I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Monday Money, I write about money management.
On Saturday, I wrote about fiscal dominance and financial repression as well as the big risk we’re looking at as investors: inflation. Some pundits say “we’re not in fiscal dominance yet”:
And others disagree:
I’ll leave you to weigh the situation yourself.
The 2010s did have their share of financial repression, as interest rates were held down below their natural levels for a very long time, often via quantitative easing, the Fed’s “printing of money” to buy long-term bonds and mortgage-backed securities. But the 2010s also had the shale oil boom and the growth of Internet-based software as a service as well as cloud services, which led to disinflation. And, just as important, the 2010s started as the Great Financial Crisis was ending — a time when there was plenty of unused productive capacity, unemployed people, and depressed activity ready to take off without causing price increases. Inflation averaged 1.8% over that decade.
Things look different now. We’re seeing deglobalization and increasing trade restrictions. The AI buildout demands significant commodity inputs. Geopolitical unrest has led to energy and other commodity supply shocks as well as increased investment in defense. The covid pandemic led governments around the world to use stimulus to avoid economic disaster, leading to increased inflation and inflationary expectations.
So, expect inflation to continue not return to 2010s levels.
What to do with your portfolio?
Here are four ideas I’m leaning into:
- Allocate a portion of your portfolio to precious metals. While the complex has wobbled for most of 2026 after its big run-up in January, and hasn’t found a good footing yet, precious metals always do well in inflationary times. In the 1970s, a time of great inflation, gold increased over 2,300%, climbing from a fixed $35 per ounce to a peak of $850 in January 1980.
- Include a broad commodities ETF in your allocation. The inflation that results from financial repression leads to higher commodity prices overall, if economic growth stays reasonably strong. I have 20% of my retirement savings in PDBC, an Invesco diversified commodities futures fund. You can also look at BCI, the Aberdeen Bloomberg All Commodity Index, a passively managed fund with an expense ratio of just 0.26%. It covers a broader range of commodities. I’m thinking of switching at least part of my commodity sleeve to BCI. Perhaps I’ll do a comparison later this week. One caveat: we’ve already seen some runup in commodities so you’re not getting in on the ground floor if you allocate today.
- Pare back on U.S. equity exposure. While U.S. stocks have seen an incredible run since the GFC, they sit at unusually rich levels even considering that forward P/E ratios have declined as earnings have grown. Developed and emerging market stocks around the world look generally much more fairly priced. If we are facing a time of structurally high inflation, due to emergent fiscal dominance and consequent financial repression, stocks may hold their nominal value while losing value in real terms. U.S. stocks will likely perform poorly over the next decade, even if they don’t outright crash. So will stocks around the world, but non-U.S. markets are starting from much less inflated values.
- Eliminate bond exposure for now, or greatly reduce it. There will come a time when financial repression practices will bring down bond yields, and as they come down, this will be a good time to get in and out. Also, if we do see a recession, yields may moderate at that time too. In the next ten years, don’t plan to buy and hold bonds. Instead, carefully move in and out to capture any times of moderation in yields without getting caught when they begin rising again.
Check out what happened with bond yields in the 1970s
If we are entering a time of generally higher inflation, bonds will do poorly, but not all the time.
In the 1970s, the ten-year yield generally increased, with a massive spike into 1980 as inflation became unanchored.
Note that yields moderated in recessions (shown as shaded areas on the graph), but only after continuing increases. After the 1974-1975 recession, inflation began moderating after a surge, and yields declined into 1977. After a recession, manufacturing slack and subdued investment can restrain inflation. But then yields began to march up again, as inflation re-emerged.
I wouldn’t buy and hold bonds in a time period like this, because as yields move up, bond prices — what you can sell them for — decline. So even if you’re getting yield on those bonds you may lose money over all.
Ultimately, can’t predict the future
If the AI bubble bursts, perhaps due to a private credit blowup, we could see stock markets crash around the world and bond yields come down, while economic growth falters.
In such a scenario, bond values would go up while everything else would likely go down. But the U.S. stock market would go down the most. Here are some investing ideas if you think the AI bubble is the worst risk we face.