Inflation

[Nepa]

Where should I be putting my money if I thought the U.S. is headed towards High inflation?

Should I short the market?
Look oversea?
Gold?
Cash?
Bonds?

I don't remember how it was during the '70's

[FishHooks]

Is this purely hypothetical? I hope it is because good luck trying to find when inflation will go though the roof.

[Nepa]

[ QUOTE ]
Is this purely hypothetical? I hope it is because good luck trying to find when inflation will go though the roof.

[/ QUOTE ]

I hope I'm wrong. But it is hard to hide that fact that we are going to get some sort of hit from inflation do to the super fast rising gas prices. Sooner or later it is going to effect the cost of everything.

Short answer: commodities and foreign currency will hold their real value if inflation explodes. Cash will do okay, because money market rates will rise to at least match inflation. Bonds, especially long bonds, will get killed as interest rates rise.

Commodities are difficult to invest in for the retail investor. Yes, you can buy precious metals, but the transaction costs will kill you. Also, if inflation doesn't increase, you probably won't make much money. One possibility is to buy the stock of commodity-producing companies.

Personally I think the best way to hedge against US inflation is investing in foreign companies and secure foreign government bonds. That way you protect your money by having it denominated in other currencies, so if the dollar falls, your investments will rise in dollar terms. Also, your money is invested and gaining interest or dividends while you protect it, instead of just sitting there like a bar of gold would. I would suggest an unhedged international bond fund (I own LSGLX, but there are others). If you invest in foreign equities, you should realize that a falling dollar will often hurt exporting companies. So if you buy, say, Sony, as the dollar falls, they'll make less money selling Playstations to American consumers. This will limit whatever gains you make on the currency change. One way around this is to buy companies which don't serve an export market: utilities. I own KEP and EN, and I'm keeping an eye on UU. In the case of a weak dollar or worldwide recession, I expect these to hold up better than most alternatives. If there isn't any recession or disruption, I'll still get a decent dividend and shot at capital gains.

[CardMinger]

Another option to consider is investing in US Treasury inflation indexed securities. I believe they are called I-bonds or TIPS (Treasury Inflation Protected Securities)

Please correct me im wrong...

Kevin

[FishHooks]

Yea TIPS are a great way to protect againt inflation.

[r3vbr]

hmm how about buying berkshire hathaway?

[r3vbr]

Supermarkets are also good investments i think.
here in brazil during hyperinflation, supermarkets got rich because they recieved a lot of cash and had like a 1 month period to play suppliers, when they do pay them, the money is worth much less.

[chardog]

[ QUOTE ]
[ QUOTE ]
Is this purely hypothetical? I hope it is because good luck trying to find when inflation will go though the roof.

[/ QUOTE ]

I hope I'm wrong. But it is hard to hide that fact that we are going to get some sort of hit from inflation do to the super fast rising gas prices. Sooner or later it is going to effect the cost of everything.

[/ QUOTE ]

I know this is counter intuitive but higher energy prices actually act as a contractionary force in our economy (i.e. just the opposite of inflation). Higher energy costs act as a de-facto tax on consumers as almost everyone buys energy to live their daily lives. That money could have otherwise gone to non-energy goods and services creating greater demand and increased pricing power for them.

Runaway job and wage growth would be a much better indication of higher inflation on the horizon. Companies spend most of their $$ on paying worker's salaries. Watch the montly non-farm payroll report. The latest just came out on Wednesday. 169K new jobs v. 190K expected with an upward revision of 44K on previously reported numbers. Basically almost a perfect report. If you started seeing 300K-400K+ every month then I would be worried about inflation and an over-heated economy.

FYI, the next CPI (consumer price index) report is on September 15.
http://www.bls.gov/cpi/cpireldates2005.htm

Check out the last one (http://www.bls.gov/news.release/cpi.nr0.htm). The important line in the first table is the "All items less food and energy" (aka the CORE CPI rate). You can see as oil prices have spiked in recent months the growth in the core rate has diminished.

[squiffy]

In addition to some of the other answers, real estate tends to keep pace with inflation, long-term, as it is a real asset. As the value of the dollar drops, the owner of property, in theory, can charge more for the land.