Where You Should Invest in a High-Inflation Environment
In this episode of the Invest Like a Billionaire podcast, co‑hosts Ben Fraser and Bob Fraser dissect the current U.S. inflation surge and translate macro‑economic trends into concrete investment guidance. They begin by outlining the primary inflation drivers—massive fiscal stimulus, COVID‑induced supply‑chain bottlenecks, and a labor shortage fueled by stimulus‑enhanced consumer wealth. They then review historical inflation periods by decade, showing that housing (especially residential multifamily) consistently outperformed inflation, while the stock market delivered outsized real returns and gold lagged behind. The hosts argue that the key to thriving in an inflationary regime is owning assets with pricing power—those that can pass higher costs to end‑users—citing residential multifamily, self‑storage, and certain high‑margin stocks as prime examples. They explain how borrowing at fixed‑rate debt magnifies returns because the real value of debt erodes with inflation, illustrating the effect with a commercial‑real‑estate (CRE) model that doubles property value and yields a 4.9× equity multiple over ten years. They contrast sub‑sectors of real estate, noting that multifamily and self‑storage have strong pricing power, whereas office, industrial, and retail are more constrained. The conversation warns against bridge‑finance structures with adjustable rates, urging investors to lock in fixed‑rate debt. Bob challenges common inflation hedges, showing that gold’s 40‑year return barely matched inflation and that the money‑supply metric M2 has a weak correlation with price rises. They also discuss sovereign debt, explaining how inflation transfers wealth from savers to borrowers, reducing the real burden of the U.S. federal debt. Finally, they convey a bullish outlook for the next three to five years, citing robust consumer balance sheets and a supportive macro environment, and recommend investors acquire inflation‑protected assets with solid debt terms to capitalize on the current regime.
Chapters
This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Welcome to the Invest Like a Billionaire podcast. I am your co-host Ben Fraser, joined by Bob Fraser, and today we're going to do a podcast about inflation. So you've been hearing a lot about inflation, we've even talked about it in a past episode breaking down what's driving inflation, and today we want to take it one step further. So a lot of investors are seeing the headlines, um, hearing about inflation But as investors, what do we do from here? And looking back historically, we have not had periods of high inflation for a long time, really since the '80s. And so it's kind of a new concept to a lot of investors. And so what we want to do is look at historical data. And what Bob Fraser has done here and is going to present is looking at macro time periods, 10-year time periods, and inflation numbers and what asset classes have performed the best during those time periods. We're going to talk about a host of other things, including gold. We recently had We had a great guest on who runs a gold royalty company, and where does that, you know, fit in a portfolio? And we're going to talk about the national debt, and is this something to be concerned about, especially in a period of inflation? How's that impacted? So those things, a lot more we're going to be talking about right now. So let's jump in. First off, maybe a quick recap of inflation. How do we get here, and is this going to be a persistent thing we're going to see for a period of time? And just kind of give us a real quick rundown of some of the things driving it.
Yeah, sure. So we've seen pretty high inflation prints around 7.5% annualized inflation, which is fairly high. Certainly historically, that is quite high for America. It's driven, you know, well, I think it's important to say, first off, it is virtually an entirely US phenomenon. So we are seeing about half these levels of inflation in Asia and pretty much not any inflation in Europe. So it's a US phenomenon and it's, pretty much entirely stimulus-driven. It's stimulus-driven and COVID-driven. Let me, let me say that. So there's several components to inflation and there's some of these components are both transitional. So they're, they're transitory rather. So they're going to, they're going to dissipate, but some are going to be a little bit more persistent. The transitional. So of the components you have, you have the supply chain disruption. And we think that's going to be kind of solved this year and maybe into next year. One of the big components is demand. So what's happened is because of the stimulus and other things, we have an extraordinarily healthy consumer. Now, a lot of times when I'm saying that, most people are not tracking with me when I say the consumers are incredibly financially, fiscally healthy right now. And I, in this podcast, we're not gonna go over that. But if, if, if that's a question mark to you, please go, go look at our previous blog post. But you see record high net income per capita, record high household net worth, record low debt service payments as a percentage of disposable personal income, record low household financial obligations. Literally, it's historic. We have never seen a consumer this healthy before. And a lot of it has been due to transfer payments because of stimulus payments.
