What to Expect When You're Expecting Inflation

All the papers are claiming inflation is non existent. Well, maybe for the short run it might be. Looking back at the Great Depression of 1929 there are many similarities to the current situation and inflation could raise its ugly head.

In the midst of the Great Depression there was a strong upward trend in commodity prices that began during 1933-1935. This move was a reaction to the inflationary policies of the F.D. Roosevelt administration.

The Roosevelt administration devalued the U.S. dollar relative to gold and spent on numerous programs to boost economic activity. These policies led to strong economic growth during 1935-1937 and to a strong rebound in commodity prices. This was an artificial stimulus and was not sustainable. The commodity boom came to a sudden end in early 1937 and all the economic ‘progress’ that had been made over the preceding 4 years was quickly wiped out. In 1938 commodity prices were back to their 1932-1933 lows. In reality, no real economic progress had been made during 1933-1937. The Roosevelt administration through its massive spending, had only managed to create the ILLUSION of prosperity.

It is uncannily similar to the current situation. Stock market participants were not able to make money in this situation nor were real estate speculators. Anyone who traded commodities at the time were not just able to survive the Depression, but actually made money. There were distinct trends. Trend followers made money.

More interesting, (maybe just as it is now,) in 1938 Roosevelt began a spending program that would be so large it made all the monetary recklessness of 1933-1937 look miniscule by comparison. The only thing that saved Roosevelt and possibly the US economy was World War 2.

Bottom line: In the Great Depression first there was deflation but all the spending caused inflation. Inflation is a destroyer of wealth. Any way you look at it, government spending schemes have led to monetary inflation and to a rally in commodity prices.

There are obvious comparison between the 1930s and the 2000s. In particular, monetary inflation during the early-to-mid 2000s led to an economic boom and a commodity-price rally that quickly fell apart during 2007-2008, prompting the current government to implement massive spending schemes that should ultimately lead to vastly greater monetary inflation.

There are those that cannot even contemplate that inflation will raise it ugly head. All they are concerned about is deflation. It is interesting that whenever there are announcements which are not U.S. dollar friendly, commodities took off. They are the only things that are real.

So without just making this an interesting discussion. How does one protect wealth? Even just staying in US dollars one stands the chance of being devalued (as it was in the Depression). The best suggestion is not to have an opinion but be a trend follower. Learn about trend following. Find Trend Following managers that understand risk.

What do you think?

Comments

[Dave Wrixon:]

I think you need to understand that this financial contraction is primarily a US phenomenon. Yes, other stock markets have taken a short-term hit from the disruption in World Trade, but they are now fundamentally undervalued in dollar terms, even if they are close to fair value in their own currencies. Get your dollars out. Get them anywhere. Australian Mining would be a safe bet, but the opportunities in China, Russia, India and Eastern Europe are huge. And over the medium period you'll will not only get a return but it will be magnified by the currency adjustments.

Apr 05 06:45 AM

[paxjds:]

Protect wealth in order with coming massive inflation:
1. 40% Gold Collector Coins in your personal posession,vaults.
2. 10% ditto on Silver
3. 20% in Oil such as USO
4. 5% in several uranium investments
5. 15% in stock of major: Miners of precious metals and commodities
6. 10% in cash and 90 day CD's less than 100K each
Don't follow trends, learn the lesson from the Wizard of OZ and as Dorthy said, USE YOUR BRAIN. If you followed all the trend managers, you are really down 50% or so in your portfolios right now and cannot afford any more mistakes. High inflation and debt in the future will cause another long recession in the USA, and not as bad in the BRIC contries that are not printing money like we are.

Apr 05 10:43 AM

[Jimmy in NYC:]

I really wish I knew what would hold value. At this point it appears that it is cash., and cash only

The herd mentality that goes along with gold and oil simply reminds me of the half a million wood frame houses, the dot com boom, and my favorite (as an automotive fan) the classic car/muscle car boom.

In order to get inflation, we will need demand. And nobody is buying cars, or houses (at least not at prior rates of consumption), and creditors now require proof of the ability to repay loans (what a concept!).

Massive job losses, people walking away from home loans, an i increasing savigs rate, municipalities increasing property tax burdens - this is demand negative. That being my current view of the landscape tells me cash is king. For now.

Apr 05 11:54 AM

[Andy Abraham:]

IF or when the US dollar devalues... Commodities will move up as they are priced in US dollars... the same potential scenario as what occurred in the Great Depression could repeat itself... the key is not demand..but rather the dollar..commodities are a dollar hedge.

Apr 05 03:15 PM

[PaulyinOz:]

Just happened to be reading Ganns 'How to make Profits in Commodities' last night! (to identify the correct trend in local gold stocks).
Gann MADE his money during the period you speak of & his number 1 mantra was 'follow the trend'.
You are RIGHT on the money. The trend is your friend, know what it is.

Apr 05 05:56 PM

[Andy Abraham:]

No opinions... I have yet to meet anyone who can predict the future..look at Michael Covel's books... Trend following.. good stuff..

Easiest thing to do... but the hardest emotionally...

Apr 06 06:05 AM