Inflation is Not Coming…
It Has Arrived!

May 29, 2009

By Jon Herring

Don’t be deluded into thinking that inflation “might be coming” in the future and that once you see the signs you can protect yourself.

Inflation is already here. And if you wait too long to take precautions, this silent thief will most certainly steal your wealth and savings. You must act NOW if you wish to protect what you have worked so hard for. Take the right actions today, and you can not only insure your wealth against erosion by inflation… you can generate life-changing profits as well.

First, it is important to have a proper understanding of inflation. Most people believe that the definition of inflation is rising prices. This is not true. The definition of inflation is when the supply of new money outpaces the production of goods and services. When an increasing supply of money chases a decreasing or static supply of goods and services, the money becomes worth less (or worthless, if you prefer) and the price of goods and services goes up.

In other words, rising prices are a symptom of inflation. They are the end result of a monetary phenomenon. But if you wait until the symptoms appear, it will already be too late. If you own a house on the Gulf of Mexico, you wouldn’t start pricing hurricane insurance with a Category 4 storm curling around the Florida Keys. Likewise, the time to shop for inflation insurance is not when prices have already begun to rise.

The government’s Consumer Price Index (CPI) fell in March and was unchanged in April. This would indicate that prices are stable and there is no need to worry. But the bond market is telling a different story. The bond market is signaling that rising prices are just ahead and you should be worried.

In a report issued in November, I wrote:

“The credit markets are much larger than the stock markets. These markets are driven by traders whose job it is to see beyond the lies and propaganda coming from Washington and Wall Street. You will not have to wait for asset deflation to finally give way to inflation. The bond market will spot it on the horizon and begin discounting bonds and raising long term rates.”

The chart below of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) illustrates the point. When Uncle Sam’s creditors begin to worry about inflation, they demand a higher rate of interest for their loans. As interest rates tick up, bond prices fall. And as you can see below, the prices of long-term U.S. Treasury bonds are falling at a record clip.

This is not the only indication that the first winds of inflation will soon arrive. Gold stocks have broken out to highs not seen since last August. And the dollar is back in a sustained down trend. The market is speaking loud and clear. It is time to batten down the hatches.

There are a number of ways to profit and protect your wealth during a period of inflation. If you are knowledgeable and prepared, it can make you a fortune. First, you should have a healthy portion of your portfolio in precious metals and energy investments.

You may also consider shorting long-term government bonds. As interest rates inevitably rise, bond prices fall. Shorting the TLT would make an excellent long term inflation hedge. You could also consider buying TBT, a leveraged inverse fund which seeks to return two times the return of the TLT.  In other words, if the TLT falls by 10%, the TBT should rise 20%.

Blue chip companies with strong business fundamentals and a long history of raising dividends are also an excellent way to profit in an inflationary environment. These companies can raise their prices to keep up with inflation, and then pass the profits along to shareholders. And the consistently rising dividends can produce a yield that outpaces all but the most severe inflation.

And finally, don’t be afraid to hold sensible levels of long-term fixed rate debt on valuable assets (a mortgage, for example). By “sensible”, I mean debt that can be easily serviced, even in a worst case scenario. Fixed rate debt can be a powerful financial tool in an inflationary environment. How else could you legally borrow a dollar and pay back 50 cents? If you use that debt wisely to purchase assets that increase in value over the term of the loan, your profits can be substantial.

Disclaimer:

At InflationData.com we are not registered investment advisors and do not provide any individualized advice. Past performance is not necessarily indicative of future performance and future accuracy and profitable results cannot be guaranteed.