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Inflation is coming
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According to the Labor Department, the nation’s jobless rate has now reached a 26 year high. It just climbed to 10.2% in October 2009 (11% for Florida; 11.7% for Tampa). This is the highest since 1983. Real GDP in the second quarter was off almost 4% from a year ago. Commercial and residential real estate prices are off as much as 50% from their highs. Our financial system is still badly wounded, as banks continued to fail this week (bringing the total to about 120) and hundreds more are projected to fail. Yet some economists are saying that the economy appears to be “pulling out” of the recession which began in December 2007. Stopping the downward trend, which is probably a more accurate description, is very different from starting to move upward. Another economist said the recession ended in June 2009. It reminds me of a joke I heard……. Economics is the only field in which two people can receive a Nobel Prize for saying exactly the opposite thing. These statements must seem like rhetoric to the thousands of folks that are still hurting with no real relief in sight.
Perhaps this optimism comes from the market rally. Instead of worrying whether or not this is a new bull market or a pause in a bear market, you should be worrying about the continued decline in the value of the dollar. It is projected that the United States is likely to experience another period of wild inflation at least as bad (maybe worse) as what the nation had from 1979 to 1981. During that time, the Consumer Price Index (at its worst) was climbing at a 13% annual rate and Treasury bond yields were as high as 15%.
Why is this high inflation predicted? It’s very simple. Our Treasury is printing money as fast as it can and many other countries worldwide are doing the same as well. The Treasury is also issuing massive debt (bills, notes, and bonds) in an effort to revive the stagnant economy (not to mention the extra $1.2+ trillion needed to fund the new proposed health care bill). The current 1.4 trillion dollar deficit doesn't seem to bother politicians at all. Most policymakers around the world believe that large fiscal stimulus is crucial to ending an economic turndown. It is inevitable this entire stimulus at some point will be followed by a period of rapidly rising prices.
So generally, how can you protect your investment portfolio? In the past, solid stocks have provided a good hedge against inflation. Consider repositioning to focus on oil and natural resources and cut back on consumer staples. It’s also prudent to have up to 15 % of your portfolio in gold and/or other precious metals. Keep your bond maturities and other fixed income maturities short (unless you’re depending on the income stream). Now is a great time to take a look at real estate investments too.
(Comments are not intended as specific investment advice; Consult with your financial advisor to develop strategies germane to your unique financial situation)
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