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Which ‘flation camp are you in?
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, but not everyone agrees.
“Picking which ‘flation we may or may not be heading toward can be like predicting the severity of the coming hurricane season,” says Eric Zimmerman, a partner at Chatham McKinley Partners in Atlanta and Savannah, which works with private family partnerships and foundations. “The so-called gurus really don’t know if a storm is coming. Most are assuming one is looming. We think it is in question if one does make land at all, let alone what category it will be or if it will be a hurricane by the time it gets here.”
In other words, Zimmerman and his partner Rick Muller aren’t worried about inflation. So how are they positioning client portfolios now? The duo believe stocks are especially appealing. While the most extreme cases of inflation in the 1970s as well as deflation in the early 1930s grab headlines, “the hard truth is those periods are, in fact, the outliers,” Muller says.
Economies and markets typically “muddle through” averaging things out during the three to four years following a major ‘flationary bout, Muller says. “We think the odds are in favor of a ‘muddle through’ period, in spite of the current extraordinary circumstances,” he notes.
Inflation has averaged 3% during the past 80 years, these advisers argue. By contrast, dividend growth from stocks has averaged 6%. Although dividends for the entire S&P 500 will be down a good bit this year, the yield on the S&P is currently 2.6% based on 2009 estimated dividends.
Here is how Zimmerman and Muller compare stocks to other ‘flation-oriented investments:
Treasury Inflation-Protected Securities (TIPS)
“The 9-year TIPS real yield is roughly 1.5%. Stocks pay a higher yield and dividends on stocks have increased at 6% per year vs. the rate of the CPI at 3%. Here TIPS lose to stocks.”
“Seems like a logical safe haven but over the last 10 years gold has already tripled, and today lots of bad outcomes are already discounted so again stocks represent a more attractive value today.”
“It is only slightly more than stock yield but it has no growth to its coupon. (With historic outperformance to stocks), here again lots of bad things are already discounted in and again stocks represent a more attractive value from here.”
What’s your take? Do you think fears of fears of surging inflation are overblown?