This is how I plan to play inflation.

So inflation is on the prowl and it’s coming for your money.

If you’ve got cash stuffed under your mattress, it’s currently losing value at a pace of about 5% a year.

That’s not great.

But what are you going to do? Is there a hedge against inflation? Where can you put your money so it’s safe?

There’s no one answer to this, but one answer I know is: property.

I’m aware at this point I sound like a broken record. Property is a great way to build wealth. Property is a great way to generate cashflow. Property is a great way to hedge inflation.

And as boring as I know I must sound, it’s true.

Property works as an inflation hedge.

In fact, some analysts like SQMs Louis Christopher reckon that as inflation accelerates, that could actually drive demand for property:

Rising inflation could temper the declines to some extent as higher inflation tended to lift dwelling values.

“There is a chance here with accelerating inflation that investors and home buyers will flock to property to get a hedge against inflation,” he said.

“If we were to see a pick-up in real wage growth commensurate with inflation, similar to what we had in the 1970s, that will likely stop a hard landing in the housing market.”

The central idea here is that when everything is devaluing, then you want your money to be in something ‘real’.

That’s why a lot of people say commodities (like gold, but also iron ore) are a good hedge against inflation.

But I’m not about to go out and buy a freighter full of iron ore, am I?

No, real things will hold their relative value as the value of money falls.

I mean, think about what happened in Germany during the hyper-inflation that followed WWI.

In 1922, in the German Weimar Republic, a loaf of bread cost 160 marks. By 1923, that same loaf of bread would cost you 200,000,000,000 (200 billion) marks.

That’s some very serious inflation.

But think about it. Imagine in 1922 you bought a house for 48 million marks (about 300,000 times the price of a loaf of bread. Hey, let’s say you bought a really nice house for 100 million marks.

What can you do?

Well, you can wait a year, bake a loaf of bread, sell it for 200 billion marks, and completely clear your debts.

Score.

You just traded a loaf of bread for a house.

And so this is the thing. There are losers but there are also winners with inflation.

And people who hold property, and people who hold property with debt, so long as their incomes are rising, can do very well by holding property through inflationary periods.

And so yeah, do I expect high inflation to drive property demand higher?

Yes. Yes I do.

It does for me. I’ll be rotating out of cash and into property if inflation looks like getting too much more of a run on, you can be sure of that.

JG.

It’s just one token, but it’s a big one.

So the big news last week is the collapse of the cryptocurrency “Luna”, and the associated stablecoin ‘Terra’.

Crypto coins explode and crash and burn everyday so there’s nothing particularly unique about that.

What’s unique is that the stablecoin had one job and it just didn’t do it.

If you haven’t invested much in crypto, stablecoins are like the chips you use at a casino, as one regulator put it. You turn your ordinary Aussie dollars into stablecoins, and then use those stablecoins to trade in and out of crypto currencies.

It’s allows you to execute trades without the hassle of converting your money in and out of fiat.

On some estimates, about 70% of Bitcoin transactions are done through Tether – the largest of the stablecoins out there.

And stablecoins, like it says on the box, aren’t meant to change. One of Tether’s UST’s should always be equal to one USD.

That’s exactly the point.

But last week, the fourth largest stablecoin, Terra, collapsed. It lost its peg to the dollar and is now functionally worthless.

Not only that, it took down its sister currency Luna with it.

In April Luna was worth US$116. Today its worth nothing.

The reason for that is a little beyond what I have time for, but basically, Terra maintained its peg to the dollar “algorithmically” through buying and selling of Luna.

In hindsight, nobody thought this was a good idea, because as the peg is tested to the downside, more and more Luna have to be printed, which puts downward pressure on Luna, with erodes confidence in the peg, and you have what they call a ‘death spiral’.

As Luna tried to fend off collapse, it just printed more and more and more. The number of coins in supply went from 345 million to 6.5 trillion in a matter of days.

That’s money printing on steroids.

And with the collapse of the world’s fourth largest stablecoin, the price of Bitcoin got hammered, and many people are now wondering about the fate of crypto itself.

I don’t think this is the end of cypto – it’s survived much worse. But it is significant.

First, because it puts pressures on the other pegs. Tether, the worlds largest with almost half of all stablecoin value, is pretty controversial.

