Here is a great article with some sound wisdom (about which I will go into greater detail in my next post). It really gets some macroeconomic points out there correctly--which is sadly unusual these days. Pay particular attention to his points about the Fed and Treasury Dept.; it represents sound economic thinking.
I'm not a registered investment advisor, so I must disclose the onus is on you to do your research, etc. but it offers some practical ways to shore up against inflation (which I fully expect to be a rip-roaring problem within the next 12-18 months). I also really like gold and/or precious metals ETFs to hedge inflation. Check it out...
Factiva Dow Jones
OutFront
Inflation's Coming, Hide Here
690 words
7 September 2009
Forbes
FB
102
Volume 184 Issue 4
English
(c) 2009 Forbes Inc.
The rally has investors giddy with excitement. Frankly, I'm a bit baffled by it all. Everywhere I look I see ominous signs. Despite the slight downward tick in the unemployment rate in July, the employment ratio (full-time jobs as a fraction of the working age population) is 59%, lower than it has been since 1984. Real GDP in the second quarter was off 3.9% from a year earlier. Our financial system is still badly crippled. Commercial and residential real estate prices are off as much as 50% from their highs. It's ugly out there. That said, as a contrarian at heart I see great opportunities in this tough environment.
We are likely to run into a period of wild inflation, at least as bad as what we had from 1979 to 1981. At its worst, the Consumer Price Index was climbing at a 13% annual rate and long Treasurys yielded as much as 15%.
Why the dire outlook? Simply because our Treasury and its counterparts in other countries are printing money around the clock. They are also printing bonds, and with the same objective: reviving stagnant economies. The Keynesian belief that large fiscal stimulus is crucial to ending an economic downturn is prevalent among policymakers worldwide. No democratic government could stay in power these days if it didn't undertake countermeasures against unemployment, the possibility of deflation and the worst financial crisis since the 1930s. It is inevitable that all this stimulus will be followed at some point by a period of rapidly rising prices.
Central banks, including our not-so-omniscient Federal Reserve, will again fail to take the punch bowl away from the party soon enough, keeping stimulative polices going far past the point when unemployment has turned a corner and the financial debacle is behind us. Treasury Secretary Geithner and Fed boss Bernanke are trapped by politics and events. They make pronouncements downplaying the inflation threat, but inflation will hit like a tsunami within three years, maybe sooner.
What do you do to defend yourself? Buy stocks, buy real estate and sell bonds.
In the past stocks have provided a defense against not only inflation, but even hyperinflation. Reposition your portfolio with heavier weightings in oil, natural resources and cyclical stocks, while cutting back on utilities and consumer staples. Also, sell your long bonds and keep your fixed-income maturities short. Bond market crashes (like the one we had in the 1970s) can be as bad as stock market crashes.
If inflation hits hard, the chief culprit of the bear market--real estate--is likely to be one of the best investments in the years ahead. Buy a home if you don't already have one or a second home if you can afford one. Here are three stocks I like:
Apache (APA, 85) explores for oil and gas in the U.S. as well as in Argentina, Australia, Canada and Egypt. The stock has bounced back from a low of 51 in March but is still priced at not much above half its 2008 high. With the business cycle near a bottom and oil and gas exploration depressed for the past 18 months, Apache is on track for significant upside as demand increases again. Apache is priced at 8.5 times last 12 months' earnings and at 12.1 times the next 12 months' earnings.
Eaton Corp. (ETN, 54) makes highly engineered products for industrial, commercial, aerospace and automobile markets. Earnings are likely to be off sharply this year but should rebound as the economy improves. Eaton will cost you 20 times trailing earnings and yields 3.7%.
Wells Fargo (WFC, 26) is, with $1.3 trillion in assets, the nation's fourth-largest bank holding company. Earnings should move up sharply as it works through the large losses it inherited when it took over Wachovia. The stock trades at 16 times projected 2010 results.
