From the Desk of Podcast
Father Knows Best—Inflation Hedging


Allen:Welcome. My name is Allen Gillespie, and I am the Chief Investment Officer for FinTrust Capital Advisors, and today’s host. You’re listening to the FinTrust Capital Advisors From The Desk Of Podcast: our podcast about markets, life, and things financial.

Today’s podcast is about Father’s Day and inflation hedges. The army green, and probably army issued filing cabinet, had stood silently at attention holding papers behind the reading desk in my father’s study for as long as I could remember. It’d probably been there since my parents built the house in 1971 and before my birth in 1972. In that regard, the house and the filing cabinet both predated Nixon’s closing of the Gold Window in August 1971, and the Great Inflation Wave which followed in 1973 and ’74, during which inflation reached a high of 12.34%. Little did I know, or expect, as I began to open drawers and shuffle through old papers, that what I would find that day would over time would become among my most valued possessions. The initial papers I pulled appeared to be mostly junk. A secret stash of extra Hallmark birthday and anniversary cards, should one need a quick solution to forgetfulness; newspaper clippings about civic organizations which have since been created, grown, or shrunk, or moved to the next generation’s responsibilities; articles about people I did not know or remember. There were files of old financial records of long closed accounts and bills paid. Trash, trash, and more trash. Then finally, I found something interesting. There it was: an old Liberty Life Insurance policy with the face value of $1,000, that Jesse Gillespie had purchased in 1931 on one Marion Ray Gillespie. The immediate question that came to mind was straightforward enough, “Why purchase life insurance on a newborn?” Maybe the grandfather I never knew purchased it because he clearly understood life’s uncertainties. He had crippling injuries from World War I and his own death certificate hung on his office wall. He had been lost in No Man’s Land and reported dead back in 1917. I had also heard the stories of Charles, a young child my grandparents had lost just before my father’s birth, and the mental toll that it had taken on them. Maybe it was just common practice in 1931 because of the status of healthcare in Upstate South Carolina. The time was also in the middle of the Great Depression when 50% of the country’s banks failed, so maybe my grandfather saw it as a way to save a little cash outside of the banking system. He was a County Treasurer, so maybe he just viewed it as a reasonable financial thing to do. Regardless, as I looked at the policy date, I quickly realized that Roosevelt ended the Gold Standard and devalued those 1931 dollars just two years later in 1933. As a result, the purchasing power of the face value of the policy had declined by 69% within a mere two years of its purchase. From the time of my father’s birth to his passing in 2012, when I cashed in the policy, the gold price had increased from $20.67 an ounce to $1,650.00 an ounce. From that, I calculated that the inflation had averaged just over 5% per year during my father’s lifetime. Clearly, nominally priced, fixed amount insurance policies with long time horizons are not designed to survive a lifetime of inflation. While I enjoyed tracking down the remains of the Liberty Life Insurance Company through decades of mergers, the policy’s history was only a passing curiosity.

As I continued shuffling through folders, I eventually found what would come to be among my most favorite possessions: a folder full of quotes, clippings, and words of wisdom from various newsletters, articles, and newspapers collected and curated over many years by my father. There was the full poem of Rabbi Ben Ezra by Robert Browning, the opening line of which Dad loved to quote, “Grow old along with me! The best is yet to be,” it was also carved into the benches around our yard. There was Rudyard Kipling’s famous If— poem, there was a prayer to begin the day, there were words from the Dalai Lama, Spinoza, Cicero, and others. There were words on gardening, love, and on being a good husband. There were economic thoughts from Abraham Lincoln,

“You cannot bring about prosperity by discouraging thrift. You cannot strengthen the weak by weakening the strong. You cannot help the [wage] earner by pulling down the wage payer. You cannot further the brotherhood of man by encouraging class hatred. You cannot help the poor by [destroying] the rich. You cannot establish sound security on borrowed money. You cannot keep out of trouble by spending more than you earn. You cannot build character and courage by taking away man’s initiative and independence. You cannot help men permanently by doing for them what they could, and should, do for themselves.”

