Continued from Part 1...
Quick and dirty: Which financial assets to buy during inflationary periods? Part 2
Without further ado, here are the financial assets to own during inflationary periods.
Long gold and precious metals: Gold mining shares are closely linked to the price of gold (but not always the case). But gold, palladium, silver etc may provide a hedge against inflation as the debasement of fiat money continues.
Long crude oil: As crude oil price will not move much in inflationary environment due to inelasticity of supply.
Short fixed income: Inverse relationship between interest rate and price of bonds. Bond yields will rise to curb inflationary pressures, thus bond prices will fall. Say if you buy a Treasury bond that pays interest of 3% with the intention of holding it to maturity. However, when inflation creeps up faster (eg rate of inflation of 5%) your investment in bonds is not justified. One analogy which may be strike a strong chord with most of us: The rate of inflation is an absurd rate of 5% but the employee’s rate of monetary compensation is not on par with the rate of inflation. Therefore the inflationary rate is eating right into your purchasing power.
Long Treasury Inflation Protected Securities: Treasuries known as TIPS that espouses safety of government bond with protection against inflation.
Long technology: Technology sector is continually evolving and is a dynamic industry, thus you would even want to own it during deflationary periods. See my take on Microsoft Microsoft Corp. (MSFT, Financial) – an Undervalued Stock with Strong Business Predictability Part 1 and Part 2
Which financial assets to buy during deflationary periods?
Deflation is a period of decreasing prices which is typically bad for commodities and stocks (maybe) and good for bonds. For example during mid-1997 period.
Long USD (non inflationary): Therefore you would want to own these cold hard cash in your coffers
Long long-term bonds: Bonds should be bought due to expansionary monetary policy undertaken which will force interest rates to be low. Fed will buy long term bonds, the cash flows into the financial system and therefore will result in an inverted yield curve. In short long bonds because its value is not eaten away by inflation during low interest rate milieu.
Short equities: Companies will have lower margins and unsavory losses, therefore you wouldn't want to own loss making entities but
Buy high quality dividend paying stocks: Read, Headed for Depression? 105-Year-Old Investment Banker – There Were a Lot of Valuable Buys http://www.gurufocus.com/news/143064/headed-for-depression-105yearold-investment-banker---there-were-a-lot-of-valuable-buys
While the deflationary period may sound counterintuitive to own stocks, but some large cap high quality companies may be able to maintain their pricing power for eg Microsoft, see below.
Long technology: Technology sector is continually evolving and is a dynamic industry, thus you would even want to own it during inflationary periods. See my take on Microsoft Microsoft Corp. (MSFT) – an Undervalued Stock with Strong Business Predictability Part 1 and Part 2
Quick and dirty: Which financial assets to buy during inflationary periods? Part 2
Without further ado, here are the financial assets to own during inflationary periods.
Long gold and precious metals: Gold mining shares are closely linked to the price of gold (but not always the case). But gold, palladium, silver etc may provide a hedge against inflation as the debasement of fiat money continues.
Long crude oil: As crude oil price will not move much in inflationary environment due to inelasticity of supply.
Short fixed income: Inverse relationship between interest rate and price of bonds. Bond yields will rise to curb inflationary pressures, thus bond prices will fall. Say if you buy a Treasury bond that pays interest of 3% with the intention of holding it to maturity. However, when inflation creeps up faster (eg rate of inflation of 5%) your investment in bonds is not justified. One analogy which may be strike a strong chord with most of us: The rate of inflation is an absurd rate of 5% but the employee’s rate of monetary compensation is not on par with the rate of inflation. Therefore the inflationary rate is eating right into your purchasing power.
Long Treasury Inflation Protected Securities: Treasuries known as TIPS that espouses safety of government bond with protection against inflation.
Long technology: Technology sector is continually evolving and is a dynamic industry, thus you would even want to own it during deflationary periods. See my take on Microsoft Microsoft Corp. (MSFT, Financial) – an Undervalued Stock with Strong Business Predictability Part 1 and Part 2
Which financial assets to buy during deflationary periods?
Deflation is a period of decreasing prices which is typically bad for commodities and stocks (maybe) and good for bonds. For example during mid-1997 period.
Long USD (non inflationary): Therefore you would want to own these cold hard cash in your coffers
Long long-term bonds: Bonds should be bought due to expansionary monetary policy undertaken which will force interest rates to be low. Fed will buy long term bonds, the cash flows into the financial system and therefore will result in an inverted yield curve. In short long bonds because its value is not eaten away by inflation during low interest rate milieu.
Short equities: Companies will have lower margins and unsavory losses, therefore you wouldn't want to own loss making entities but
Buy high quality dividend paying stocks: Read, Headed for Depression? 105-Year-Old Investment Banker – There Were a Lot of Valuable Buys http://www.gurufocus.com/news/143064/headed-for-depression-105yearold-investment-banker---there-were-a-lot-of-valuable-buys
While the deflationary period may sound counterintuitive to own stocks, but some large cap high quality companies may be able to maintain their pricing power for eg Microsoft, see below.
Long technology: Technology sector is continually evolving and is a dynamic industry, thus you would even want to own it during inflationary periods. See my take on Microsoft Microsoft Corp. (MSFT) – an Undervalued Stock with Strong Business Predictability Part 1 and Part 2
