inflation hedges

[newyorklady]

besides for TIPS I am looking for a good inflation hedge. don't worry, not a large part of my portfolio but was thinking of adding some commodities. was thinking of T ROWE PRICE NEW ERA (PRNEX) the expense ratio is .68.

morningstar says that stocks are a good hedge for inflation, but if people can't afford as much, won't they spend less and this negatively impact many companies driving the markets down? i am trying to come up with a long term strategy for the possible inflation which the Coming Generational Storm (someone kindly posted as a free ebook on this board) predicts.

what are the best strategies for an inflationary environment? i have googled and researched and all i have come up with is precious metals, TIPS and commodities.

 

[lswswein]

besides for TIPS I am looking for a good inflation hedge. don't worry, not a large part of my portfolio but was thinking of adding some commodities. was thinking of T ROWE PRICE NEW ERA (PRNEX) the expense ratio is .68.

morningstar says that stocks are a good hedge for inflation, but if people can't afford as much, won't they spend less and this negatively impact many companies driving the markets down? i am trying to come up with a long term strategy for the possible inflation which the Coming Generational Storm (someone kindly posted as a free ebook on this board) predicts.

what are the best strategies for an inflationary environment? i have googled and researched and all i have come up with is precious metals, TIPS and commodities.

First thing: This has been an extensively discussed topic on this forum; You should read some of the older posts.

What is inflation? It is basically the fact that your currnet day dollars are worth less every passing year and goods cost more with every passing year. All the cental banks seems to think that the sweet spot of inflation is between 2-3% and are trying to manage the money supply to hold inflation at that rate. The long term US inflation has been around 3% and this has been factored into everyones calculations for future returns. Now for inflation that "worries" people could be one of the following scenarios:

1. The long term inflation rate is higher than 3% lets say 5-6%
2. Inflation becomes even higher and gets to around 10%
3. Hyper Inflation - Inflation reaches 100%; has happened eg. Germany after WWI, Argentina couple of years ago, Turkey about 10 yrs ago and happening in Zimbabwe right now; This is the s**t hits the ceiling case!

Now these changes in inflation could happen in 2 different ways:
a) Very quickly within 1-2 yrs
b) Gradually over 5-10 yrs

How are you going to plan for these and what instruments could you use other than Inflation indexed bonds(which serve the exact purpose of keeping up with CPI, which the govt calculates and does mess around with - ask CFB or read his posts):

Case 1a(5-6% in 1-2 yrs) : You could say this was the case in 2004; Generally sudden changes in inflation happens beacuse of Energy prices becaus ethey are a big component of household inflation and have a very big ripple effect on the prices of other stuff like groceries. Solution - Buy an energy fund.
Case 2a(10% in 1-2 yrs): Same as above and you could add issues with some of the other components of CPI like increase in crop prices etc. Again buy an energy or commodities fund.
Case 3a(100% in 1-2yrs): A few guns which you hopefully know how to use to hunt and gold bars maybe along with a very well stocked pantry. Start loooking for places to move.

Now for the gradual increase cases:
Cases 1b & 2b are very similar - stocks are the only solution; They energy funds after a quick boost will be back to being cyclical and all the big companies will be able to pass on the costs to the consumers. This works because when you have a gradual increase, you income if you are employed keeps up with inflation. Other wise you would quit and find another job. So income increases, and companies will be able to pass on the costs to buys. So if you own companies which are not affected by outside influences (cheap imports) then their stock prices will be ok. Buffet calls this the moat of the companies he owns - eg CocaCola - inflation goes up then the price of coke goes up simple. So own Stocks
Case 3b Hey you had enough notice why haven't you move yet? This is the case where you have to be faster than the guy next to you. Everyone is f**ked but if you have a lot of money you hopefully would be in a slightly better state and I hope you know how that gun works very well!

So moral of the story: Own stocks for any long term inflation fears and Energy or commodities funds for short term fears. But then no one knows about the short term issues, Energy funds and commodities are basically for you to feel good for a year or so of great returns and can infact be excluded unless you hold them through all their cycles and rebalance such that you buy low and sell high

So Cliff notes version is own stocks and you will be fine with inflation. And start practising the hunting lessons! (Damn this has turned into a NRA Ad! - How did that happen?)