Right.
And in the past, you know, easing— easy— the business cycle was controlled in the '80s and '90s through, through basically the money, the maintaining of interest rates. So you raise interest rates to cool the economy. You, you chill the economy by lowering interest rates. Well, what happened in 2009, they created a new a new methodology called monetizing the debt or quantitative easing, where they actually purchased— they printed money, so to speak, to purchase government debt. And in the latest installment, you know, in 2020, they actually did direct payments to individuals. So literally what Ben Bernanke joked about in the '90s about helicopter money, what would happen if we actually put money in people's pockets? Well, Now we know what happens. They stand straight up and they start spending like crazy. And it's, it's really exactly what you would expect.
And there's something like $6 trillion of cash sitting in savings accounts.
Excess savings, $6 trillion, massive amounts. And as soon as confidence increases, you're going to see that flowing into the economy.
Yeah. So we have these two sides of both the supply side as well as the demand side. So supply side, there's supply chain issues which we're seeing. There's also the labor shortage, which we talked a lot about.
And that's the third element. So you have this basically crushing consumer demand, and it meets a supply disruption and labor shortage. And a lot of the labor shortage also, unfortunately, is stimulus-based. So a lot of people, when they got their wages increased, they got their stimulus checks, they basically quit their jobs or retired, you know, dual earners. Dual family earners, one of the earners quit, that kind of thing, and others retired. So you see a lot of people that were— you just left the workforce and figured it's time to exit the workforce. So all of that is this perfect storm causing inflation. Well, some of it's persistent, as we pointed out. So what's persistent, what's going to be persistent is the consumer demand that's going to that's going to diminish somewhat but stay strong for several years. And the supply chain, I believe, is transitory supply chain disruption. So that'll diminish. But the consumer demand is resilient, as well as the labor shortage. It's going to be resilient. So we've got inflation. Our view is that inflation is going to remain stubbornly high. But probably not spike up much higher from here. And but it's something we want to get used to. We want to understand how it affects us. And so what I've found in all the research lately is that inflation has been all but forgotten amongst research and analysts. Okay. It's something that in the last, you know, 30 years, we really haven't had much of. And so people have forgotten how to underwrite to it, how to invest to it, et cetera. So I want to just kind of do a little bit of review of, you know, how do we really manage an inflationary regime? And inflation is not neutral. It is both a time to lose a massive amount of money and a time to make a massive amount of money, whichever side of the coin you're on. So, So, right.
And really, really the whole point of this podcast is to provide education for investors and have this macroeconomic thesis and viewpoint and framework that we can make decisions to invest wisely. And so looking at these, these trends, we want to take it a step further with this podcast and actually look at the data and break down, you know, how have different asset classes fared in periods of high inflation historically. So let's maybe jump to that first is, you know, you've pulled a lot of data and some of the data is more challenging to get, especially in the commercial real estate space. But we really tried to break it down as best we could into kind of a few different categories and looking at how different asset classes have performed.
Right. So, all right. So, so what we've done is just the biggest picture imaginable. I just looked at decades and in fact, inflation falls kind of neatly into decades. So you have the decade of the '70s and it was a very high inflation, you know, Jimmy Carter years, whip inflation now, you know, and to the 1980s was also fairly high inflation. But by the '90s, inflation was by and large tamed. So we had, you know, inflation was hitting, let's say, in the '70s, 7.5% on average in the '70s. During the '80s was 5.1%. So we're at 7.5% right now. Then it dropped in the '90s to 2.9%, 2.5%, and then 1.8%. So it's kind of been trending in the, you know, right around the 2% range, a little above the 2% range. And so we've forgotten how to do it. So, so, so it's super important to look back in the '80s and see what was, what was trending well. But one of the things that we want to show is just, first of all, you can see this, this housing chart to show by decade I just looked at, okay, how did housing prices do relative to inflation? You know, and housing was really one of the best ways to beat inflation. It beat inflation every single decade. And so you can see from the chart, and it's not surprising, I think we've known that. But again, that's, that's a really good way to beat inflation.
