Pink Panther

Preparing for the Inevitable Inflation

You're all very welcome. It's great about this site, that we all can
learn from each other a lot!
Keep in mind that for a long term portfolio you need to chose a commodity index which copes well with contango losses:
Bad (rolling monthly): GSCI, DJ-AIG, Reuters CRB, USO
Good (improved roll strategy): The DB Indices (DBA), (DBB), (DBC), CMCI
I don't know about the strategy of (JJA) or (RJA)

Living4Dividends wrote: > Pink Panther,Thank you also for the link to the Shiller data

On Jun 10 01:28 PM mbkelly75 wrote:
> PinkPather
> - thank you for the links. I found them very helpful. ETFs have made
> investing in both Commodities and Bonds MUCH easier now than they
> were when I got started in investing over 50 years ago. It is now > very easy to keep them in an easily tradable form as a part of a
> balanced portfolio and re-balancing when needed is equally easy now.
> DBA, JJA and RJA are all ETFs that track Commodities - RJA tracks
> 20 different ones. These make it easy to use Commodities in a portfolio
> without having to learn futures trading. They are worth a look.

Preparing for the Inevitable Inflation

As for how commodities performed vs equities & corp. bonds during the inflationary 70's, here's an interesting article:
www.cxoadvisory.com/bl.../

Preparing for the Inevitable Inflation

Living4Dividends wrote:
> Interesting point. Yes, equities do poorly at the beginning of inflation. Bonds do even worse. As for the commodities are better than equities, during inflation - this is an interesting idea. Do you have any long term studies you can direct me to?

I use Robert Shiller's data for this kind of studies:
www.irrationalexuberan...
There you'll find the Excel file with the data on S&P 500 stock prices, earnings, dividends and interest rates since 1871. In this file, there's also the CPI as the indicator of inflation and the inflation adjusted "real price" of the S&P 500.

The periods to look for are 1917-1920, 1941/1942, 1946/1947, 1973/1974 and to a smaller extent 1970 & 1979-1981

Preparing for the Inevitable Inflation

There's a big qualitative difference between inflation and hyperinflation:
Inflations happens, when caused by an increase in money supply and/or increased velocity of money, more money chases less goods. Fortunately higher prices causes demand to drop, thereby lowering prices - a negative feedback loop.
Inflation would be a sign of an improving economic environment.

Hyperinflation on the other hand is caused by loss of confidence in a currency, i.e. the dollar. In this scenario, investors try to get rid of the currency as quick as possible, hereby causing a drop in its value, which causes even more investors to drop that currency - a positive feedback loop ending in disaster.
Hyperinflation does not need an improving economic environment, it could happen even amidst a deep crisis!

> Bigtime inflation is in our future. I am not sure if hyper inflation is coming, but inflation for sure.

Preparing for the Inevitable Inflation

One more thing to consider:
Historically during the onset of inflation, equities got hammered badly (equity earnings get measured versus bond yields, which are rising).
After that drop in price, equity earnings yields were roughly the same as bond yields but the principal - the price of the equity or bond - only was inflation protected with equities.
Plus, when inflation goes away, equities usually soar back in price.

Therefore it's better to prepare for inflation using commodities (i.e. precious & base metals, agriculture) before commodity producer stocks (these have a certain correlation to the underlying commodity but also a large correlation to the overall stock market).
Once the stock market has dropped on inflation, equities with inflation protected underlying earnings stream are the way to go.