News of impending hyper-inflation is everywhere. Fund managers, financial bloggers and economic commentators are showcasing their “inflation
sniffing” bona fi des and providing insight on how to confront this specter. Notably, Universa Investments, a fund associated with Nassim N. Taleb, best selling author of The Black Swan, has launched the “Black Swan Protection Protocol Inflation fund” (those with less than $25 million to invest need not apply). Gold and gold mining stocks are suddenly au courant with the hedge fund cognoscenti.
AIS and our parent, AIER, have long focused on the slow attrition in consumer purchasing power wrought by a fi at currency regime and monetary expansion. The ever- present reality of inflation is not news to us – it has been an ever-present threat since gold redemptions ceased. This is why we recommend that investors maintain a portfolio that includes common stocks, gold, real estate and short-term bonds, the prices of which include the markets’ best guess regarding future price inflation.
The case for higher inflation is not a hard one to make. The bond market’s implied expectation of inflation (indicated by the spread between conventional Treasuries and inflation protected Treasuries) is 1.98 percent per year over the next 10 years, or roughly one half the rate of actual price inflation since 1945 as measured by the CPI. In response to the financial crisis, the Federal Reserve has held interest rates at nearly zero and launched an aggressive campaign of quantitative easing by buying up vast amounts of long-term treasuries, mortgage-debt, and various other types of private debt. Since September 2008 the Fed’s balance sheet has increased by a staggering $1.1 trillion dollars. New programs are in the works to spur lending in consumer finance and this figure will likely grow higher. The effect of these new bank reserves is to print money in huge quantities without actually turning on the press.
Though these extraordinary actions are intended to speed economic recovery by inflating the money supply, economists and public policy makers will debate the prudence and necessity of the Fed’s current course. Our focus, as always, is on the implications for the individual investor. If the Fed is unable put the “genie back in the bottle” and withdraw excess bank reserves in a timely manner once the economy resumes expansion – an unwelcome spike in price inflation will result.
This month we re-examine whether Treasury Inflation Protected Securities (TIPS) can play a useful role amidst these circumstances. Our recommended asset classes have historically provided protection against expected price inflation. Actual price inflation, however, cannot be forecast reliably by anyone. TIPs are well suited for those investors who are especially averse to the risk of unexpected price inflation. An investor’s time horizon, inflation basis and tax sensitivity are also important considerations.
Also In This Issue
Treasury Inflation Protected Securities (TIPS): Another Arrow In The Quiver
Asset Class Investing Post-2008
The High-Yield Dow Investment Strategy
Recent Market Statistics
Recommended Investment Vehicles
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