How To Beat The Fed's Double-Digit Inflation Crusade
Smart Profits Report Issue #503
By Marc Lichtenfeld
Senior Analyst, Smart Profits Report Inflation hasn't been much of a problem in the United States since Federal Reserve Chairman Paul Volcker jacked up the Fed Funds rate to 20% in order to combat rising prices. Unfortunately, the phenomenon is rearing its ugly head again with the Producer Price Index (PPI) rising 7.7% in January. Common sense suggests that with the Fed actually cutting interest rates in order to ward off an economic recession, inflation should continue. The question is: How high will it go? Well, check out this scary bit of data I received, along with a chart from one of my favorite technical analysts (yes, I'm a geek and have favorite technical analysts)...
A Stark Trend That Points To Double-Digit Inflation
Double-digit inflation is on the way. At least according to John Roque of Natexis Bleichroeder. Roque points out that since 1947, every time the PPI eclipsed 7%, it didn't stop until it hit at least 10%. The highest level was 19.5% in 1974. And as you can see from the chart, when inflation climbs above 7%, it tends to stay there for a while. In the late 1970s/early 1980s, the PPI was greater than 7% for more than three-and-a-half years.
Source: Natexis Bleichroeder Go The Inverse Route With These Four Inflation-Busting Funds If Roque is correct – and I believe he is – investors need some kind of strategy, or investment vehicles, that will offset the decaying power of inflation on their portfolios. And that's what we're here for. Rather than just report doom and gloom, we want to give you some ways to hedge against higher inflation. So here goes... Inverse Bond Funds: There are several mutual funds that are inversely correlated to the bond market. You see, while current Fed chairman Ben Bernanke is committed to lowering interest rates, reality will smack him hard if inflation does in fact reach double digits. He'll then be forced to raise rates significantly in order to fight continuing price increases. And when rates go up, bonds go down – which is why an inverse bond fund should perform well in that environment. Here are a few to consider: Rising Rates Opportunity 10 ProFund (RTPIX): Seeks returns that are inverse to the daily movement of the 10-year Treasury note. Rising Rates Opportunity ProFund (RRPIX): Seeks returns that correspond to 125% of the inverse daily movement of the 30-year Treasury bond. Rydex Inverse Government Long Bond Strategy (RJYUX): Seeks returns that inversely correspond to the movement of 30-year Treasury bond. (ProFunds) Access Flex Bear High Yield (AFBIX): Seeks returns that correspond to the inverse performance of the high-yield market. The World's Favorite Past-Time: US Dollar Bashing... But Is Relief In Sight? While it is trendy to bash the U.S. dollar these days and Marc Faber just came out and declared that Bernanke is in the process of “destroying” the dollar through the Fed's monetary policy, it's worth keeping one thing in mind... If inflation continues to rise and Bernanke is forced to hike interest rates, it should help put a floor under the currency. And should the dollar rise, investors can capitalize in the following ways: THE FUND ROUTE:
Rydex Strengthening Dollar 2x Strategy (RYSBX): This fund seeks to provide returns that are equal to 200% of the U.S. Dollar Index. THE ETF ROUTE:
If you're a dollar bull, you can also go for ETFs (Exchange-Traded Funds). One of the top ones is: PowerShares DB Dollar Bullish Fund (AMEX: UUP): The ETF is designed to track the performance of the Deutsche Bank U.S. Dollar Futures Index. Of course, you could always short the ETFs of other currencies such as the CurrencyShares Euro Trust (AMEX: FXE). THE TIPS ROUTE:
If you want to head down a more conservative path, then one option is to own U.S. Treasury Inflation Protected Securities (TIPS). These are securities whose principal is tied to the Consumer Price Index (CPI). Simply put, when inflation rises, so does the principal. The inverse is true as well. However, at maturity, the investor will receive the original or adjusted principal, whichever is greater. More information on TIPS is available on the U.S. Treasury's website. Of course, you don't have to go down the fund route at all. You can always power up your portfolio by picking great stocks and options, such as the ones recommended in the Xcelerated Profits Report. Our recent 99% winner in BioMarin (Nasdaq: BMRN) would help any portfolio withstand the effects of inflation. Hoping your longs go up and your shorts go down. Marc Today's Smart Profits Notes: - We hear about the general inflation rate affecting Americans all the time. But is it worse for some than others? A Wall Street Journal article points out that while inflation is generally rising across the board, it may actually be worse for America's enormous band of baby boomers. With Labor Department statistics showing essential items like food (up 5.7% a year), home energy (up 5.5% a year), medical services (up 5.7% a year), hospital services (up 8.5% a year) and nursing care (up 4.5% a year) all rising, it arguably puts more strain on America's retired/retiring population. That's in addition to gasoline, which is rising at a whopping 34% clip per year.
- To compound the problem, Americans are enduring an increasing shortage of home equity. A report today from U.S. Flow of Funds Accounts shows that Americans' percentage of homeowner equity (a home's market value minus mortgage debts) has dipped below 50% for the first time since 1945. This basically means that homeowner debt now exceeds homeowner equity. Moody's says that by the end of this month, 8.8 million homeowners (or more than 10% of homes) will have zero or negative equity. And with home prices already dropping (prices slumped by 8.9% during the fourth quarter, compared with Q4 2006, according to the S&P/Case-Shiller Index - the biggest fall in 20 years), it doesn't bode well for the future.
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