Hope this helps someone
-h

 

[lswswein]

Btw kudos to the first person who turns this into a discussion on Guns and completely away from the topic! You sir are a discussion turner

 

[brewer12345]

Commodities, commodity producers, tangible assets, companies that own tangible assets. That's about all I come up with. I think ETFs that hold commodity companies are a decent choice, and I think DJP (commodities) is also a good choice. But a little goes a long way with this stuff.

 

[cute fuzzy bunny]

If high inflation shows up, I'll just grab my gun and take someone elses commodities.

Good enough for credit or do I have to work a little harder at it?

 

[lem1955]

besides for TIPS I am looking for a good inflation hedge. don't worry, not a large part of my portfolio but was thinking of adding some commodities. was thinking of T ROWE PRICE NEW ERA (PRNEX) the expense ratio is .68.

I have 5% of my portfolio in this fund. It's heavily energy weighted. Does not move in tandem with the stock market. I've been happy so far.

 

[rmark]

case 1, 2, stock, real estate, natural resource funds
case 3, above + silver dimes, pocket pistols, moped

 

[wildcat]

Well, one more thing & it has been mentioned - real estate ownership. You have that one covered.

One book I read a little while back:
"The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel"

It is much of the same doomsday scenario stuff but that seems to be what you expect. Stephen Leeb wrote it and expects the scenario resemble the 1970s. He talks about what did well during that time.

I don't recommend following his advice per se but do what you want.

 

[newyorklady]

thanks all esp lswswein, once again. sorry to be such a pain, have been looking through old posts. fyi have been doing a lot of reading on morningstar as i await the books from amazon. i am really amazed at the vast differences in management fees for various funds. i think this forum has just blown my mind.

 

[cute fuzzy bunny]

For an actual opinion...

Commodities always have been a good predictor of unexpected inflation, and that makes a lot of sense when you think about it.

However...it performed in that capacity when it was a hard asset class to invest in, and the average high end personal and institutional investor didnt often consider it as an includable asset class.

Now you can buy ETF's and everyone owns it.

Might dampen or enhance the way it reacts to unexpected inflation, or it might change tack and follow some different correlation in the future, since its now more broadly owned and you can get in and out of it in 3.2 seconds.

 

[newyorklady]

Well, one more thing & it has been mentioned - real estate ownership. You have that one covered.

One book I read a little while back:
"The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel"

It is much of the same doomsday scenario stuff but that seems to be what you expect. Stephen Leeb wrote it and expects the scenario resemble the 1970s. He talks about what did well during that time.

I don't recommend following his advice per se but do what you want.

wildcat, i am crazy and paranoid enough, don't think i should be reading a book that makes me any more so!

 

[samclem]

i am really amazed at the vast differences in management fees for various funds. i think this forum has just blown my mind.

Amazing, isn't it? Especially when you run the projections out over decades. Consumers just don't know the cost are different, or they believe they are getting something in return, or they just don't appreciate the impact, so there's little downward pressure on fees/expenses.

It gives one a whole new perspective on the expensive ad campaigns and commissions/exec salaries of some MF/investment companies. Paid for by ignorant investors. Blech!

 

[haha]

Commodities, commodity producers, tangible assets, companies that own tangible assets.

Additionally, Warren Buffet has said that any high ROI company with a low need for maintenance capital investment and good barriers to entry is a good inflation hedge. This was true in the 70s, when WEB bought things like Washington Post and made a lot of money. He felt that intangibles like market position, lack of ready substitutes, etc. were the key drivers, since they go on earning high returns with little need for mandatory re-investment.

IMO the world is less predictable today, but companies like GE should do well in almost any circumstance barring a financial meltdown that killed their financing businesses. Ditto tobacco companies, as long as they can stay out of trouble with the upcoming Dem admistration.

We shouldn't forget that as investors, especially as soon to be retired investors, what we are after is a reliable growing flow of spendable money. This is the weakness of gold, silver and other commodities. They may be fine for someone who is working and intends to keep working, but it presents cash flow problems for retirees or wannabe retirees.

