Posted by lowem, Mon Mar 17 02:40:00 UTC 2008

This is the second instalment of a 7-part series on how to beat inflation in Singapore and elsewhere. Take a look at the stack of paper in the photo above. That's the amount of Zimbabwe dollars in Z$500 bills that is needed to buy the beer in the picture. A million-dollar beer - that's one of the things that can happen when inflation gets out of control.

Inflation usually used to go out of control in just one country at a time. So, when the Zimbabwe economy went into hyperinflation, some of their people went over to neighboring South Africa - in some cases, to import needed goods for their own use or for sale to their fellow citizens, and in other cases, to flee the hyper-inflationary environment permanently. However, if this current wave of inflation were to take off and go exponential globally, there could be very few if any places left to hide. So, what can you do? Onward to the guide.

D

Dividends.

Dividends are coming back into fashion, and it is no wonder - in the uncertain and volatile world of stock markets during the unfolding credit crisis, investors want to be compensated for risking their money out in the markets. The price of a stock may change every moment of every trading day, but a dividend payout, once it arrives in your account, is real money. The better companies with higher dividend yields can actually keep you on par with the rate of inflation, and if coupled with stock price appreciation, could even put you ahead. As for which companies, here's a tip I've already mentioned earlier - Canadian energy income trusts : with their 12-15% dividend yields and linkage to crude oil prices, this particular asset class makes a pretty good inflation hedge.

Drinks.

Drinks can be a killer on your budget. They can cost from one-third to half the cost of your actual meal or perhaps even more, especially if you order a fancy cocktail at a restaurant. So, one could do without a drink for the usual office lunch at a coffeeshop, which I've noticed more people around me doing anyway nowadays - and mind you, these are mostly IT professionals and R&D engineers that you could find around the place where I work. And if you were to go to a restaurant, you could try asking for a glass of ice water - but be sure to first check if they charge for water - some of them do, and the price being charged for plain or mineral water can be an absolute rip-off. As for alcoholic drinks, personally I don't indulge - but if you do, keep in mind the million-dollar beer coming down the road, and note that we have started on our way there already.

E

Electricity.

Electricity prices are going up, and you don't really need me to tell you that. What you can do is to conserve as much as you can, and if you do need to change appliances, buy the most efficient replacement that you can. Here's my before and after story : before energy conservation measures, my household was burning up 700KWh per month, and now, we are regularly clocking in at 450KWh per month or less. Here's what we did : we disposed of a second refrigerator, changed from an "always-on" electric air-pot to a thermos flask for our hot water, got a more efficient clothes dryer when the old one spoilt, changed the living room TV and the computer monitors from CRT's to LCD panels, and very importantly, turned off electric appliances at the wall socket instead of leaving them in standby mode. We have not turned on the aircon for years, and we use fans exclusively. If the night is slightly cooler, we turn off the fans as well.

ERP.

This is mostly a unique Singapore phenomenon, though it is being copied or emulated by other cities in other countries as well : Electronic Road Pricing. The idea is that motorists get charged whenever they enter certain regions during busy hours, such as the entire downtown area during the entire morning and evening periods (and beyond), or the shopping belt during most of the day. What can one do? Avoid working in the city area, perhaps. Or at least try not to drive there - take public transport, bus or train. The season parking charges are getting prohibitive anyway - last I heard, they were rising to $200, $300 per month and beyond. I keenly await the first $1000 season parking lot. As for shopping and running errands, try planning these for Sundays where they give the drivers a respite from the charges. Be sure to get up earlier though, especially if you use the CTE expressway - it virtually becomes a parking lot from around mid-morning onwards. There is also a "blank period" between 10.00am to 12.00 pm on weekdays where there is no ERP charged in the city area. You can try to run your errands during this period. When I used to work in the city, I staggered my working hours to arrive after 10.00am and to stop work after 7.00pm, instead of the usual 9 to 6, making full use of the flexi-hour policy. It may not apply to all jobs or even most jobs, but if you are in a position to do this, just do it.

Education.

Education is another big worry when people talk about inflation. It pains me to see people trying to plan for their children's education costs for the next, what, 10, 15 or 20 years when inflation or perhaps even hyperinflation will wipe out the effort. It pains me to try to plan for my own children's education knowing that if I do not succeed in fighting this inflation thing, I can get wiped out too. One thing I can tell you for sure - forget about those endowment plans that insurance companies try to sell to you. A while back, I briefly looked through the prospectus for one of these - it said, in language that could best be described as tentative, that I *may* get 4% annualized returns at the end of the endowment term. But, I pointed out to my friend, who was an aspiring financial planner and attempting to sell me that plan, isn't college education inflation currently running at 6% annually? If I were to put money into this plan, I will be losing 2%, or quite likely even more, as inflation takes off. She had no answer to that one. My advice : plan for your own education needs yourself, do not rely on insurance companies, and wage your own war against inflation.

F

Food.

The rising cost of food is another big worry. So what can you do? Stop eating? Not really. There are a few things to be done here - less dining out, no fancy restaurants or upscale places like that, more cooking at home or at the very least eating at cheaper places. At the supermarkets, the government of Singapore wants you to buy house brands - that's one way, but keep in mind that you get what you pay for. I find that house brands work best for the really basic commodities like rice and sugar. I am usually a little disappointed with the other house-branded products where they cut corners in the product specifications or quality of materials. But if you have no choice, then you have no choice. House brands it is. And stay at home and cook. Don't eat out at all if you can help it, or as little as you can help it. Yes, that's a recipe for economic disaster for the food & beverage industry if everyone adopts this attitude, but hey, you are watching out for yourself here, and who's watching out for you? Just do it.

For those of you with spare cash to invest, take a look at the agricultual commodities and agiculture-related companies. There's your hedge against food price inflation. There are quite a few ways to play this, you could do either a pure play via futures trading, or via the agricultural ETF's such as MOO, RJA or DBA, or you could buy stocks in the companies that are involved in one way or another. It's rather similar to investing in crude oil - go upstream. As high upstream as you can.

G

Gold.

Gold is the ultimate inflation hedge. And 6000 years of human history have proven gold to be the money of choice, both as a medium of exchange and as a store of value. Whenever there are wars, crises, or upheavals of one kind or another, humankind has always sought the safety of gold. Governments may come and go, entire civilizations may come and go, but the gold that is left behind remains as unchanging and as valuable as it always has been. Think about it : every single form of paper, or fiat currency, ever invented, has collapsed to zero or nearly so. Always. The "mighty US dollar"? It has already lost over 95% of its purchasing power over the past decades. And it's on its way to losing the remaining 5%. It is the same story with every other currency around the world. They are all going down together. Some might be going down slightly slower or faster than the rest, but, as governments continue to print money and and financial institutions continue to create credit out of thin air, they are all going down. It is the proverbial race to the bottom.

In order to avoid the fate of your currency going to zero with all the others in the inflationary spiral that is coming, buy gold. As much as you can afford, in whatever form you like. And not buy in order to trade in and out, but buy and hold it and keep it. That last point is something I really want you to know. I tried trading in and out of the gold ETF earlier - I made 40%. Not bad. But my physical gold, which I don't trade, which I just sat and sat on? It is up way over 80%. And as the gold price hits $1000 per ounce and vaults over the $1000 level, remember one thing : it is not the gold that is going up in price. It is the dollar that is going down in value. So buy gold and hold on to it.

See also :

1. ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 1
2. ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 2
3. ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 3

Re-post from lowem.log :
ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 2

Filed Under: Lowem | Tags: inflation singapore