And really the concept of being inflation protected, you know, we don't want to overlook what that actually means. And so when we're looking at, you know, what are asset classes that are going to perform best in inflationary periods, is the asset classes where you have the pricing power, where that inflation can be pushed through to the end user. And so residential housing and single-family housing especially does very well in inflation because you can increase your revenue in the form of higher rents. And that is generally expected and accepted by renters in those periods of higher inflation. And by doing that, you're actually increasing your net operating income and can keep up or even beat inflation.
Right. And, you know, we can go to that chart. What's interesting here is one of the best ways, as Ben was just saying, one of the best ways as an investor to make money in inflation is to buy assets that have pricing power. And that could be, you know, Apple, Apple Inc., you know, which they can raise the prices of their iPhones, just as an example. It can also be your commercial real estate where you have pricing power. If you— as long as you can raise your rents or you can raise the prices of your product to keep pace with inflation, that asset is going to go up. And in fact, during, you know, during the 1980s, you know, the stock market, you know, did well. And, and And in fact, you know, over the last 40 years, while a dollar, if you could buy a cup of coffee for a dollar in January 1st, 1980, 40 years later, that same cup of coffee costs you $3.30. So inflation went up, you know, basically 300%. But the stock market went up 83 times, 83x. Versus the cup of coffee, which went up 3x. So just FYI. But so let's say you have, you know, you have a dollar to spend, you have a cup of coffee to sell. A year later, that coffee costs $1.07 today in today's, you know, at 7% inflation. If you have a dollar of savings, that dollar a year later is worth $0.93. Okay, so because— so, so the— so deflation works two ways. One, it increases the value of, of, of the cost of an asset, and, and, and it also decreases the value of a dollar of, of cash. And so one of the greatest ways to make money in an inflationary environment is actually to borrow money at fixed interest rates.
Right.
So this is what our government knows with the national debt. So just here's the actual numbers. At 7% inflation, and we're at 7.5% right now, but at 7% inflation, if I have $100 in the bank today, in 10 years, that $100 is worth $50. It drops 50% of its value, of its purchasing power. Okay. So the point— so I want to have as much of that as I possibly can of other people's money borrowed. So I pay them back with dollars that are worth a lot less, right? So, so let's, let's look at this chart here. So the CRE in an inflationary environment, and you can see what Ben is, is talking about. So let's say we bought a $10 million apartment complex and it's worth $10 million and and that is priced on, let's say it's a 5 cap, right? So it's got a net operating income of X. But if that net operating income, if that's growing up every year with inflation, we're raising our rents according to inflation, that net operating income is increasing 7% per year, divide by the cap rate, it means the value of that property is increasing. And in fact, it's extraordinary. So if you look at this chart, you can see then, In 10 years, that property has basically doubled in value by doing nothing. By doing absolutely nothing. And what I've done in this chart is theoretically, I've taken out an interest-only loan for 10 years. Right. And so we're paying on an interest-only loan for 10 years, but the value of what I owe, the purchase, the value of the dollars that I owe actually decreases every year. Because of inflation. The number may stay the same, but the value of it stays. So you're letting time pay off that loan for you. And so it has this outsized gain on equity. So, and the, you know, the last chart I want to show here shows this point is that, is that so if a property value just, just based on inflation, a property value in 5 years would increase by 1.4x, right, to 1.4x in 10 years, 2.0x. So the best value-add strategy is inflation. If you want to do multifamily value-add, just buy inflation-protected assets. In 10 years, you've got a 2x by doing absolutely nothing to that property. But you have a 4.9x of your equity multiple in 10 years simply because you're letting the value of that debt— you're benefiting from the value of that debt being paid off as well. So, so, so it's a, it's a commercial real estate especially is going to have an out— be an outsized benefactor of, of, of inflation. And I will point out, and as you pointed out, that the, that there's the different asset classes are different real estate classes are going to perform vastly different.
