In the current recessionary environment can not be considered that there is a risk of inflation, but it is clear that if we were somewhat frightened by the graphs of the monetary base increases, the monetization of debt by former Federal Reserve, and more recently by the European Central Bank, are potentially very inflationary in the medium term.
Governments through the Central Banks seek to avoid deflation minoraría the price of assets and would be major problems for banks and heavily indebted companies. The problem is that this avoids the correction of excessive indebtedness, and this is necessary from a point from which we can take a sustained recovery from a more logical levels of debt. Trying to hold prices
asset-based credit bubble to create new money may seem like a short term solution, but merely postpone the problem. I still think that the best solution would be to destroy debt based on massive bankruptcies, however hard it may seem, rather than sustaining life support a mountain of debt that is more than evident that it has reached a level far above the maximum debt permissible sound with a minimum of sense.
Why there is no inflation risk today? Because the recession is responsible for this: the rising unemployment, an uncertain future, the end of the open bar credit ... hard to see inflation in this scenario.
If we look at the banking multiplier M1 which facilitates the Federal Reserve, we see why the increase in the monetary base is not causing inflation in the U.S..
However, the situation is far from what we saw in "Deflation or hyperinflation?, What's next? .
The TIPS spread does indicate inflation today, unlike then, but still low. We see in the chart below the yield on 10-year bonds by the bond yield protected against inflation for the same period. The difference between the two returns is inflation that the market discounts at the present time for the next ten years. However, this spread is subject to market failures as anyone else, and it is not no crystal ball vision, but simply what the market tells us today.
When will inflation? Hand in hand recovery. With recovery recovery I mean really, this is not the green shoots that will come to nothing.
obvious investment against rising inflation would be just inflation-protected bonds. TIPS apart from Americans, many European countries offer inflation-linked bonds. The English Treasury does not offer, but we have mutual funds that invest in bonds linked to inflation. They update their nominal bonds and coupon on the basis of higher inflation, or rather, the price index. Precisely in this lies their main weakness: the price index of a country may be more manipulated down the more prices rise, so the hypothetical hedge against rising prices, it is actually against the price index cooked by the government in power to serve their interests. In Spain we all remember the inclusion of plastic surgery in the CPI calculation, or handling of the low prices including rebates, never before considered. In the U.S. go even further and consider whether to raise the low pork and chicken, the consumer will buy chicken (and this is reflected in its calculation). If a $ 500 television is costing $ 500 next year, but with better caracterísitcas techniques these improvements are measured as a reduction of its price in order to calculate. However, the consumer will pay $ 500 and not less.
ordinary bonds fall in price when rates rise and rise when rates fall. This is because if the new bond offers a higher interest, it is logical that the old bond, which pays less interest, lower price. As usual if inflation rises, rates also, our protection against inflation is partially offset by the falling price of regular bonds because higher interest rates coupled with this inflation. In short, neither are these bonds no wonder.
sure you are thinking of the bag as a clear alternative in case of rising inflation. It seems obvious that in case of rising prices, stock prices should rise.
Consider the following chart (click to enlarge):
inflation we see in red and green S & P 500. Shaded boxes represent periods of sharply rising inflation. As we are not exactly good for the stock market periods.
If inflation is not good for bag, will the decline in inflation good for the stock market?. Glancing at the same graph we see that there has to be. In general it does better than when inflation rises, but considering that the whole graph of the S & P 500 is up in itself, does not mean much. We are left with the bag does not usually do especially well when inflation rises.
Another thing would be to hyperinflation.
Eye I do not mean high inflation . Many of those who bore us now warning of an increased danger of hyperinflation which point the insurance so when inflation rises. High inflation or hyperinflation is not much less. We see in the chart above how historically inflation has not exceeded 20% in USA. 20% is high inflation but not hyperinflation. hyperinflation in Zimbabwe is , where they reached the ticket issuing 100 billion Zimbabwean dollars.
highly unlikely I see hyperinflation in the U.S. and in Europe discard. Germany is still too recent hyperinflation in the Weimar Republic , which resulted in the loss of savings of all previous generations of Germans. Germany will push the ECB to raise rates when inflation begins to freak out.
improbabilísimo In case of hyperinflation, it would good stock market investment, and better the more leveraged . With hyperinflation everything goes up, and if we make sure that even We leverage what goes up less than inflation for the same cover us through the multiplier effect. The hard part is knowing the meaning of the bag, and hyperinflation is assured sense, then we would leverage in a senseless way ahead. Companies would do better in these circumstances would be precisely the worst they do today: the most indebted. In the overnight would be worthless debt.
As this assumption is highly unlikely, we focus on inflation. In the case of sharp rise in inflation (which is not yet the case today), most suitable investment are the raw materials and commodities . We could buy them individually through future (with the disadvantage of being aware of the rollover) or better ETF, or through an ETF that replicates the behavior of the CRB commodity index to diversify with a single investment. That would be my bet on the course.
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