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There has been a lot of talk lately about the risk of hyperinflation (meaning extremely rapid or out of control inflation). Once the domain of economists and financial geeks, the concept has reached into the popular culture. Recently, Peter Schiff made an appearance on "The Daily Show", and drew cheers from the audience when he reiterated his prediction that the US economy would collapse due to hyperinflation.

When economic ideas become popularized, they tend to succumb to hype. It's hard to make predictions, especially about the future (as Yogi Berra noted), but that's what markets try to do. How much is the market responding to this threat?

Investors have three traditional ways to hedge against inflation: precious metals, real estate, and TIPs. If concern about our currency is becoming as widespread as the buzz suggests, we should see demand for these assets increasing.

Precious metals, typified by gold, increased in value up until 2008, peaking slightly over $1000/oz.

To date, it has not exceeded that value. I know many investors are convinced that it will; all I can say is "show me the money."

But I admit that the ambivalent price of gold, in itself, is not proof that investors are ambivalent about future value of the dollar. Gold is a global resource; increased demand by US investors might be offset by weaker demand, or sales, elsewhere.

So... let's try closer to home, with TIPS (Treasury Inflation-Protected Securities). Analysts measure the market's "expectation of inflation" by the spread between yields on fixed-rate Treasuries and TIPS; the difference should express the expected inflation rate (since this value is added to the TIP).

Maturity Fixed yield TIP yield Implied inflation rate
2014 2.83 1.41 1.42
2019 3.79 1.88 1.91

By this metric, the market is expecting below-average inflation over the next 10 years (and especially low in the next 5 years).

Here's another way to view the same relationship, by way of ETFs instead of individual bonds:

Here we see that investors have priced TIP and TLT (a long Treasury bond fund) at a near-constant ratio for 5 years, except for the panic last fall, when TLT became much more highly valued, due to the fear of deflation. The ratio has just begun to return to its long-term norm. Fear of inflation would drive it far above this line. Instead, we are in neutral. For every investor expecting inflation, there's at least one other one worrying about deflation.

Although this is a cleaner way to measure inflation than gold, it's not perfect. Some investors don't like TIPS because their value depends on the government's calculation of inflation, the CPI. So this indicator, too, is only suggestive of the larger question. Let's look at the last resort of the inflation-hedger, real estate.

At last, we have data which is unambiguous. Commercial RE values are plunging at an unprecedented rate.

This is a real threat to our financial system, as many other commentators have noted. The threat, however, is not inflation, but its opposite: deflation.

That makes three strikes for the hyperinflation indicators.

I'm not suggesting that any of these asset classes are useless; on the contrary, a well-balanced portfolio should include all kinds of hedges. But if you go all-out for the inflation hedge, you are years ahead of the market. That kind of position rarely pays.

Disclosure: the author maintains a small position in TIP.

Source: Hyper-Inflation or Just Hype?