Monday, October 01, 2007

How Do You Play the Inflation Game?

Check this article out for a case of why inflation will be a severe problem in the next few years. If inflation is going to be a problem in the next few years, what should one invest in?

1) Broadly speaking, stocks and real estate beat inflation over the long run. That said, adding undue risk by paying too much for stocks or real estate is not smart either and current market valuations are on the high end of the scale historically speaking. However, value stock picks can be found even in today's market (real estate is a different story altogether - I challenge anyone to find me a 'value' real estate pick - P/E <10). Passive investors could consider investing in a Value Exchange Traded Fund like the iShares XCV, IWW, or EFV depending on the market you want to invest in. Value mutual funds like ones managed by Cundill, Brandes, Brandywine, Sionna, or Chou can be a good fit as well.

2) More specifically, one could hedge exposure to increasing prices on the necessities of life - food, water, shelter and health care for example - by investing in companies that profit during times of rising prices or in the commodities themselves. This can be done quite easily by using Exchange Traded Funds that focus on these areas. Some examples of these ETFs are:
Food - MOO - Agribusiness
Food - DBA - Agricultural Commodities
Water - PIO and PHO - Water technology and resources
Food and other- PSL - Consumer Staples
Food - PBJ - Food and Beverage
Medicine - PJP - Pharmaceuticals
Shelter - XRE - Canadian Real Estate Investment Trusts

3) Real Return Bonds offer a guaranteed principal repayment and a yield that adjusts with the Consumer Price Index which should match inflation. If you believe the bond market does not reflect the risk of inflation going forward than RRBs can be a good way to put your money where your mind is. There are also a few RRB mutual funds available from TD, Altamira, Dynamic and Mackenzie. There is also a RRB index fund available from iShares - XRB.

4) Historically speaking, gold and silver have been traditional hedges against inflation as well. One can purchase physical gold and silver via several coin and bullion dealers. One can also invest in gold and silver via ETFs GLD and SLV or in mining companies that profit when gold and silver prices rise. Many precious metals mutual funds and ETFs are also available.


Nancy said...

This is a very interesting article on Alan Greenspan. He says the glory days for the economy and housing are over - Globally!

jesse said...

The article you post comes from the Austrian school, which views inflation differently from other methods. Keep that in mind before using the article as gospel.

mohican said...

jesse - I am well aware of the source and that is why I couched what I said by saying "If" inflation . . .

It is possible that the Austrian school economists will be wrong.

I want the article to provoke thought and specifically thought about what we might do to protect our assets during any potential inflationary period.

Inwonderment said...
This comment has been removed by the author.
Inwonderment said...

Bill Moyers had an interesting interview with John Bogle on the state of the American economy. The transcript can be found at:

He discusses the state of management, concerns about private equity holdings, and the structural change away from goods production to the production of financial securities.

patriotz said...

the structural change away from goods production to the production of financial securities.

AKA the casino economy.

Given that Canada does produce stuff that the rest of the world wants, I think the problem is less severe here. I think sustained inflation in Canada would be a disaster for the public and private sectors, and individuals, and the BoC should not depart from price stability in C$ terms, no matter what that means for the US$/C$ exchange rate.

Note that during the 1970's, stocks did very, very badly. RE kept up with inflation but with high carrying costs, and only gold did well.

freako said...

Crap, REsteven packed it in and left town VHB style. Anybody else willing and able to pick up? I really liked the comprehensive and methodical approach.

Warren said...

I'm also disappointed that RESteven left.