Hedges Against Inflation? Commodities, Gold and Inflation-Linked Bonds - JPM

The carnage continues as each month brings worse and worse economic data, and the consensus continues to slash growth forecasts for this year and next. As a result, many strategists continue to recommend “recession trades” for their clients – underweighting equities and corporate credit, along with long positions in relatively safe bonds.

Jan Loeys, head of global market strategy at JPMorgan, is in that camp. He now acknowledges that it may be late summer before the U.S. economy stops contracting, while at the same time pushing his recovery forecast for Europe back to the end of the year.

Mr. Loeys suggests an overweight in the risky assets and currencies of regions that are expected to reach the recession finish line first, coupled with an underweight of their bonds. He thinks China will reach this milestone first, followed by the U.S. and then emerging markets in Asia. Japan, Europe and other emerging market countries are expected to be last to come out of the recession.

Mr. Loeys told clients:

With the needed caveat that the crystal ball is murkier than ever, our guess would be that the developed world will see zero if not negative inflation through much of this year and next, but will likely see a rise thereafter that could rival the inflation of the early 1970’s.

However, inflation is not expected to rise because of booming demand, but rather due to low capital investment, higher regulation and protectionism that will hold back production capacity and thus potential growth.

So while timing the inflation play will be tricky, he said the hedges against an inflation cycle include commodities, gold and inflation-linked bonds.

Comments

[Sakata:]

I wouldn't believe a word the comes from JPMorgan. Their activities are one of the main contributors to the present mess. They are also, almost certainly, the main cause of the decline in precious metals, due to their record high illegal shorting of silver and gold which the CFTC refuses to investigate. See news.silverseek.com/Te... if you don't know what I am talking about.

Mar 11 08:04 AM

[Minuteman:]

I need opinions re TIP & IPE. They seem not to pay interest---at least not recently. Can anyone explain?
Minuteman

Mar 11 03:13 PM

[oroloco:]

Minuteman:

I had the same question, which I recently posed to iShares. Here is there reply, dated 2/24/09:

"With regard to your request, the TIP fund is closely tied to the Consumer Price Index for urban consumers (CPI-U). Specifically the fund tracks this indicator on a two month lag. This government indicator of inflation greatly influences our distributions for this fund. During inflationary periods the value of the underlying bonds appreciates and this appreciation is liquidated and then passed on to the investor as a distribution, as you may have noticed with the large distributions which occurred this summer. Currently, we are in a deflationary period and the November distribution reflects the CPI-U for the month of August which came out with a negative value. When CPI-U is negative the value of the underlying bonds will depreciate in value and this depreciation may offset the amount we have available to liquidate and distribute for that particular month. This was the case in the month of November 2008 through February 2009 and the reason why there was no distribution. As long as CPI-U continues indicating a deflationary environment, our TIP fund may continue to have a very low or even zero monthly distributions until we return to an inflationary period. The yields which appear on our website will give you an indicator of what has been distributed, but are not good indicators of what distributions will be going forward. A look at the CPI-U figures will give you a more accurate sentiment of the expected distribution, until CPI-U returns to a positive amount indicating inflation this fund may not distribute any cash flow."

Mar 12 12:06 AM