My Take on the Inflationary Trade

Includes: AGQ, BOM, ZSL
by: Glen Bradford

Cam Hui has been a large developer and supporter of an economic timing model that jumps into one of three trades. The inflationary trade, the deflationary trade, and the neutral trade. I am going to agree with his latest article purporting that right now ordinary investors should not try to be heroes. Let the market price direction and political and economic backdrop guide your personal portfolio allocation preference. I wanted to speak my piece in terms of how I think you can hit home runs instead of first base hits employing an already brilliant strategy. As an Industrial Engineer, my specialty is more along the lines of making systems better, not designing them myself from scratch. Here's my current take:

Right now, the trade is the inflationary trade. In my opinion, there is a real risk that this could escallate off the deep end. As such, I'm advocating owning at least some of your portfolio in hard assets in case the paper markets break down and investors in ETFs like SLV and GLD are defrauded. For the most part, I'm surfing AGQ and taking profits and buying real silver.

If China starts crashing, or the euro starts to decline, or the US government decides to live within its means, that could turn the tables and cause a deflationary environment where the dollar gets stronger and commodity prices start to fall. In that case, I'll be going short base metals or silver or both through ETFs like ZSL and BOM.

Other than that, if the situation of normalcy presents itself, I'll be employing a strategy similar to that of Joel Greenblatt. I'll be hunting for above average companies at below average prices. I'd imagine that there would be 10-bagger opportunities again if we go from a deflationary environment to an inflationary one again thanks to more stimulus thanks to global monetary policy's natural fear of deflation.

Disclosure: I am long SLV, AGQ, GLD.

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