Smart Money Is Playing the Long Inflation Game

Written by Adam English
Posted June 30, 2020

While we’re getting whiplash day-to-day in the markets,  smart investors are using the opportunity to play the long game.

A lot of money is pouring into assets that are normally considered strong hedges against inflation.

Yes, gold is one. It’s now at eight-year highs today and is closing its best quarter in four years.

It isn’t alone though. Property and forest stocks and funds, inflation-linked long-term bonds, etc. If you can name it and if inflation won’t undeniably devalue it, there is interest.

But inflation is hardly an issue. Nor was it in all the rounds of quantitative easing and other Federal Reserve interventions up to now.

So, what’s the deal here? Let’s dig in.

On the surface, it does seem to be a weird time to worry. The Fed doubled down and is in full-blown intervention mode.

The IMF predicts a 4.9% global drop in gross GDP, 8% for the U.S., and 10.2% for the Eurozone in 2020.

It hardly seems to be the time for prices to heat up and inflation to reemerge.

And let’s be honest — it won’t. For a while at the very least.

The real question is what we’re baking into the system going forward.

In addition to the downward GDP revisions, the IMF included a stark warning about global debt levels.

Governments are rolling out massive spending measures to paper over the reality of what is going on.

The IMF sees global public debt reaching all-time highs of 101.5% of GDP in 2020 and 103.2% of GDP in 2021

The average overall fiscal deficit is seen as soaring to 13.9% of GDP this year, 10% higher than in 2019.

That massive debt increase is exactly the issue that we’re presented with now. That was not the case back in the last recession.

As PineBridge Investments’ Head of Multi-Asset Mike Kelly put it to Reuters recently, “We will be pushing, pushing, pushing on the string and dropping our guard, then 3-5 years from now... that’s when the (inflation) dog will start barking. Gold worries about such things long in advance. It has risen through this coronavirus with that down-the-road-risk top of mind.”

Of course gold doesn’t worry about a thing. It’s people doing the worrying. They should.

Throw in concerns about a global pullback towards domestic production, due to realization that our supply chains are terribly vulnerable to disruption, causing a rise in prices.

Consider an acceleration of the aforementioned debt concerns and a Fed that holds over $10 trillion in assets by the end of the year or next as a very real possibility. We have many catalysts set up to create a multiplying effect and potentially a hard-to-break feedback loop.

Smart money from investors is hedging, on both the retail and institutional levels.

Inflation-linked bonds are a solid long-term play as a hedge for a conservative portion of a portfolio.

The 10-year TIPS Index is up 12% since March and looking pretty cheap still overall.

Real estate is tricky. We’re about to face a rent and mortgage implosion as all the deferred bills come due. Eviction dockets are already flooded.

Commercial and investment property funds are already circling like vultures, but it will be chaotic and they’ll take a hefty cut to manage assets that aren’t particularly fungible for all but the richest investors.

Don't forget their existing assets are very vulnerable in the short-term. This will be a form of doubling-down, or dollar-averaging, that pays off over a long time frame.

Plus property funds still have to worry about inflows and outflows just like stocks. If things really get bad again, we can expect another rapid and broad sell-off that indiscriminately affects assets yet again.

For the short- and long-term, nothing beats gold as an underlying asset for stocks in our view.

Plus expert guidance over the next several years will be a godsend for investors who have plenty of other things to worry about, health and employment to mention the two big ones.

Gerardo Del Real has you covered for both the short and long term. If you haven’t seen what he’s looking at now, now is the time.

Take care,

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Adam English

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Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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