3 Strategies to Profit From U.S. Inflation

by: Follow My Alpha


Inflation is coming whether you want to believe it or not. The old adage of “a dollar today is worth more than a dollar tomorrow” reminds us of this reality. Further, economics teaches us that every economy will be challenged by inflation, deflation, and stagflation with the given reality that this is all cyclical in nature. Currently, the US looks poised to enter an inflationary cycle and it would be wise to evaluate inflation-related investment options. All that matters, though, is identifying the current variables leading toward US inflation and learning how to profit from the situation.

Helicopter Ben Looking for Signs of Life

Ben Bernanke, head of the Federal Reserve, has made it abundantly clear that he has no intention of raising interest rates until he sees the US on a sustained path to recovery. His primary focus remains on unemployment numbers relative to the recovery. Given that unemployment numbers are the focus, we don’t see him lifting interest rates till late 2011, at the earliest.

EU Judging the US Without a Leg to Stand On

If the argument holds true that when America gets a cold, then the world gets pneumonia, it's safe to say we won’t see any interest rate action across the pond either. The European Union (EU), for better or worse, is stuck together and will need to tough it out. With high unemployment in places like Spain, Italy, and Greece it looks unlikely that interest rates are going to increase anytime soon or allow the EU to build enough economic clout to pressure the US into taking some sort of action. In simple terms “there goes the neighborhood” with US inflation tearing up the streets on both sides of the pond.

US Dollar in a Catch-22 Situation

Now the weak dollar is a double-edged sword. On the positive side, the cheaper US products become, the more competitive they become abroad and that translates into the US economy growing more via exports. On the negative side, a very weak USD indicates that the US is heading toward an inflationary environment without question. Try to fight off inflation and the US recovery might be derailed but fail to act and US inflation is likely to hit. What we can take away here is that the US is basically in a Catch-22 situation and no matter what action it takes it’s going to come with a cost.

Calls to Action to Make a Profit

We feel that there are several different strategies, which allows the investor to profit from inflation. Below we offer three different “calls to action” relative to how severe you see US inflation getting.

Scenario 1: The End of Days Trade

With China being the largest buyer of US debt, many people fear that the Chinese government may stop buying US debt securities in the future. To our surprise, there are more people than we thought that truly believe this is a real possibility. Regardless, this situation will be the catalyst that brings down the US government. If you fall into this camp, then it’s all about the “bling”, also known as gold. We feel that in terms of investing in a highly liquid security that correlates well with the hard price of gold, then the ETF GLD is the place to be.

Scenario 2: Hyperinflation

The US government has seen the hyperinflation devil before and some believe it’s only a matter of time till the US faces it again. Oil, for example, will skyrocket to levels unimaginable by today’s standards, along with every other commodity that we currently take for granted. The hyperinflation camp believes that this scenario could last anywhere from a few years to a decade.

In this hyperinflation scenario, all commodities are likely to rise in price but oil is the most likely candidate to outperform all the others. The first name to look at should be deepwater sea driller Transocean (NYSE:RIG). It stands to substantially profit as energy companies lease out their platforms to access more difficult to reach oil reserves, which have now become “economically viable” to drill.

As well, it makes sense to buy oil ETFs such as USO, OIL, and or DBO. These particular ETFs all have pros and cons but accomplish the one purpose, which is to provide returns relative to the price and movement of crude oil prices. If you fall into this camp now, you have a game plan for the End of Days.

Scenario 3: Above Average US Inflation

In the last scenario, the expectation is that within the next two years the US will enter an elevated inflationary environment. The inflation will not spiral out of control though in this scenario. Instead, we expect that the Federal Reserve will eventually step in and aggressively raise rates to destroy any further increase in US inflation.

We fall into this category and this is our personal opinion regarding what investors face. We feel that the best places to profit from this scenario are in mining stocks and deep-sea oil drillers. Our favorite names are Southern Copper (NYSE:SCCO) and Rio Tinto (NYSE:RIO) for mining stocks since they focus on industrial metals and have less exposure to gold than other competitors. In particular, Southern Copper has a large focus on copper, of course, while Rio Tinto operates a diversified mining portfolio of different metals. Our favorite name for deep-sea oil drilling is again Transocean (RIG). This firm operates with an economic moat and continues to trade at a good discount, in our opinion, due to oil prices remaining below $100 a barrel.


Figure out what camp you stand in and take action accordingly if you feel that the probability of future inflation is high. Just remember that when you are trying to profit from inflation or any other theme, you need to take proactive action and not reactive action after the fact.

Disclosure: I am long RIO, RIG, SCCO.