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How to Invest for 'Flation

Posted by: Lauren Young on April 27, 2009

Which way is the economy heading next? Is it inflation, deflation, and stagflation? Overwhelmingly, most of the 50 advisers and analysts I interviewed for a story about ‘flation in the most recent issue of BusinessWeek think the U.S. economy is headed on an inflationary path.

In the coming weeks, I’ll be highlighting arguments from some of my sources as well as their investing advice. Here are some investment ideas from three folks who are in the inflationary camp.

Adam Miller, financial adviser at ElderAdo Financial in Montrose, Co.

The argument
Miller is concerned about inflation in the coming years. “We have watched as Washington works tirelessly to avoid further declines in the market, interest rates remain at record lows, trillions in stimulus spending, easing in mark to market accounting, and so on,” Miller says. “I would compare this to a sling shot. With each new program, bill, change in accounting practices, and rate cut, the pebble gets pulled back a little bit more, further and further. Eventually this could rocket the economy forward and with that we may see prices climbing dramatically, especially if no action is taken to prevent it.”

If interest rates remain low, Miller expects dramatic inflation over the course of the next decade.

Investment Strategy
Miller likes Pimco Real Return for inflation protection, along with energy and commodity funds. “REITs generally help out as we see inflation but we still feel that it is a bit too early to buy real estate,” Miller says.

Azim Nakhooda, chief investment officer and principal, Cedar Brook Financial Partners in Cleveland, Ohio

The argument
Inflation is absolutely certain to occur given the amount of money that has been printed. “We also see the dollar being very weak for the next few years related to inflation,” Nakhooda says. “Business simply needs to raise prices to survive and gain back margin. Even if the consumer is unable to spend, the alternative is complete loss of profit margin and no debt is available to carry them through. That’s our rationale for being pro-inflation.”

Investment Stategy
Nakhooda likes Pimco Foreign Bond Fund because foreign bonds that are unhedged to the dollar are a direct play against a weak U.S. economy.

For TIPS exposure, he recommends iShares Barclays TIPS Bond, an efficient TIPS index fund. Finally, he recommends ProShares UltraShort 7-10 Year Treasury fund as a play against the low interest rate environment. “Treasury yields must rise along with inflation,” Nakhooda says.

Brian R. Smith, president of Resonant Insight Advisory in Vienna, Va.

The argument
Smith says he is preparing his clients for inflation due to the global efforts to print money and stimulate various economies.

Investment Strategy
Hedges are important for investment portfolios, Smith says. He recommends gold via the SPDR Gold Trust exchanged-traded fund and inflation-protected securities via Vanguard Inflation-Protected Securities Fund as well as the TIP ETF.

“History of 1930s and 1970s indicates that other commodities such as oil, industrial metals, and agricultural commodities will be desirable,” Smith says. His picks include PowerShares DB Agriculture ETF. He also likes oil and gas trusts, such as Permian Basin Royalty Trust and BP Prudhoe Bay Royalty Trust, both track oil and gas prices and have high yields in addition to capital appreciation.

“Investing in stable countries that are commodity-based and not experiencing deep banking problems is prudent,” Smith says. Two countries that fit the bill are Canada via the iShares MSCI Canada Index ETF as well as Brazil (iShares MSCI Brazil Index).

Reader Comments


May 4, 2009 1:28 PM

I received a call from a “Commodities Broker” by the name Ray Gentile claiming that he had a GREAT investment in unleaded gas that would return substantial profits over the next 3 months. He was very convincing & I was interested. So I decided to do my home work. It seems that the company he currently works for United Commodity Trader appears to be a boiler room type operation. As my investigation continued I see that Ray Gentile & the president of United Commodity Trader JOHN ANTHONY BYRNES they were also registered with a company called Pioneer Commodities google search them also brings a lot of concerns about boiler room type operation. But the main concern is the President of Untied Commodity Trader JOHN ANTHONY BYRNES has a slew of regulatory actions
3 cease and desist & 1 suspended from membership. Unbelievable he is allowed to be a president of an investment firm. Sounds like a Madoff situation. Obviously I am not investing with these crooks & I would not advise anyone else to either! You will be ripped off and scammed!!!!

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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