Investors May Consider Riding TIPS Wave As Inflation Expectations Rise

Sep.21.12 | About: iShares TIPS (TIP)

The QE critics are truly coming out of the woodwork. For something everyone seemed to want, this policy is immensely unpopular. Former Morgan Stanley chairman and Yale senior fellow Stephen Roach heaped criticism on the Fed and its new asset purchase plan in a CNBC interview Friday, calling U.S. consumers the "walking dead" and contending that trying to bring the unemployment rate down by purchasing mortgage backed securities would be "exceedingly difficult."

Roach also noted that Ivy League macroeconomists don't even see a connection between MBS and the labor market:

"I hobnob with all these macro theorists at Yale, they don't see any evidence of a linkage between liquidity injections in the mortgage-backed securities industry and the labor market distress in the U.S.,"

Roach's prescription: deleveraging and higher levels of personal savings, a theme repeated by the sensible on numerous occasions.

Roach wasn't the only notable to question the wisdom of QE3 Friday. Respected financial industry heavyweight Mohamed El-Erian used the "experiment" analogy (which is becoming more popular seemingly by the day) to describe the Fed's actions:

"We are so deep into unfamiliar territory, so deep into experimental mode, that we don't know what the consequences will be."

El-Erian also said the Fed was not only fully cognizant of the heightened inflation expectations its actions have produced, but actually pleased with this outcome:

"...they actually...target higher inflation [so] whoever comes afterward will have to clean up the mess."

What is important to remember here is that these commentators are part of the same experiment we are all participating in as far as QE3 is concerned. Their expectations are part of the equation too and if they are talking about rising inflation expectations it follows that at least some expectations are already rising: theirs. If investors want to ride the wave, it may be worth considering an investment in the iShares Treasury Inflation Protected Securities ETF (NYSEARCA:TIP) which will benefit from investors' desire to protect themselves from rising prices. Of course, one could easily argue that this is a poor choice in terms of buying at the bottom and selling at the top as the ETF is trading at multi-year highs, but then again, so is the S&P 500 (NYSEARCA:SPY).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.