Right.
So, so some of the, some of the ones that are going to respond well to inflation that have pricing power are self-storage.
Yep.
Okay. Because you just raise rates. Super easy. Very, you know, probably even they probably would— could lag inflation by just, you know, a quarter even.
Yep.
Is all. Commercial multifamily is going to— is going to have a lot of pricing power, right? Because you can raise rates. Maybe it lags by 6 months or a year because you— it takes you that long to raise— to raise rents. Other— other asset classes less so. So. Office space is typically on 5 or 10, 7, 10-year leases. Industrial, much less pricing power there. So overall, they're going to do fine, but they have less pricing power. Same with retail. So I think the ones that are going to have the most pricing power are self-storage and residential.
Yeah. And just to underscore that point, you know what we've been talking about, even you were just on a panel last week at a conference, the Best Ever Conference, discussing, you know, what's the future of real estate, you know, this year. And as far as what's the transaction volume going to be, it's going to be a big buyer, it's going to be a big, big boom. And to your point here, if you can buy inflation-protected real estate, which a lot of the real estate is, with fixed-rate debt, you are going to massively be successful and have a very— be set up for, right, good success.
And we do want to make this point, it isn't, it isn't just multifamily that's going to do well, it's particular multifamily. Um, so what we're seeing today, a lot of these larger deals are being, being driven high, you know, prices are being dropped, driven up in multifamily, and the multiples, the, the, the cap rates are being driven super low, especially in high demand markets. But in order to close these deals, a lot of these operators are are using, you know, bridge financing, which basically is adjustable rate after 3 years. It has other terms. And this is not what you want to be doing in this environment. So the worst case scenario in a multifamily scenario like that is, well, let's say there is a cap rate adjustment that goes against you in 3 years. You know, I'm not expecting that. But if there was, well, all of a sudden and maybe you've got a higher interest rate. You put that higher interest rate on, well, now it actually reduces your net operating income significantly, and you actually maybe will fail your debt service ratio covenant, right? And you could lose the property. And they're doing it in order to close deals with less equity because these bridge lenders allow Higher leverage rates. Higher leverage rates. And so it's not really something you want to be playing with. So you want to be very careful about the structuring of your deals. And if you're as an LP, as an investor, you want to be very— you want to make sure that your operators understand the risks of leverage and understand how this is going to play out in this inflationary environment. So it's not just getting in the right assets. but it's getting in the, in the right assets that are structured well.
Exactly. Yeah. So it's, it's increasingly important. It's always important, but increasingly so now looking at deals you're investing in, what is the debt structure? And, uh, to the extent you can invest in deals that are locking in interest rates now, those are gonna be the ones that perform the best, that have the least amount of interest rate risk, um, and the chance that interest rates do adjust and reset at higher rates down the road.
And just to make the point, you know, it's the same in the stock market. The companies that have pricing power are going to actually track just fine with inflation. The companies that do not have pricing power will not track the same. And so, you know, Procter Gamble, which produces Pampers and Crest toothpaste— I think they do at least— they're going to track just fine. They'll raise the prices. So companies that do not may not be able to raise prices. So, and their stocks won't do as well. So it's the same thing. It bifurcates the economy into those with pricing power and those without pricing power. So super important.
So you wanna walk through some of the asset classes and the data you've—
Yeah, so this is super interesting. What about, what about, You know, I point out this, the stock market was one of the outsized performers. So if you had a dollar on January 1st, 1980, that dollar today, you know, what you could buy with that dollar would cost you $3.30. Okay. Yeah.
So inflation increased by 3x to your point.
By 3.3x in 40 years. 3.3x.
Okay.
