JHU's Hanke: Inflation looms; buy dividend stocks
Johns Hopkins economist and Forbes columnist Steve Hanke is worried as usual about inflation, although how consumer price inflation becomes a problem in a world with so much excess capacity is a puzzler. Lavish monetary stimulus these days produces not consumer inflation but asset inflation -- ie., soaring prices of stocks and other assets. In addition to gold and commodities, Hanke recommends several stocks paying good dividends. Read the whole Forbes column here.
With the Fed intent on keeping interest rates artificially low for an extended period of time, some of my previous recommendations should still work well. In September I recommended tapping into gold and commodities via the SPDR Gold Shares (GLD), iShares S&P GSCI Commodity-Indexed Trust (GSG) and PowerShares DB Commodity Index Tracking Fund (DBC). Since then, these funds have appreciated by 13% to 15%, while the S&P 500 has notched a 9.2% gain. Retain these positions to protect your portfolio from the Fed.With the inflationary wolf at the door, what's an income investor to do? Go for dividends.
Comments
As to your puzzler, the boiled down answer is very simple: increase the amount of money faster than you increase the amount of stuff to buy it with. Here's a more detailed explanation:
One gigantic myth that needs dispelling: THE PHILIPS CURVE IS ONLY VALID IN THE SHORT RUN. There is no long term empirical inverse relationship between inflation and unemployment. Every excess capacity argument is founded by the false premise that the Philips Curve has longterm validity. Edmund Phelps (no relation to Bmore's finest) won the 2006 Nobel Prize in economics for this. As if the period that coined the word "stagflation" were not enough to debunk this myth. You can have rising prices and high unemployment/overcapacity at the same time, as true inflation has, is, and always will be a purely monetary phenomenon.
As for the decoupling between consumer prices and equity/commodity prices, there are a few reasons that explain that. First, it always takes at least 6-12 months for changes in monetary policy to be felt in consumer prices. The big, big debt monetization (the treasuries and MBS rate subsidy program) is less than a year old. Secondly, much of M0 is still sitting in reserves and has yet to become M2. Until it becomes M2, consumer prices will not be significantly impacted. With that said, food prices already have started to rise, crude inputs prices have started to rise, the dollar index is at an all time low, and oil is artificially high, hovering at $80/barrel (remember when $70 was high?) when actual demand and miles driven are down year over year. A weak dollar is preventing fuel prices from falling and is therefore resulting in higher than natural prices that we are already paying for.
Posted by: Josh Dowlut | December 2, 2009 5:28 PM
Inflation? Goldman disagrees: they project "extremely low inflation – close to zero on a core basis during 2011".
http://blogs.reuters.com/james-pethokoukis/2009/12/02/goldman-sachs-2011-forecast-would-be-an-absolute-disaster-for-dems/
The 10 year bond rate is around 3.3%, and the 30 year at 4.25, so it doesn't seem as though the bond markets are that worried either. Especially since the difference between the 10 year fixed and TIPS bonds is around 2%.
Posted by: hilzoy | December 3, 2009 1:08 AM