How to make an inflation play?
- Thread starter kmiklas
- Start date
It would depend on your estimate of how much inflation you expected and the rate of increase. Under some circumstances, you would want to max out on longer term credit, if you could, then let inflation pay your creditors. Corporations are doing that right now as a matter of fact. But there is no guarantee they will be right. Smart folks, who could, did that also when the funds rate dipped to near zero and reserve accounts were swollen by QE, at the outset of the Great Recession. Of course you can't afford to let money sit idle. You have to put it to work at other than near zero net interest. And that means buying assets on the cheap expecting them to recover once the storm passes. And that also means taking on risk. There is no reward without risk.
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It CAN be tricky because a modest uptick in inflation can be bullish for stocks. (To a limited extent - increasing corporate profits whilst preserving consumer buying power is the delicate balance)
Any meaningful increase in core inflation metrics would hit Treasuries the first and the hardest.
Any meaningful increase in core inflation metrics would hit Treasuries the first and the hardest.
I'm not sure about inflation decreasing or remaining flat, but historically REITS (with dividends) move up nicely as inflation increases. (Rents, property values etc)
Also commodities move up in an inflationary environment. The GSCI is the S&P commodity index, they bought it from Goldman, it stands for the Goldman Sachs Commodity Index. There's a few ETF's that track it... probably best to use I-Shares ($GSG). I think Bloomberg has an index that tracks them too.
Traditionally you’re absolutely correct. But globalization has drastically changed that paradigm. The most sensitive commodity is Natural Gas and Crude Oil - and North American Production has profoundly altered the Supply side of the equation. Even when we see regional commodity spikes - like in the case of Chinese Pork production, international production takes up the slack. Cotton production in India, Bangladesh, and China has suppressed US Cotton volatility. Same for US Soybean production (South America) and Sugar.
Vietnam has become the second largest coffee grower in the world.
This profound trend of suppressed commodity volatility and globalized world supply has forced speculators into more esoteric products like rare earth metals and fresh water.
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If "expected inflation" is expected to rise means markets are pricing that already. You get no benefit from buying TIPS or other instruments which prices that expected inflation.
For ex. If expected inflation in 10 years is going to be higher from current 2% and say markets are expecting 2.5%. Buying TIPS doesn't add any value if the inflation during the 10 year period is 2.5%. TIPS will be profitable only if inflation edges above 2.5%, which is "unexpected" from market point of view.
Also TIPS are complicated because it has Interest rate component and Inflation premium component. If you want isolate only Inflation component, then you need to short treasuries of equivalent duration.
Same reasoning applies to other inflation sensitive instrument.
Long 10 year TIPS, Short 10 year Treasury Bonds