So how about gold? Gold, the ultimate inflation hedge. You know, how did gold do? Well, if you'd have bought an ounce of gold January 1st, 1980, it would have cost you about $500, and if you had exited 40 years later at, you know, 12/31/2019, that was about $1,500. So you would have made 3x on your money. So it basically— gold has not been— it's been a very disappointing asset class, and it has not even kept pace with inflation. So, you know, talking about the gold as an inflation hedge, You know, it sounds great, but it really has not been reality. It has not been a great inflation hedge. Now, a lot of people may take issue with that and say, well, let's look at the '70s when we had very high inflation. But it's a little bit unfair because gold began the 1970s pegged to the dollar at $35 an ounce. And so when it got unpegged, you know, it was then free-floating for the first time in history. So, yeah, it shot up. But that's not going to be repeated. It's not, and it's not, you can't really measure that as an inflation kind of, kind of metric, right?
So a lot of investors, you know, and us included, you know, up until, you know, really several years ago, I'm looking at the data again, you know, the assumption is that gold is the ultimate hedge against one, volatility, and two, against inflation, right? Because it's viewed as an alternative currency. So if we're debasing the value of the dollar, then the gold will, you know, increase correspondingly. And, um, you know, especially in the real estate world, there's a lot of investors where they just believe gold is, you know, an equivalent asset class as far as, you know, value and, um, returns that you can get. And you used to kind of be in that camp, you know, in the Austrian School of Economics, where kind of the hard money, um, school of thought where, um, you know, as you increase the money supply you know, you can expect hyperinflation and gold is going to help prevent the erosion of your value of your dollar. And so talk a little bit about kind of maybe your viewpoints and how they've changed over time. Right.
Yeah. I was what you would call the Austrian school, the hard money school of economics, really until about 10 years ago. And when I saw what happened in 2009, when the Fed began monetizing the the debt by buying Treasury bonds and buying mortgage debt. And I immediately thought, like pretty much all the hard money guys, that this meant the end and you're going to see the dollar collapse and you're going to see hyperinflation. And it didn't happen. And so I really began to look at all the data again and rethink all my assumptions and came to some very different conclusions after that that are that I represent today. And so, you know, you're seeing what, you know, this idea of inflation being tied only to M2 just isn't actually true. It's not correct. The M2—
Explain what M2 is for those that may not know.
It's the money supply. So a lot of people are saying, okay, the money supply basically represents the amount of liquidity in dollars. And as that increases without the equivalent GDP increasing, you— it's, it's money printing, and therefore it's inflationary. But, but the, but the M2 has not— is not been highly correlated to, to inflation. So, um, in fact, the M2 in 40 years has gone up 10x. 10x. Inflation has gone up 3x, 3.3x.
Yeah.
In 40 years. So, you know, so all this money printing has not resulted in high inflation. It has not. By the way, and then there's the argument that the dollar is going to be, you know, it's going to fail. The dollar is going to fail because of the money printing. Again, you see this in Argentina. They print money and it destroys the value of the Argentine currency, but we're not Argentina. So 40 years ago, the dollar is is measured by what's called the dollar index, which is the value of the US dollar relative to a basket of foreign currencies, right? And that dollar index 40 years ago was 85. The value of the dollar index 40 years later was 96. It went up, it went up. The dollar increased in value, uh, by 1.2x during this, while, while the value of the dollar in fact went down by 3.3, right? So the point is the dollar index, or in other words, the dollar's value relative to other currencies, is not as super correlated to inflation and even money printing. Right. So, and that makes sense because guess what? Everybody else is printing money too.
So it's all relative.
It's all relative.
So talk a little bit about— and this is, you know, more of an aside, and we'll talk about this in future podcasts— but a lot of, you know, investors are concerned that if the dollar loses its status as the world reserve currency, well, that kind of changes the conversation, right? Because, you know, the— if the dollar loses its status, and that is pretty impactful too.
