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The Great Inflation Debate?
Linda Stern of Reuters reports, The great inflation debate:
Worried about inflation? Neither Federal Reserve Chairman Ben Bernanke nor all those traders currently dumping gold seem to be, but that may be the best time to make sure you're covered if prices go haywire. Some people think the combination of an expansive Fed policy and an expansive fiscal policy make that inevitable. Oh, and as I'm writing this, the United Nations is announcing that world food prices are at an all-time high. The last time consumer prices went crazy, it happened pretty fast: They rose roughly 3 percent in 1971, 6 percent in 1972, and 12 percent in 1973, according to the Labor Department's Consumer Price Index data. Back then, it took almost a decade and a deep recession to get that genie back in the bottle. "The rapidity with which that ... changes is actually pretty astonishing," says Hans Olsen, chief investment officer for J.P. Morgan Private Wealth Management. Olsen's clients already have roughly 25 percent of their portfolios in inflation hedging assets. "You want to skate to where the puck will be, not to where it is," he said in a recent interview. But not everyone thinks inflation is looming, or that typical inflation-fighters, such as gold, are a good place to keep money right now. "I'm concerned with investors making big bets on gold" and other traditional inflation hedges, says Dave Loeper of Wealthcare Capital Management in Richmond, Virginia. Loeper, a former adviser to the Virginia Retirement System, recently studied the behavior of anti-inflation assets during inflationary periods. He concluded that the payoffs for hedging inflation might not be worth the extra trading and holding costs. "Adding gold and real estate to a 60/40 (60 percent stocks, 40 percent bonds) portfolio looks pretty similar to a 50/50 balanced portfolio," he wrote. "Those extra positions... are certain to add cost... and do not appear to be worth much unless we do have that perfect storm" of an unusual and severe double-spike in inflation. Loeper looked at the most recent three major periods of inflation and observed that there was not one asset class that produced positive real returns in all three periods. Because gold, in particular, has been bid up as a safety plan during recent low-inflation years, he's concerned that it may not perform its typical anti-inflation role when prices rise. The yes-it's-coming/no-it-isn't debate about inflation can be seen in market prices and consumer expectations, too. Both bond market swaps and inflation-protected securities seem priced with an expectation that prices will rise a modest 1.5 percent or so, says Olsen. But consumers responding to the Conference Board's last survey had a different view: They expect prices to rise about 5.3 percent in the next 12 months. So, what's an investor to do? Here are some tips for preparing for a run-up in prices, which may or may not materialize. * Let some investments do double duty. Loeper and Olsen agree on this: Some investments already in your portfolio might protect against inflation without being strictly anti-inflation plays. For example, if you own a large-cap stock fund, you probably already own shares of Exxon Mobil Corp. or Weyerhaeuser, two traditional inflation-fighters. Similarly, Olsen's clients own foreign stocks; they'll be some protection if runaway prices hurt the U.S. dollar more than other currencies.
* Go long on items you'll use. Not all investments happen in your brokerage account. If you're a year or two away from buying a new car, lawnmower or retirement house, think about buying now while prices and interest rates are comparatively low. You can stockpile canned goods and paper towels, too, but not to the extent that you end up on A&E TV's reality show, "Hoarders." * Keep carrying-costs low. There are now many inexpensive exchange-traded funds which focus on commodities and other anti-inflation strategies. Many are available for an annual expense charge well below 0.8 percent. * Stay safe. You may lose purchasing power, but you won't lose money by buying individual Treasury inflation-protected bonds and holding them to maturity. Yields are low, but guaranteed to rise as the CPI does. The big risk there? If interest rates rise faster than prices, you could find yourself losing ground to better-yielding short-term securities.
Is inflation the real threat going forward? The answer is nobody really knows for sure. Inflation is already present in China and emerging markets, but it has not picked up significantly in the US and Europe. We are likely to see higher energy prices, but even this is not enough to kick start a severe inflationary episode. Only wage inflation can do this, and to compare what is going on now with the 1970s is simply wrong. Despite December job gains, unemployment remains stubbornly high, unions are not as strong as they used to be, and the structure of the global economy has changed significantly in the last three decades. Demographics, global competition, the internet, deleveraging, are all factors weighing down inflation. It is possible that we start importing inflation, but even this is debatable. Bottom line: the great inflation debate will continue for quite some time, and while you should hedge against all scenarios, be careful not to jump on any inflation bandwagon. Deflation hasn't died; it might just be hibernating.
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Amen Brother +1000
"Is inflation the real threat going forward? The answer is we don't know."
The answer is you don't know. *sigh*
Oh? A gallon of gas at my local station went up .40 in about a month; a 14.25% rise. If that's not "flash" hyper-inflation, what is? I say look for these flash Hyper-inflation to happen with all middle class necessities of life going forward.
So say you spend an extra $5.00 on that weekly tank of gas. If your wages went up $20/month, you'd be OK. The problem is only the people at the top of the food chain are seeing wage increases that outpace price inflation. The rest of us have stagnant wages or worse.
Sigh, I edited my coment so you guys don't get all anal on me. The reality is nobody knows for sure what the future holds. Right now, we can speculate all we want, but it's far from a foregone conclusion.
Why the FUCK do you post here if your worried about Hedgers going all ANAL over you?
The FUTURE is crystal clear, inflation in neccesities of life (Food, Energy etc) Deflation in Assets (Homes, Commericial Real Estate etc) Do you read or get out much?
Arsehole
Leo's got a problem with his sphincter muscle so he's concentrating more on questions than answers...LOL.
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http://www.zerohedge.com/article/outlook-2011-climbing-wall-worry#comment-842138
Not to be too critical, but you essentially clipped an article from Reuters and then said maybe, maybe not - now way to tell. Really? That's an article worth writing and reading?
Oh, and I thought you've known for a long time that the PTB would reflate and print Chinese solars to profitability.
Oh well...I came here to see the car crash - and got it...
Leo perhaps you would be kind enough to back that statement up with facts and data. I do know that Krugman supports that perspective.
With high unemployment, or more accurately a high number of applicants for every open job, there is little to no wage inflation. Wage inflation is a positive outcome for wage earners and is the only real way for most people to keep up with the rising cost of goods. We can certainly have price inflation (or whatever classical inflation is) without wage inflation. And this is what causes riots.
I believe the Federal Reserve wants to avoid wage inflation at all cost, and I also believe the best way to insure this is by having a monetary policy that keeps unemployement high. I agree significant wage inflation could kick start hyperinflation.
Home prices deflating, necessities of life inflating, salaries stagnant. Yeah, that's good.
For the last 30 years we have inflated assets (real estate, equities etc) with leverage via a DEBT BASED FIAT CURRENCY and a fractional reserve lending system. Now the "powers that be" are trying to maintain status quo. Its not going to happen unless they can monetize ALL the debt (money we don't have). The cash in circulation is only a fraction of the debt laden system. These inflated asset values cannot remain inflated (with money we don't have) forever. The Fed's desperation is evident but in the bigger picture will not change the course of what will happen. Credit INFLATES and DEBT DEFLATES. We have too much debt. The FED cannot control the entire economy, it can only influence it. The Fed's only asset is the PUMP and there is plenty of evidence that the pump has blown a gaskit and the economic bubble has burst.
So you're saying the U.S. will be the first country in history to avoid hyperinflation in its currency when its debt-load becomes crushing, because...
I missed your "because".
What a load. The Bernank will have no trouble monetizing the debt. Just a few clicks on the computer and we'll have whatever inflation is necessary at that particular moment. The economic bubble has burst, but the Bernank is still easing.
Cliff's Notes version of life in middle class America. Nice.