Talk about Money: Investing safer than saving amid inflation

Prices always rise at this time of year for the tomatoes, lettuce and avocados that Jorge Aragon puts into the dishes he serves at his two Los Gallos Taquerias in Scotts Valley.
“In these months, the vegetables have to be imported, so they cost more,” he said.
But there’s something different this year.
“Now, everything is going up,” he said. “The soybean oil we use to make our chips went from $17 for 5 gallons to $28. Meat is up a dollar a pound. Vegetable prices are up 70 percent. Fish, shrimp, corn, it’s all going up.”
I think what Aragon is seeing is just the beginning. Easy-money government policies and near-zero interest rates are likely to keep fanning the flames of inflation.
Investors who want to prepare for it can learn a lesson by looking south, to where Aragon’s savory recipes originated — Mexico.
In 1979, as crude oil prices dropped, Mexico, a major oil-producing nation, used easy-money techniques to try to keep its economy afloat. One of those techniques was negative real interest rates.
Negative real interest rates occur when the cost of living rises faster than the cost of borrowing money. For example, if the cost of living is rising by 8 percent a year and you can borrow money at a 4 percent interest rate, then you have real interest rates of negative 4 percent.
If negative real interest rates persist, people learn that they can make money by borrowing at 4 percent and buying commodities and other assets that are rising in price by 8 percent. That further drives up prices.
Just as Mexico used negative real interest rates to buoy its economy in 1979, the U.S. is using negative interest rates now. Savings accounts pay close to zero, and the prime rate for borrowing is 3.25 percent. But it looks to me — and Aragon — as if the cost of living is rising by much more than 3.25 percent a year.
Swiss-born investment guru Marc Faber says the cost of living in the U.S. is rising by between 5 and 8 percent a year now, and he sees that rate going higher as the U.S. maintains negative real interest rates “for as far as the eye can see.”
Negative real interest rates are bad for savers, who see the buying power of their savings shrink — but they tend to help owners of commodities, such as gold and oil, and investors in companies that provide products or services that are going up with inflation.
In Mexico, between 1979 and 1989, the peso lost 98 percent of its value against the U.S. dollar. Inflation skyrocketed, and the basic necessities of life became difficult for many Mexicans to afford. But stock market investors saw huge profits. If you were a Mexican resident investing pesos in Mexican stocks, your investment of 1,000 pesos in 1979 would have rocketed to 131,000 pesos by the end of 1988.
Of course, those 131,000 pesos in 1988 bought only a tiny fraction of what 131,000 pesos bought in 1979. But the stock investors were still much better off than their fellow Mexicans who had left their money in savings accounts.
The lesson for U.S. investors, according to Faber, is that if your government is determined to maintain negative real interest rates, you want to invest in assets whose prices are inflating — such as commodities, real estate and stocks — and not leave your money in savings.
Mark Rosenberg is an investment consultant for Financial West Group in Scotts Valley, a member of FINRA and SIPC. He can be reached at 439-9910 or [email protected].