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May 04, 2009 O’Higgins, Buffett Predict Return of Inflation

May 04, 2009 O’Higgins, Buffett Predict Return of Inflation

In interviews last Friday two icons of value investing in the United States predicted inflation will make a comeback as massive government stimulus combined with rapid credit acceleration eventually result in higher consumer prices.

Michael O’Higgins, the father of the Dogs of the Dow strategy in the early 1970s, told PBS in an interview that he believed stocks were in the midst of a secular bear market, not unlike the 1966-1980 period when, adjusted for inflation, equities posted a cumulative loss. In nominal terms, or before adjusting for inflation, the Dow went nowhere over that 15-year stretch.

O’Higgins is worth listening to. He pioneered the Dogs of the Dow strategy in the 1970s at a time when investors were battle-scarred from equities and later in the late 1990s called the bull market in Treasury bonds ahead of the March 2000 stock market peak. Now O’Higgins is buying gold, silver, gold mining stocks and TIPS, or Treasury Inflation Protected Securities, ahead of a major resurgence in inflation. According to O’Higgins, the “Obama administration won’t stop stimulating the economy until we have inflation.”

The Sage of Omaha, Warren Buffett, voiced similar concerns ahead of Berkshire Hathaway’s annual shareholder meeting on Saturday.

Buffett sounded an alarm on the macro economy in an interview with Bloomberg Television; “There’s no signs of any real bounce at all in anything to do with housing, retailing, all that sort of thing,” said Buffett. Berkshire’s book-value declined 9.6% last year – its worst performance since 1965.

Buffett also warned of higher inflation eventually in the United States because of unprecedented dollar creation or the expansion of the Fed’s balance sheet and credit growth to stimulate the contracting economy.

The world’s wealthiest investor also dismissed the results of impending government stress tests this week but declared his bullishness on Berkshire’s second-largest holding after Coca-Cola – Wells Fargo.

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not,” Buffett said at Berkshire’s annual meeting in Omaha, Nebraska. “If I had to put all of my net worth into stock that would be the stock.”

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