizes. It doesn’t need to go to ten thousand dollars to be useful; it just needs to hold its value relative to the dollar. That’s a win in an inflationary regime. Luna: So maybe a small allocation, say five percent, isn’t about profit. It’s about peace of mind. Lucas: Peace of mind is underrated in finance. But let’s get practical. How do you implement this? Start by auditing your cash. If you have three months of expenses in a standard savings account earning barely anything, you’re subsidizing inflation. Move that to a high-yield option or short-term Treasuries. Luna: And for the rest of the portfolio, focus on sectors with tangible assets or pricing power. Real estate, utilities, consumer staples. Lucas: Utilities are interesting here. Their regulated models allow them to adjust rates, but they’re also capital intensive. Rising interest rates hurt their debt service. So it’s a mixed bag. You want utilities that have already refinanced at lower rates. Luna: That’s a nuanced take. Most people just buy the sector ETF and forget about it. Lucas: Which is exactly the mistake. You can’t automate away inflation risk. You have to understand the mechanics of each holding. Look at the JOLTS report or NFP data coming out next month. If unemployment rises, the Fed might cut rates, which would help bonds. But if wages stay sticky, inflation remains. Luna: So we’re waiting for a signal. Until then, defense is the best offense. Lucas: Defense with a tilt toward offensive characteristics. Meaning, assets that can grow revenues even when the economy slows. That’s the holy grail right now. Luna: It feels like we’re back to basics. Quality over quantity. Pricing power over growth hype. Lucas: Always. But the context changes. Five years ago, quality meant software subscriptions. Today, it means companies that can physically raise prices without customers fleeing. That’s a different set of businesses. Luna: Like those Southeast Asian banks mentioned today. They’re pitching Singapore as a haven because they’re boring, steady, and profitable. Lucas: Boring is good. Boring pays the bills. When inflation is the enemy, predictable cash flows are your best friend. Volatile tech stocks might recover faster in a bull market, but in a stagflationary scenario, they suffer the most. Luna: Stagflation is the word everyone avoids saying, but the data points to it. Growth slowing, prices rising. Lucas: And that’s why your risk profile must be dynamic. Rebalance quarterly. Trim winners that have become speculative. Add to laggards that are fundamentally sound but unfairly punished by macro fears. Luna: Discipline over emotion. That’s the takeaway. Lucas: Discipline over emotion. And don’t ignore the tax implications. If you’re moving between asset classes, make sure you’re not triggering unnecessary capital gains taxes that eat into your already thin real returns. Luna: One more detail, but it matters. Tax efficiency is part of the hedge. Lucas: It absolutely is. So, review your holdings. Check your bond durations. Look at your cash yields. Ask yourself: is this asset protecting my purchasing power, or just hoping for luck? Luna: Hope is not a strategy. Especially not when the CPI is ticking up. Lucas: Agreed. Stay sharp, stay diversified, and keep an eye on those breakeven rates. They’re watching you too.