Is Smart Money Betting on Inflation?

One no longer needs to turn to well-known Fed critics such as Jim Rogers or Marc Faber to hear warnings about the risk of accelerating inflation. Concerns have been expressed recently by some of the investors we respect most, including Bill Ackman, Warren Buffett, David Einhorn, Tom Gayner, Julian Robertson, Paul Singer, and David Swensen.

Said Warren Buffett, chairman of Berkshire Hathaway (BRK.A) in a Fox Business interview on June 24th:

What we're doing raises the probability significantly of very significant inflation down the road -- not this year, next year, maybe the year after. But we have taken actions -- and they were appropriate actions -- to fight the war we were in that started with a vengeance last September. In taking those actions we've applied medicine dosages to a patient that's never been done before, except in wartime. It will have consequences, and nobody knows exactly what they will be and nobody knows how effective we will be in draining a system that we've been flooding. But the probability of significant inflation has really gone up."

The rationale is as obvious as it is simple: Inflation is first and foremost a monetary phenomenon, and recent Fed policies have been unprecedented in size and scope. As a result, the purchasing power of the U.S. dollar may erode at an accelerating pace over the next decade. As investors, the time to prepare is now.

Read notable recent statements on inflation.

Disclosure: No positions.

Comments

[Steven Hansen:]

although i surely agree with you inflation will be a long term trend, i do not see it as a short term event. to prepare now would be the same as knowing the market was going to crash in 2008, and preparing for it in 2005 - you would have missed out in the huge rally through 2007.

Jun 29 04:28 AM

[Old Rick:]

The problem with your analogy Steven is that not many people in 2005 (except for the permabears) were saying that the market would crash in 2008. There are now LOTS of good knowledgeable investors (as opposed to traders) who believe the inflation scenario. Even if it doesn't happen until 2011 (my guess is summer 2010 in time for mid-term elections), doesn't it make sense to start positioning your portfolio for the eventuality?

Jun 29 11:18 AM

[CLH:]

The majority is always wrong at turning points.

No inflation. (Nor earth warming--grin)

Jun 29 03:14 PM

[bigmoney:]

don't tell me there will be "inflation". Tell me where inflation will be. Housing? Oil? Food? Corporate Salaries? Healthcare? University tuition? Gold? Predicting inflation without predicting which asset classes will have inflation is pointless.

Jun 30 12:14 AM

[Think-About-It:]

There is no consensus that inflation is on its way (I believe it is and have invested for it and I know I'm early). Many investors believe deflation will be with us for a while as the recession lingers and credit remains constricted. Therefore, investing for inflation now is NOT investing with the herd. If the masses were convinced of inflation we would be experience it right now.

Bigmoney asked: "Where will inflation show up" My guess is that it will be all around you but more-so in non-durable goods such as Oil, agriculture and precious metals. Yes, healthcare and education will continue growing faster than the CPI but not sure how to invest in those two sectors purely on an inflation theme. Areas sensitive to higher interest rates like housing and stocks (in general) will not experience the same inflation boost as others mentioned.

Jun 30 02:44 AM