Here is a reprise of David Rosenberg's thoughts on how to prepare for inflation, from Breakfast with Dave, December 15, 2010.
HOW TO PLAY INFLATION?
There is no sense in being dogmatic. But just in case inflation were to stage a comeback, this is how one would prepare for it:
- Precious metals (while gold grabs the spotlight, silver has surged 52% this year and has far outpaced the 27% runup in gold; and the gold/silver ratio, while down from a peak of 84 to 66, is still above the average of 54 over the past three decades).
- An even steeper U.S. yield curve!
- TIPS (or real return bonds) - the 5-year TIPS breakevens right now point to an inflation expectation of just over 1.7%, whereas consumer expectations are closer to 2.6%.
- Short-term duration corporate bonds (and go out the credit curve).
- Commodity currencies - Canadian Loonie, New Zealand Kiwi, Aussie dollar, Brazilian Real, and Norwegian Kroner.
- Basic material stocks (including energy) as well as consumer staples (tobacco, food/beverage).
We don't have a big inflation view, but you never score brownie points by being dogmatic. If (when?) the massive amounts of fiscal and monetary stimulus ever do show through in final inflation (this will hinge on a renewed expansion in household balance sheets and a fresh credit-creation cycle), these are the areas that would likely garner the most investor interest.
Source: Breakfast with Dave, December 15, 2010