Its supposedly back one for one with real US dollars – or dollar like instruments like Treasury bonds, but no one really knows. Many doubt that the money actually exists.

And so that raise the prospects on more ‘attacks’ on the pegs.

I don’t know if you’re old enough to remember when George Soros broke the bank of England and destroyed the Pound’s peg to the German Mark.

But basically pegs create one way bets. If you short the pound (bet that it falls) the worst that can happen is that the peg holds, the pound doesn’t fall, but it doesn’t go up either.

But if it does go down, you can make a squillion, which is what George Soros did. (The world’s first billion dollar trade apparently.)

So if things start to look shaky, there will be a lot of people lining up to test those pegs.

Second, if stablecoins go down, it will do serious damage to the crypto space.

Their combined value (at around $180bn at the end of February) is less than 3 per cent of the crypto market.

But on daily trading volume, Tether’s trading volume is more than Bitcoin and Ethereum combined.

Stablecoins provide liquidity, and without liquidity, the whole show risks falling over.

Finally, it’s not clear how far this story is going to bleed out into the financial system.

The total crypto market cap has fallen from around $3trn to $1trn from its peak last year.

Of that lost $2trn, about $1trn is retail – mum and dad investors and crypto-chads.

But another $1trn is institutional. We’ve been hearing a lot about how the institutional players were getting involved. Institutional players accounted for around two thirds of trading volume on Coinbase last year, about from about nothing a few years ago.

So Wall St has lost a trillion.

That’s not a huge amount in the scheme of the global economy, but it really depends on how leveraged it is.

That much, highly leveraged, is what gave us the Global Financial crisis.

So that’s why the collapse of this particular crypto token is potentially big news.

Crypto will bounce back.

But this is a Black Swan that will keep circling the economic outlook this year.

JG.

Will Labor’s Help to Buy policy have a big impact?

You know, I’d been thinking that the election campaign hadn’t delivered all that much for property.

Normally housing policy is a hot-button topic, and you have money flying here, there and everywhere.

But things had been a bit quiet.

That was until Sunday that is, when Anthony Albanese launched Labor’s official election campaign.

(Who knew we’d been listening to the unofficial, bootleg campaign until now.)

And sure enough there was a little something for housing.

Labor’s calling it the “Help to Buy” scheme.

Basically, it’s a shared equity scheme.

So if you qualify and can come up with a 5% deposit, the government will take a 30% stake in the house (40% for a new home).

So you tip in 5%, the government tips in 30%, and then you go to the bank for the remaining 65%.

Happy days.

There government then has an interest in your home. When you sell it, if you sell it for a profit, then the government takes 30% of your profit. And if you sell it for a loss, the government wears 30% of the loss.

So Canberra just became a property investor.

But think about this for a sec. The price cap in Sydney is for properties valued at $900,000 or less.

So at 30% we’re talking a few clicks shy of $300K!

Imagine having an extra $300K in your pocket at auction. Imagine competing with the guy who does.

For now, there’s only 10,000 places available in this scheme in the first year. That’s something, but given over 100,000 people buy their first home in any year, it’s not going to be massive.

But this is how these things usually play out. Same story with the LNP’s Home Guarantee Scheme. You start small. Make sure it’s working, and then roll it out to more people.

And at least initially, it’s targeted at lower-income earners.

There are price caps on the kinds of properties that are eligible, and it’s limited to individuals with a taxable income of up to $90,000, and couples with a taxable income of up to $120,000.

The other thing I like about it is if you do major renovations on the place, then you’re entitled to the full uplift from the renos. The government’s stake is pegged to 30% of the unimproved value of the property, not the final sale price.

This is great because I’ve seen many people put in some sweat equity into renovations on their home, and then use that equity to begin their investing career.

So it’s great that that ladder will still be available to people under this scheme.

It is true that schemes like this already exist in WA, SA and Tasmania. But there’s no national scheme, and the Federal Government has access to the cheapest money in the country, so it makes sense for them to use their borrowing power to help people out.

So there it is. It does contribute to housing demand, particularly in certain entry level markets, so it is price positive, but not in a massive way… for now.

That said, if the scheme is rolled-out successfully, then it could easily be expanded.

And so that’s Labor’s contribution. A policy that seems to make everyone happy – from the development lobby to the social housing welfare groups.

There you go Labor. That’s how you do it.

Democracy is about giving people what they want.

JG.