Inflation Investment: Concerns are Overstated

Are you worried about investing for high inflation, but have no idea when it will arrive? You shouldn't worry about changing your whole portfolio just yet.

While record low rates and the increasing money supply guarantee inflation in the future, what about the short term? The problem with the steep rally and talks of a V-shaped recovery is that now most people expect rampant inflation. There are myriad investment tools to protect your money, seemingly discussed everywhere. We have discussed the topic of inflation in depth on this blog before:

The steep market rally aside, what is the real economy telling us? See the graphic below:

Low interest rates and massive liquidity will not cause inflation until demand picks up. Lending and borrowing must increase for consumer prices to rise. And credit growth has taken a nosedive.

While it could reverse, consumers and banks will take some time to repair their balance sheets. GDP will be positive in the 3rd quarter, but the growth will come from government intervention, not the private sector.

Additionally, there will be no price inflation coming from increased wages, as growing unemployment and competition from abroad are continuing to take their toll. We must continue to watch these different factors, because when lending and borrowing begins to grow and unemployment stops rising, inflation may rise in the blink of an eye.

Conclusion: How to Invest

Until then, keep your capital safe. Remember that if everyone is screaming about inflation, most of the gains on that trade have already taken place. If you want to prepare your portfolio for inflation, try foreign bonds like BWX, or short term tips like STPZ. Gold and commodities may have more room to run, but the risk is high to the downside. Don't jump into them because everyone else is doing the same.