AssetInflation's  Instablog

Many people have asked me “what factors should I look for when making a determination as to what to buy”.  Most would agree that inflation is a negative factor on real net worth, but deciding where to invest is not as complicated as one would think.

First, realize that in a real inflationary environment that the companies that produce things that people NEED will be able to increase prices to compensate for their higher input costs. PRICING POWER

Second, any hard assets that are scarce or not able to be produced sufficiently with increased prices will benefit during inflation.  Price increases typically lead to more volume or to substitution of other commodities, but in some commodities that does not apply.   PRICE ELASTICITY

Third, realize that inflation is RELATIVE to the currency that you are dealing in.  Stated a different way, the impact of global inflation will be felt differently by different currencies.  Valuable assets in weaker currency countries will rise in “nominal value” quicker than in stronger currency countries. CURRENCY RELATIVITY

Fourth, the ability to adapt returns quickly in a changing environment will carry a premium.  And the negative opposite is also true, the fixed nature of certain returns will destroy value.  RETURN VARIABILITY

Those four factors are essential when deciding what assets to purchase.   A good place to start when evaluating your portfolio is to apply these factors to your investments and see how they stack up.  As a “very general” rule:

1. Large-cap multinational companies with exposure to more than 50% of sales outside of home country
2. Commodities that require large investments and long lead times to increase incremental output
3. Variable Interest Rate Notes and Bonds

Finally, a fifth factor that should be considered when choosing your assets is that Price Earnings ratios tend to fall in an inflationary environment.  Be very careful to consider what valuation your company is valued at.  While the PE ratio of the market will drop overall, many ratios of individual companies will be currently mispriced due to lack of recognition of our inflationary resurgence.  PE COMPRESSION