Hedging against possible inflation , an interesting read

Business Times - 10 Dec 2009


Hedging against possible inflation

THE tug of war between those who believe that higher inflation is a sure thing in the near-to-medium term and those who insist that it isn't gets fiercer with time. On the one hand, it would seem to be a given that low interest rates and massive government stimulus packages are inflationary. Yet, as a Morgan Stanley report recently pointed out, deleveraging is 'wildly deflationary'. The painful process of weaning governments and households in developed markets off debt has barely begun. In the US, total debt - including government and consumer debt - stands at a staggering 350 per cent of GDP. In Japan, the proportion is 340 per cent. The expectation that at some point in the future, the stimulus will have to be withdrawn and debt whittled down points to the prospect of more muted growth for economies and for asset markets. For now, the US market appears to be pricing in inflation of a relatively muted 1.3 per cent based on 10-year Treasury Inflation Protected Securities.

Still, concern over inflation and the debasement of the US dollar has bid up prices of assets seen as hedges, such as gold and commodities. Gold, in particular, touched a high of US$1,226 an ounce last week, and prominent goldbugs are holding out for it to hit US$2,000. That is despite the fact that as an inflation hedge, it has a mixed record at best. Even real estate is stirring in some parts of the world. To be sure, near-zero interest rates and abundant liquidity have spurred renewed risk taking. But the lessons of the recently averted financial crisis should not be so quickly forgotten.

Those who are mulling an entry into gold or other real assets such as real estate would do best to evaluate their options from a portfolio point of view. Gold, for one, does not pay any income, and risks long, fallow periods where it simply goes nowhere. Real estate typically requires leverage, a double-edged sword. If the backdrop turns out to be inflationary, and even modestly so, taking on leverage could be very rewarding. But in an opposite scenario, as the events of 2008 clearly demonstrate, leverage is potentially debilitating.

That there is little consensus on inflation should not detract from the need for some inflation hedges for portfolios, particularly for the retail investor who needs to save for retirement and does not want to take undue risk. Arguably, a benchmark of inflation plus should be the starting point, with the goal of matching that against one's future income needs. The rub is the dearth of relatively safe inflation indexed instruments. Even insurance with its high penetration rate among Singaporeans does not have its benefits and payouts linked to inflation. Assets that could serve as hedges such as real estate and collectibles are relatively inaccessible for those with modest savings.

What Singaporeans need is inflation indexed bonds, whose issuance the government should seriously consider. Such issuance will surely find a ready market among those seeking a stable asset with real income and those with long term future liabilities, whether institutions or individuals.

Food for thought... hmm

Austrian Theory

Back to Austrian Theory, most of the jobs 'created' are govt jobs. Govt jobs do NOT create economic goods and services. It only serves to take away potential employment from beneficial private sectors and keep the wage rate at a fake high. Some may argue that the jobs created may be long term jobs and in previously private sector / similar to private sector jobs and that the agency is behaving like a private firm. It could be but we must understand a manager installed by a bureaucracy can never be the same as an entrepreneur who puts forth his money and time to invest. In this sense any jobs in this govt private firm only will steer people away from producing true goods that are demanded by the market. This kind of mal-investment will increasingly require support from govt and become a weight to the administration. And when the govt decides to stop supporting, those ppl in these jobs are already trained and have to be trained in other jobs again, thus creating structurally unemployment.