David Dreman is chairman of Dreman Value Management of Jersey City, N.J. His latest book is Contrarian Investment Strategies: The Next Generation. Visit his homepage at www.forbes.com/dreman [http://www.forbes.com/dreman].
Document FB00000020090824e5970000q
© 2009 Factiva, Inc. All rights reserved.
OutFront
Inflation's Coming, Hide Here
690 words
7 September 2009
Forbes
FB
102
Volume 184 Issue 4
English
(c) 2009 Forbes Inc.
The rally has investors giddy with excitement. Frankly, I'm a bit baffled by it all. Everywhere I look I see ominous signs. Despite the slight downward tick in the unemployment rate in July, the employment ratio (full-time jobs as a fraction of the working age population) is 59%, lower than it has been since 1984. Real GDP in the second quarter was off 3.9% from a year earlier. Our financial system is still badly crippled. Commercial and residential real estate prices are off as much as 50% from their highs. It's ugly out there. That said, as a contrarian at heart I see great opportunities in this tough environment.
We are likely to run into a period of wild inflation, at least as bad as what we had from 1979 to 1981. At its worst, the Consumer Price Index was climbing at a 13% annual rate and long Treasurys yielded as much as 15%.
Why the dire outlook? Simply because our Treasury and its counterparts in other countries are printing money around the clock. They are also printing bonds, and with the same objective: reviving stagnant economies. The Keynesian belief that large fiscal stimulus is crucial to ending an economic downturn is prevalent among policymakers worldwide. No democratic government could stay in power these days if it didn't undertake countermeasures against unemployment, the possibility of deflation and the worst financial crisis since the 1930s. It is inevitable that all this stimulus will be followed at some point by a period of rapidly rising prices.
Central banks, including our not-so-omniscient Federal Reserve, will again fail to take the punch bowl away from the party soon enough, keeping stimulative polices going far past the point when unemployment has turned a corner and the financial debacle is behind us. Treasury Secretary Geithner and Fed boss Bernanke are trapped by politics and events. They make pronouncements downplaying the inflation threat, but inflation will hit like a tsunami within three years, maybe sooner.
What do you do to defend yourself? Buy stocks, buy real estate and sell bonds.
In the past stocks have provided a defense against not only inflation, but even hyperinflation. Reposition your portfolio with heavier weightings in oil, natural resources and cyclical stocks, while cutting back on utilities and consumer staples. Also, sell your long bonds and keep your fixed-income maturities short. Bond market crashes (like the one we had in the 1970s) can be as bad as stock market crashes.
If inflation hits hard, the chief culprit of the bear market--real estate--is likely to be one of the best investments in the years ahead. Buy a home if you don't already have one or a second home if you can afford one. Here are three stocks I like:
Apache (APA, 85) explores for oil and gas in the U.S. as well as in Argentina, Australia, Canada and Egypt. The stock has bounced back from a low of 51 in March but is still priced at not much above half its 2008 high. With the business cycle near a bottom and oil and gas exploration depressed for the past 18 months, Apache is on track for significant upside as demand increases again. Apache is priced at 8.5 times last 12 months' earnings and at 12.1 times the next 12 months' earnings.
Eaton Corp. (ETN, 54) makes highly engineered products for industrial, commercial, aerospace and automobile markets. Earnings are likely to be off sharply this year but should rebound as the economy improves. Eaton will cost you 20 times trailing earnings and yields 3.7%.
Wells Fargo (WFC, 26) is, with $1.3 trillion in assets, the nation's fourth-largest bank holding company. Earnings should move up sharply as it works through the large losses it inherited when it took over Wachovia. The stock trades at 16 times projected 2010 results.
David Dreman is chairman of Dreman Value Management of Jersey City, N.J. His latest book is Contrarian Investment Strategies: The Next Generation. Visit his homepage at www.forbes.com/dreman [http://www.forbes.com/dreman].
Document FB00000020090824e5970000q
© 2009 Factiva, Inc. All rights reserved.