Protect Your Investment Portfolio Against Inflation And Stagflation
The results are in . . . and the results are surprising to say the least. Economic data posted this week shows that the US Economy grew during the first quarter at 0.9%. I was totally surprised, and I’m sure you were too. Given the deteriorating credit markets and the collapse of the housing industry I thought we’d be in a recession.
So where’s the recession?
The Commerce Department’s GDP numbers originally called for a growth rate of 0.6%. For those of you who don’t know, GDP or Gross Domestic Product, is a measure of the value of all the goods and services produced in the United States. A positive number is good. A negative number means recession.
The GDP number was helped along by exports . . . which are growing by 2.8%. The weak Dollar is making US made goods cheap. Because of this exports are increasing. Despite that good news, unemployment numbers are rising.
Housing’s still a problem though.
The housing industry is holding back growth in the economy. By every measure housing is hurting. Many of the key housing indicators are sitting at multi-decade lows. Just this week we learned home builders were slashing spending by more than 25%. The biggest cut in almost 30 years.
So the economy continues to limp along . . . what’s the point?
Right now, the biggest threat to the American way of life isn’t the economy, or terrorism. It’s inflation.
Look across the pond (aka the Atlantic Ocean) and you will notice something interesting. Tough talk on inflation. The European Central Bank has done nothing but talk about the risks of inflation for the last several quarters. Everyone thought they’d lower rates to drive economic growth. But they didn’t. They held tight on their interest rates in order to combat inflation.
The British are facing the same problems. Their housing market is in trouble. Home values are falling, mortgage applications are down, and the economy is softening. Yet the Bank of England refuses to drastically cut interest rates. The reason? Inflation.
What’s the Fed think?
Now I’m not the only one here who thinks inflation is a problem. Our own Federal Reserve hinted that they were done cutting interest rates. This means they may raise rates in the near future. The biggest reason they would do this? To combat inflation.
Other Proof.
Don’t take my word for it. Inflation is here. Just look at this week’s announcement from Dow Chemical. They’re raising prices across the board – 20%. Look at food prices. Despite a recent fallback in commodity prices, we are trading at levels not seen in years. Have you filled up the gas tank lately? Gas now costs over $4.00 per gallon.
To the point.
The economy is slowing and prices are climbing. This is the textbook definition of stagflation. Stagflation is deadly folks. It means your costs are going up but the value of your money and your investments are falling.
What’s the solution?
You only have a few limited options when it comes to stagflation. The first one that comes to mind is moving to another country. I realize this isn’t really an option for most people. So I looked back to see what assets performed well in this kind of environment. There were a number of them. Two well known ones were commodities and real estate.
It’s hard to argue that the real estate industry is the place to be investing now. Commodities are another story altogether. Investments like gold and silver are known to hold value in inflationary environments. Make sure your assets are well diversified, and consider establishing a meaningful position in commodities.
Category: Bonds