Um, and that's, that's, that's kind of— I just— it's hard to take that seriously. Be honest. And I'll tell you, the people that are propounding that view are people who are primarily invested in other countries, right? Okay. As their main bet on the future. Okay. And they'll, you know, to be unnamed, or maybe you should name them, but the dollar's reserve status is not under any threat whatsoever. So I believe it's 87% of global trade today is in US dollars, 87%. You know, and the idea— and most of the most people are saying the ascendant currency, of course, is the Chinese currency. But I remember back in the '80s, the most ascendant currency was the Japanese yen, and everybody believed we were going to be speaking Japanese, and we were going to all be transacting in yen, and it didn't happen. And the idea that you are going to instead go into your bank around the corner and deposit your money in Chinese yuan, you know, is ridiculous. This is a police state without democracy, under the control of a communist government, without human rights, and even the— you know, that's really ridiculous. They are not going to be the global financial plumbing. They're simply not. They're not ready for that. It's not going to happen in the next 10 years or the next 20 or the next 30. It's not going to happen. What is going to replace the dollar? There's really nothing that could even come close. Europe is possible, but the euro has structural problems as well. They are more of a hard money— they have more of a hard money stance than America does. They have less ability to print currency than America has. So if, for example, all of the member countries in Europe can borrow money in euros, but they have no authority to print money. And that's when you go broke, is when you borrow money in a currency you can't print. America, we both borrow dollars and print dollars. Um, you know, and let me make this point too about, about inflation. One of the things that inflation does, as I made the point, it— inflation is a massive transfer of wealth from savers to borrowers. Massive transfer of wealth from savers to borrowers. So the one of the ways to get ahead is to be a big borrower, okay? And that goes against some people's ethos. Well, You know, that is the way to get ahead. Well, who is the biggest borrower?
Federal government.
The federal government. And they benefit massively. So if I said a dollar in your bank account in 10 years is worth 50 cents, well, it works for the federal government too. What they owe, the $24 trillion they owe, in 10 years will be worth, you know, the buying power of that is half what it is today. So the taxes will go up, will be double by then just because of inflation alone. And the value of that debt is unchanged, if it is. And so in fact, most countries, you know, having high debt-to-GDP ratios is quite often, quite common. But default amongst countries is not common. And the reason is they simply can pay their debt off through inflation. And that's exactly what's happened. So America had a debt-to-GDP ratio right around 100 after World War II because of all the borrowing. And guess what? We didn't default. In fact, that debt, while it never diminished, it simply, as a percentage of the GDP, it massively diminished.
Right.
So GDP is the gross domestic product. It's the productivity of every single person times the population, right? And so GDP is going to increase with inflation.
Yeah, especially when 70% of it is from consumer spending and there's $6 trillion.
Yeah, but even so, the point is, if there's pricing power, if that Apple costs, you know, 7% more, that iPhone costs 7% more than it did last year, well, that increases the GDP. By that much. So as this pricing power works through the system, it also benefits GDP. So you see higher GDP growth as well. And so the debt-to-GDP ratio, which is the most relevant kind of statistic, actually is diminished. So that's all kind of hyper-technical. I hope that's not over your heads. But, you know, it's— the point I think you should walk away with here is that, one, debt inflation benefits debtors. And real estate is perfect for that because it allows us to be large debt holders as long as we have fixed rate debt. And then not to fear the collapse of the dollar, not to overinvest in gold, not to worry about the M2 money supply.
And really, I mean, the sentiment from that conference we were at, the Best Ever Conference, hearing from several big-name economists and many others is that they really see a runway of at least 3 to 5 years where the economy is going to remain strong. And the consumer being as healthy as they are is really the foundational underpinnings of that to drive GDP forward. And so, again, there's some trepidation and fear with external factors going on in the market, but we just believe it's a very good time to be backing up the truck, buying good assets with good debt terms and using all these kind of pieces to our advantage as an inflationary environment.
That's it.
That's it. Well, hopefully these are some helpful thoughts for you guys and we're going to be kind of doing more on these kind of topics. And again, just helping educate investors. So if you guys are enjoying this podcast, we really appreciate any support you guys can give on iTunes or Spotify with the review and telling your friends about it. And really appreciate the support so far. So thanks for listening. Join us next time.
