Three Investment Opportunities High Inflation Creates

Last week I warned about the white elephant of the financial markets, inflation. A few of you were kind enough to write in suggesting that I had screwed up my metaphor. After all, the most common phrase in the English language for an obvious, but ignored truth is “the elephant in the living room.”

However, the white component is essential here. The phrase, “white elephant,” refers to a valuable possession whose costs far exceed its usefulness. The Fed’s inflation measures in this country are nothing if not a white elephant. After all, their costs— the destruction of the dollar and rampant inflation— far exceeds their usefulness—shoring up Wall Street’s banks.

Over the weekend, I actually caught a picture of this beast on camera. Here it is:

The above chart illustrates the US money supply. MZM refers to “money of zero maturity.” It’s essentially a composite of all the money in circulation, savings deposits, checking accounts, and money market accounts depicted in graph form.

As you can see, the Fed has been running the monetary printing presses virtually non-stop over the last 15 months. All told, the monetary supply in this country has increased by an incredible $1.4 trillion— with a “t”— dollars (roughly 20%).

The costs of maintaining this policy—letting inflation run wild— far outweigh its value— shoring up the Wall Street banks and kicking off a rally in stocks. Frankly, it’s unsustainable. At some point the Fed will either have to raise interest rates to curb inflation, slow the printing presses, or both.

Inflation has begun receiving more coverage in the mainstream financial media. Yesterday, Bill Gross of PIMCO fame went on CNBC and stated that we’re deluding ourselves by claiming inflation is 2% (see the GPS New Bulletin below). As more and more investors realize that inflation is a major problem in this country, several trends will emerge:

1. Commodities, particularly gold, will soar as investors seek inflationary hedges.
2. Treasuries will plunge, bringing their yields above the rate of inflation.
3. Stocks will fall, as traders and dumb money follow the adage that if the Fed raises interest rates it’s bad for stocks.

Gauging when all of this will happen is a job for psychics, not me. However, it’s worth noting that stocks have been extremely weak while gold has popped over the last few weeks. If you’re interested in trying to time all of this, you can check back for weekly updates on the MZM at:

http://research.stlouisfed.org/

Watch for when the rate of money supply starts to slow or decreases. At that point, stocks will be in serious trouble.

Comments

[Larry House:]

Thanks for this insight. Please keep us informed. My finger is on the trigger for my stocks, my bonds can be held to maturity, and my gold and silver are put away.

2008 Jun 03 10:08 AM

[Jason Rines...:]

Agree with you Graham. I am invested in businesses rather then commodities (damn missed that boat). Alternative energy, consumer healthcare, agriculture, higher education and business efficiency technologies are the companies I would be interested in investing in for the next five years. That said, I am sure there are those who will apply this logic to stocks & commodities. I am in Consumer Healthcare.

2008 Jun 03 01:03 PM

[Bear Stocks...:]

iThinkBig, it's still not too late to profit from rising prices by investing in commodity ETFs like DBE, GSP and DBC. But don't use them as buy & hold investments. You must know when to get out.

2008 Jun 04 09:35 AM

[notsosmart:]

the inflation rate of the 5 daily needs is 15.68%. you better be darn good in your market plays to match that.

2008 Jun 04 09:50 AM

[Daniel Kowk...:]

It's easy to predict what has already happened. Gold has already tripled in price. As most Financial Advisors recommend stocks that are going up. You make some money,but when it turns south and you've lost your profits, then they tell you to sell. I still say study the fundamentals of a company and ignore these people trying to advise and then you'll make money.

2008 Jun 07 01:43 PM

[huangjin:]

That graph measures fear, not inflation. Money supply is flat.

2008 Jun 09 10:23 AM