Jamie Dimon, CEO of JPMorgan Chase (JPM 3.03%), told investors recently that the bank has been "stockpiling cash" to prepare for a potentially inflationary environment. The nation's largest bank is currently sitting on $500 billion in cash, which it's prepared to deploy if interest rates tick up higher. Here's what this means for JPMorgan and, more importantly, what you can do to prepare your own portfolio for inflation.
JPMorgan Chase is hoarding cash to "protect the fat tails"
Dimon said that we need a better rate structure that reflects the inflation he believes is coming. He also mentioned that JPMorgan Chase will "look to protect the fat tails," which are simply extreme risks that exist outside of the norm.
Dimon isn't necessarily saying inflation is a lock to happen. However, it does mean the bank views inflation as a potential risk that could get out of hand.
If inflation were to stay higher than the Federal Reserve is comfortable with, the Fed will likely react by raising interest rates. In this scenario, JPMorgan Chase will reinvest its cash at better interest rates. Ultimately, Dimon wants JPMorgan Chase to be "a port of safety" for whatever storm may be on the horizon.
Dimon isn't the only one to sound the alarm on inflation. During Berkshire Hathaway's annual meeting in May, CEO Warren Buffett said, "We are seeing very substantial inflation. ... People are raising prices to us and it's being accepted." Morgan Stanley CEO James Gorman has said that he expects rates to rise in the early part of next year, going against the Federal Reserve's expectation of rate hikes in 2023.
How you can prepare your portfolio for potential inflation
JPMorgan Chase's strategy makes sense for the big bank. However, there are certain things investors can do to protect their portfolios from inflation.
First of all, investors should always diversify their portfolios, and preparing for inflation is no different. Aim to own some assets that will benefit from the ripple effects that come from rising inflation.
Commodities and commodity producers, value stocks, and real estate investment trusts (REITs) can all be good stocks investors can buy to protect against inflation. These assets tend to be more inflation resistant. In fact, in an interview with CNBC, legendary investor Paul Tudor Jones said, "The only thing I know for sure is I want to have 5% in gold, 5% in bitcoin, 5% in cash, and 5% in commodities."
Commodities include things like precious metals, electricity, beef, and other items. The iShares S&P GSCI Commodity-Indexed Trust is an ETF that could give you broad exposure to commodities, including energy, agriculture, and metals. Inflation tends to rise as commodity prices rise, and when commodity prices rise, that tends to be favorable for those that produce it.
REITs are another great investment to hedge inflation. That's because property prices and rental incomes should rise alongside it. Companies that can more easily pass costs on to customers tend to be good hedges against inflation.
The Vanguard Real Estate Index Fund can be one way to gain exposure to the broader real estate market. If you're looking for a company to own in this space, Arbor Realty Trust is a good dividend-paying REIT you can trust.
As inflation rises and interest rates climb higher, interest-rate-sensitive companies like banks and insurers will also benefit. Banks make money off the difference between the interest rate earned and the interest rate paid on deposits. In this space, you could own the Financial Select Sector SPDR Fund, which gives you exposure to those largest financial institutions, including Berkshire Hathaway, JPMorgan Chase, and Bank of America, to name a few.
There is one caveat, however. If interest rates rise too rapidly, consumers may be less likely to take out loans, and banks would take a hit from slow loan growth as economic activity slows down.
Insurers also can benefit from inflation for a couple of reasons. For one, they have the ability to pass along rising rates to their customers. Again, companies that can more easily pass on costs to customers tend to do better in inflationary environments.
Second, inflation brings with it higher interest rates, which benefit insurers that generate investment income from excess funds generated from underwriting policies. Two insurers I like are Progressive and Allstate.
You can also reduce interest-rate sensitive holdings, such as Treasury bonds, and hold a small allocation of gold or even cryptocurrencies as a way to hedge inflation. Gold can also be a great hedge, especially if inflation rises higher than expected.
Higher inflation doesn't mean you need to get overly defensive with your portfolio. Too many investors lost money in the 2010s holding onto gold and other assets in anticipation of inflation that never came, and missed out on the huge rally in tech names.
Continue to hold your highfliers, but also allocate some portion of your capital to those assets that benefit from inflation. There's no telling whether inflation will continue to stay elevated in the next year, so the best you can do is spread your risks wisely.