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There is a thief in your midst, silently picking away at your wallet if you own US dollars. If you think your dollars are safe in a bank account giving a dismal 1% return or that a well diversified portfolio with some AAA rated US treasury bonds will secure your wealth, I'd advise stepping back a little and thinking about the prospect of runaway inflation. Seriously consider taking a look at leading indicators of inflation because currently 4-5% per year is the figure to beat just to break even (the thief has a head start).

Questions:

  1. Are commodities rising?
  2. Is gold rising?
  3. Are industrial metals rising?
  4. Is the CPI rising?
  5. Are interest rates rising?

The answers to these questions may seem to imply an over-simplification of inflation indications. However, they are reliable early warning signs of runaway inflation that many informed traders are aware of. The answer to most of them is YES. You could also look at M2 charts, however, how indicative is the money supply of inflation? "Runaway inflation is not a monetary phenomenon", and ultimately, interest rates are the most critical thing the central banks can do to stop runaway inflation.

However, in my opinion, they are already too late. The Fed can print as much money as they like, but they don't control where that flow of funds actually goes. Nor can they stop it as quickly as they say they can (it takes about 12 months before an interest hike can actually have any effect on inflation).

Look at how quickly inflation has picked up in New Zealand:

click to enlarge

It is not the only commonwealth country on the rise either with the UK and Australia also following suit. Runaway inflation doesn't rise steadily either. It can triple within a year or two. This is what the 1970's taught some people about wealth destruction.

This is a chart of comparisons of the CPI (guess which line has been manipulated to mask inflation?):

Where would you want to be if runaway inflation or hyperinflation and interest rate hikes were to really kick off?

Commodities are one thing, in particular gold and energy. Popular opinion might have one believe that commodities have had their run, however I'd beg to differ. You can gain currency exposure by going long the Norwegian Krone or long emerging currencies against the US dollar via CEW.

The more aggressive trader may short financials when an interest rate hike puts on the squeeze by trading FAZ, and shorting long term US treasuries through TMV. If one can manage risk actuarially, one can prosper in this environment.

A final thought worth considering for those who do not see inflation as a valid argument.

Where does this massive flow of monetary stimulus go? Commodities? Stocks? And at this present stage, with China and Japan holding the most US debt instruments internationally, how do you position yourself as they begin to dump US treasuries?

There is pressure building in the markets. Get a sense of it, manage risk carefully, and you won't have to worry about waking up to find your furniture missing.

Disclosure: I am long TMV, DBC, SLV.

Source: Positioning Yourself Against Runaway Inflation