Inflation Watch gets mail!Posted: February 10, 2010
Reader Jay writes:
Do you think TIPS are a good inflation hedge? Some say the Fed will raise interest rates well before significant inflation is captured in the official CPI. Theoretically does the market go up during inflation? What are some other good hedges other than gold and gold stocks?
Hm, Inflation Watch isn’t an investment blog. I’d like to take a stab at Jay’s questions, but please keep in mind that nothing on this blog should be construed of as investment advice. (Do your own research!)
1. Treasury inflation-protected securities (TIPS) were a steal in late 2008, when everyone was worried about deflation. Less so now, because the market has priced in higher inflation expectations. Nonetheless, in my opinion, TIPS are an excellent inflation hedge if held over a long period of time. I don’t personally own TIPS but I would seriously consider buying the iShares Barclays TIPS Bond Fund as a long-term holding if prices pull back significantly from current levels.
2. The short answer is that the stock market can go either up or down in times of inflation. Certainly there are many companies (for example, those that have pricing power) that can prosper in times of inflation. But for the market as a whole, generally stable prices are best. So a complete answer to Jay’s question is that it depends on a number of factors, including how much inflation there is, how the Fed responds to it, and how predictable the inflation rate is. For example, low, predictable inflation that is carefully kept in check by the Fed is a lot better for the stock market than high, unpredictable inflation that is ignored by the Fed.
3. Other good inflation hedges, aside from gold and TIPS, include real estate (or real estate investment trusts), land, commodities, and any asset denominated in a foreign currency.
At times during the past 18 months, I have owned the ProShares UltraShort 20+ Year Treasury Bond Fund (TBT). I have also owned long-term puts on the iShares Lehman 20+ Year Treasury Bond Fund (TLT). Although both of these holdings performed extremely well, I do not recommend them now and I certainly do not recommend them for long-term investors.
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