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Inflation is Coming ; Adjust your Portfolio … not your Pantry!

|Includes: EEM, iShares MSCI EAFE ETF (EFA), EWC, GLD, SPY, TBF

A very dear client of mine called the other day and asked about all the stories surrounding inflation. She had particular interest due to one coming from political commentator and television host, Glenn Beck. Initially my ears perked up because, whether you like him or not, Mr. Beck is a very talented personality and from the few times I’ve viewed his program he attempts to make a solid case for his viewpoints by using facts. He also seems to do his homework (or at least pay others to kick the tires with decent due diligence)

That said, he is still in the entertainment business and the last time I checked he doesn’t manage a dime of anyone else’s money. More and more I hear his name being mixed in with economic headlines. This trend, in my opinion, appears to be more than a commentator who disagrees with anything related to Obama policy. For the past couple of years the economy certainly has been topic numero uno and I believe he, as an extremely savvy entertainer, knows where the highest Neilsen ratings will come from.

Back to the concern over inflation and this story….What is inflation and where are we now versus historic norms as well as what could be looming in the future? Glenn Beck says 2011 will be the year where we don’t just outpace historical norms of 2% to 3% inflation like we see now but we will have hyperinflation upwards of 50% per month. He goes as far as saying that the top crisis in 2011 will be a food crisis. Let’s mark that prediction and come back to it 12 months from now. Most entertainers, and advisors for that matter, never come back to their lock down pick of the year if it doesn’t turn out. (and most extreme predictions rarely materialize anyway)

I agree that we will inevitably see some inflation creep in. How can it not? The Fed is printing money faster than my local Penny Saver rag. The dollar is anemic and getting kicked in the pants even more. This has been a large part of the recent market run-up and added fuel for the gold bugs. The United States is running up a credit card bill and once countries stop lending to us we will be staring at even more massive piles of debt. The only way to pay our debts will be to monetize them and that will be a tremendous burden on the dollar. Yes, inflation is coming but that doesn’t mean you need to go out and buy food insurance as some are apparently advocating. There are a few more prudent and less extreme solutions to prepare for inflation but please remind yourself that we are actually currently closer to deflation… i.e. This didn’t happen overnight and you have time so don’t panic just yet.

First and foremost, I always suggest keeping sane by simply turning off the T.V., but if you can’t do this, at least have your advisor make sure you are well allocated and consider the following “portfolio inflation-insurance” adjustments:

Hedge against Treasuries-

Bond yields will eventually increase and when they do prices will fall. Going short on treasuries is easily done with an ETF (Exchange Trade Fund) like TBF (ProShares Short 20+ Year Treasury). This investment will do well if there is a run on treasuries. It has a 100% inverse correlation to the Barclays 20+ Year U.S. Treasury Bond Index. TBF should be a huge winner in the next few years. I rarely take bets or go short for clients on something going down but in this case the writing is on the wall and here’s a fantastic way to play it smart. TBF currently trades at $43.50 and could easily trade over $50 in the next 6-12 months. The following 1 year chart shows how it has fared relative to the S&P 500:

Increase your International Exposure-

All of my clients have a healthy allocation to international companies. Over half the world’s investing opportunities are abroad and as we continue to see a flattening globe with interlinked economies, you are missing the boat if you don’t allocate accordingly. I am increasing my standard percentage over the next year to compensate for a weakening dollar. Bulk up your international mutual funds or ETF’s like EFA (iShares MSCI EAFE Index that tries to mirror the European, Australasian, and Far East markets). If you have conviction in a specific country, like Canada for example, but want to avoid the pure risk of owning an individual international company, consider buying an ETF like EWC(iShares MSCI Canada Index Fund)

Lastly, for you domestic stock hounds, increasing your exposure overseas can also be done by buying U.S. based multinationals that do huge amounts of business globally. There are several Fortune 100 companies that make money for you when the Euro beats the dollar. All things being equal this is a no brainer.

Buy Treasury Inflation Protected securities-

Again, by using certain ETF’s you can efficiently allocate a portion of your bond portfolio to hedge against inflation. I typically recommend buying TIP (iShares Barclays Treasury Inflation Protected Securities Bond Fund ) for most clients. By owning this investment you basically have an instrument that adjusts for inflation and a weakening dollar. While you hold TIP for a hedge and some potential appreciation, you are also currently rewarded with a 2.757% yield.

What is your cash paying you at the bank? Speaking of cash…that would obviously be the last thing to hold in a period of increasing inflation. In this scenario, the money you have today is worth far less than what it will be worth tomorrow.

Go ahead…buy some gold (NYSEARCA:GLD) as a small inflationary hedge but don’t cash out your entire portfolio because some guy on the boob tube told you to. Please don’t stock pile your pantry either; unless you plan on donating some food to those who are less fortunate during the upcoming holidays.


Disclosure: Long TBF