This Inflation Gauge Just Ticked Higher Again… Four Ways To Fight Back
Wednesday, August 5, 2009
Guest Editorial by David Fessler, Advisory Panelist, Investment U
Dear Smart Profits Report Reader,
Editor’s Note: Following a 1.6% increase in May, the U.S. personal consumption expenditures index - one of the Federal Reserve’s closely watched inflation gauges - just rose by a further 1.5% in June. Oddly, though, the mainstream financial media aren’t talking about it much, so we’ll have to do it for them. Here’s Investment U columnist David Fessler with a timely column on how to protect yourself from inflation. Read on to find out his four inflation-busting investments…
Martin Denholm, Managing Editor, Smart Profits Report
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The Treasury Is Punch-Drunk On Stimulus
We’ve all heard that the stock market always looks forward, never back.
You can see the proof. Just take a look at companies that recently announced great earnings, but still hedged their bets on future guidance.
The reason is that the market wants to know what’s going to happen in the future. It couldn’t care less about what’s already in the bank. Right now, the markets know one thing for sure: The U.S. Treasury is printing money and dumping it into the financial system at historically unprecedented rates in an effort to stimulate the economy.
Chances are good that the Fed won’t know when to stop the printing presses. Its thought process goes something like, “If some stimulation is good, more will be even better.” And most politicians, who are always looking ahead to the next election, won’t want to risk their futures by cutting off ANY economic aid prematurely.
But continuing to print money only exacerbates the inflation problem and deepens the hole. For example, the ratio of the U.S. budget deficit to GDP is at the highest level since World War II.
The real problem, though, is that all this economic over-stimulation sets us up for inflation. It’s something every investor should guard against. And it’s why we’ve got the best four investments for you to limit inflation’s impact.
#1: Gold - The Tried-And-Tested Inflation Hedge
These days, many think of gold as a great investment for its safety and growth. And solely based on the amount of direct-mail advertisements I get from gold bugs, you’d think it was the only investment worth keeping.
But it’s actually an effective hedge against a declining U.S. dollar and an inflationary economy. It’s why every investor should have some exposure to gold in his or her portfolio. As part of our Asset Allocation Model, we recommend 5%.
For all its benefits, there are currently two problems with the physical metal. Because it’s in great demand, it’s hard to get. Consequently, purchasing it requires a stiff premium - in some cases, a premium of 10% or more - when and if you do find bullion or coins to invest in.
A much better way is to pick up a few shares of SPDR Gold Trust ETF (NYSE:GLD), which seeks to replicate the price performance of gold bullion. Shares of GLD trade at the ratio of 10 shares to one ounce of gold.
This investment trust holds the physical metal for investors in vaults: You can see what that looks like here. HSBC Bank serves as the custodian of the trust’s physical gold and recently had to move it to a larger vault to accommodate growing investment.
#2: An Inflation-Busting “TIP”
Our next inflation hedge is inflation-adjusted Treasuries (TIPS). These investment bonds stand alone in the investment world, as they’re the only investment guaranteed to beat inflation.
Essentially, they’re Treasury bonds that hedge against inflation - the bondholder gets an interest payment twice a year, just like a standard Treasury note.
But the catch here - and it’s a good one - is that the bond principal increases each year by the amount of the consumer price index (CPI). And so does the amount paid in interest, which is exempt from state and local (but not federal) taxes.
While you can buy the bonds directly from the U.S. government or any broker, the easiest way to participate in them is through the iShares Barclays TIPS Bond Fund (AMEX: TIP).
This fund seeks to duplicate the return of the Barclays Capital U.S. Treasury Inflation Protected (TIP) Securities Index.
#3: Pump Some Energy Into Your Portfolio
Our third hedge against inflation is energy stocks.
The reason is simple: Energy figures into the cost of just about everything. And since oil and natural gas are priced in dollars, an inflationary cycle tends to raise the price of energy and energy-related stocks.
Of course, even without inflation, the long-term trend for energy prices is one way: Up. Inflation will just add fuel to an already burning fire (pun intended).
Rather than looking at individual energy stocks, however, consider a shotgun approach in the form of an energy ETF.
One we like for its low fees and solid performance is the Vanguard Energy ETF (NYSE: VDE), which seeks to replicate the performance of the Morgan Stanley U.S. Investable Market Energy Index. It’s up 36% since its March low.
Made up of a diverse group of large, medium and small cap companies in the energy sector it provides wide ranging coverage of the sector. In addition, it includes companies such as drillers, equipment providers, exploration, refining marketing and production and transport of oil and gas products.
Personally, I find energy and infrastructure some of the most interesting opportunities in the markets today. So investing in energy companies not only allows us to take advantage of the sector itself, but also protect us from inflation.
#4: Combat Inflation Through Commodities
Our final inflation-protection hedge is in commodities like wheat, cattle, fertilizer, and base metals - many of which usually rise during inflationary periods.
Until recently, profiting from commodities involved commodities futures trading - something that most people know little about. But today, investors can leave the fancy futures trading to the experts and still reap the benefits as commodities rise.
For example, the Pimco Commodity Real Return Strategy Fund (MUTF: PCRDX) invests in both leveraged and unleveraged commodity-linked index notes to match the return of the commodity futures markets.
The fund also uses other fix-income instruments like treasuries and preferred stocks to increase returns and lower the volatility that is commonly associated with investments in commodities.
So that’s it - four great ways to protect your portfolio against inflationary pressures. And as the global economic engine shifts into higher gear, it will likely become an even more significant factor.
Good investing,
David Fessler
Editorial Endnote: The best way to understand inflation is that it’s the loss of purchasing power due to rising prices. In other words, your dollar doesn’t buy as much.
An easy way to put this in perspective is to take something like a McDonald’s hamburger. In 1959, its weight-adjusted price was $0.57, while some 50 years later we pay $4.29 - a 653% increase, or an average of just over 13% a year. If we look another 50 years ahead, with the same percentage increase, we’ll be paying over $32 for that same burger.
If you’re looking at consistent income as the holy grail of investing and retirement savings without considering inflation’s impact, your retirement plans could be on unstable footing.
To put inflation protection to work in your portfolio - and make sure that your purchasing power continues to grow - take a look our Investment U course. It’s the first step towards never having to worry about money again.
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Locved your article updating inflation. However, it seems all economists always overlook one thing regarding inflation - - -Iraq and Afghanistan costs. By definition all wars are inflationary. So we will continue to have inflation as long as we piss away our money and American lives on these wars. Don’t get me wrong - - I’m retired military - - but why piss away lives. If you have BIG weapons use them and end the war once and for all. It doesn’t matter if your neighbors will not love you - - they will always hate the top dog.