There was “The Lessons of History” by Will and Ariel Durant, which concluded that history’s lesson to the country is that moderates save the day, the extremists will always be pulling one way or another, but to yield to either is perilous. There was the strong voice of Winston Churchill pushing back against the collectivists of his time,

“I do not believe in the [capacity] of [the] State to plan and enforce [an active high-grade economic productivity upon its members or subjects.] No matter how numerous are the committee[s] they set up, or the ever-growing hordes of officials they employ, or the severity of the punishments they inflict or threaten, they cannot approach the high level of internal economic production [which], under the free enterprise, personal initiative, [competitive] selection, [the] profit motive corrected by failure, and the infinite of processes of good housekeeping and personal ingenuity, constitute[s] the life of a free society.”

Finally, there was the focus of today’s podcast, a clipping from the Babson United Newsletter, a reprinted summary of Roger Babson’s book, “If Inflation Comes, What Can You Do About It?” Roger Babson was an MIT Engineering Graduate. He considered himself a statistician, and he was so passionate about teaching others that he persuaded MIT to start a Business Engineering degree. He founded Babson College, Webber International University in Babson Park, FL, and the now defunct Utopia College in Kansas. Roger Babson was made famous for predicting the 1929 Stock Market Crash and subsequent Depression a year too early in 1928. Surely, if there’s an answer to today’s inflation question, we can learn it from this scholarly statistician. Under the heading of Supposed Inflation Hedges Against Inflation, Babson extensively details the historical record of a wide variety of assets during inflation: stocks, bonds, mortgages, life insurance, and various kinds of real estate, private equity, international investing, and collectibles, among others. After examining the historical record, Babson determines the safest hedge against inflation is broad diversification. He then specifically recommends a 20% allocation to useful commodities in real estate, which he defined as rural farmland, well-constructed single-family homes, and multifamily properties provided they’re not at risk of rent control, 20% to short-term bonds, and 60% to common stocks. He cautions, however, that it behooves the investor to realize that while prices rise on the stock exchange and most groups during the course of an inflation, the trading on such exchange has many features of a bear market. Unfortunately, he later concludes that even to those who exercise the greatest care, the European experience is very disheartening. Inflation brings grief for everyone, for there is no sure-fire way to make money from securities during a period of serious inflation. The reason is that if you sell to take a profit, there’s nothing to buy, which has now also gone up as much as that that you wish to sell. Successful investors in those countries which have experienced inflation have been the people who got started right and then who stayed through the inflation and stabilization periods without selling. That is those who went both up with the cycle and down with the cycle; they refused to borrow, loan, or sell, but just sat pat. Securities are useful during inflation only for reducing and preventing losses.

If real-estate commodities, bonds, and stocks are only supposed hedges against inflation, what did Mr. Babson see as the only safe hedge against inflation, which prompted my father to save his advice so many years ago? Mr. Babson writes,

“Health, happiness, and security are reactions to certain conditions. They cannot be bought or given. They come largely from the ability to sacrifice popular things for things more worthwhile […] All of the above leads me to say that the most worthwhile hedges against inflation is character. This applies to us as individual citizens, as well as to the nation as a whole. Any well-trained physician [however] will tell you that there is a very intimate relationship between health and character […] Health is a very valuable asset, although easily lost. Even from a material point of view, health is a tremendous asset […] A program of inflation will never add one iota to one’s health or to the health of the nation […] Good health is both a spiritual as well as material asset. Money and time spent upon health is one of the best hedges against inflation. Character and health [however] are not sufficient in themselves to hedge against inflation, as we were created with a brain, the power to see and hear, as well as a stomach with the power to eat and sleep, so we should also learn to value culture […] The value of music, literature, art, and other cultural assets are not in any way dependent upon the amount of money in circulation, or upon the value of the dollar.”

Babson continues to list the valuable assets related to work, love, and play that are not dependent upon the value of the dollar: participatory sports, knowledge, healthy children, family, friends, costly hobbies, and time spent in nature. In the end, one of the world’s great statisticians concludes the surest way to hedge against inflation is to remind ourselves that the most valuable things, the most wonderful things, and the most beautiful things are not advertised, commercial, or popular things, but robust health, good judgement, and spiritual faith. These great assets are not affected by the amount of currency in circulation nor the indebtedness of the nation.

“Amidst inflation it is important to keep our eyes focused on the prize: a life well lived.” – Roger Babson.

In closing, we wish you the best this Juneteenth Father’s Day, as you celebrate fathers, freedom, and free markets. Thank you for listening.

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