Ha

 

[wildcat]

Ha -

True from what I know of WEB's historical holdings. Loaded up on businesses that raise prices during inflationary times + ones that have somewhat of an inelastic demand.

wildcat, i am crazy and paranoid enough, don't think i should be reading a book that makes me any more so!

True. You have had enough financial porn for a week.

 

[brewer12345]

Additionally, Warren Buffet has said that any high ROI company with a low need for maintenance capital investment and good barriers to entry is a good inflation hedge. This was true in the 70s, when WEB bought things like Washington Post and made a lot of money. He felt that intangibles like market position, lack of ready substitutes, etc. were the key drivers, since they go on earning high returns with little need for mandatory re-investment.

Maybe, but such things don't exactly grow on trees and high barriers to entry may not last over time. I think I'd prefer commodity producers and owners of tangible assets. Snce REITs are priced to teh moon, I look on the shipping companies as "floating REITs."

 

[macdaddy]

Real estate gets my vote...

 

[newyorklady]

are you serious? now is not the time, but this is speculation on my part. i have some cash set aside to vulture in in about a year or so

 

[Gone4Good]

"The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel"

Gee, if the economy collapses who's gonna pay $200 for a barrel of oil.

 

[2B]

You are asking good questions NYL.

 

[jazz4cash]

Real estate gets my vote...

yeahbut, I don't see the real estate as the hedge as it may be tough to unload.........I think of the MORTGAGE as the hedge. If you have a "fixed" payment on this significant percentage of your cost of living, it limits your inflation risk to "consummables". I think I might get hammered for this because "to have or not to have" (a mortgage) can be pretty emotional around here. One of the first financial professionals I ever met brought this to my attention: Each dollar on a fixed mortgage payment is devalued by inflation, so your payment is actually going down over time. He used to joke about trying to get a 100 year mortgage.

 

[Gone4Good]

We shouldn't forget that as investors, especially as soon to be retired investors, what we are after is a reliable growing flow of spendable money. This is the weakness of gold, silver and other commodities. They may be fine for someone who is working and intends to keep working, but it presents cash flow problems for retirees or wannabe retirees.

That is a very good point. Gold doesn't grow. It doesn't pay interest or dividends. It just sits there waiting for a bigger sucker someone else to pay a higher price for it.

The other problem is that commodities do not protect against inflation year-in and year-out. They tend to massively overshoot (like recently, maybe?) and then do nothing for decades. High prices encourage new supply, make alternatives viable, and curtail demand. So if I'm buying an inflation hedge don't I have to worry that what I'm buying has outpaced inflation by 300% or more in the past couple of years? Is it the current price, or the year 2000 price, that is going to keep pace with inflation over the next 20 years? Because I don't know, and because no one else does either, I'll stick with TIPs and stocks.

BTW the S&P 500 has nearly a 10% allocation to Energy stocks and another 1-2 percentage points dedicated to other commodity producers (S&P Mid Cap has 7.5% Energy allocation and the S&P Small Cap has a 6% allocation). So most folks have more commodity exposure then they realize even without doubling up on it through a separate allocation.

 

[newyorklady]

yeahbut, I don't see the real estate as the hedge as it may be tough to unload.........I think of the MORTGAGE as the hedge. If you have a "fixed" payment on this significant percentage of your cost of living, it limits your inflation risk to "consummables". I think I might get hammered for this because "to have or not to have" (a mortgage) can be pretty emotional around here. One of the first financial professionals I ever met brought this to my attention: Each dollar on a fixed mortgage payment is devalued by inflation, so your payment is actually going down over time. He used to joke about trying to get a 100 year mortgage.

makes a lot of sense. thanks

 

[newyorklady]

You are asking good questions NYL.

I hope so. One of the reasons why I accumulated a large sum at a young age is because I ask questions and actually listen and then go and research for myself. This forum has some great information and wonderful people. Often people are too scared of asking dumb questions or looking foolish. This really does halt progress.

 

[cute fuzzy bunny]

Each dollar on a fixed mortgage payment is devalued by inflation, so your payment is actually going down over time.

Unfortunately, the same thing is happening to the value of your portfolio invested using the money you didnt use to pay the mortgage.

Once again, there is no free lunch unless you leave stuff out of the equation.

 

[newyorklady]

i am sorry cute fuzzy bunny but i don't understand what you mean