What Assets are Going to Beat Inflation in the Coming Ten Years?

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“So what do you think? Would you try it?”

“Try what?”

“Inflation indexed bonds mate!”

Last night was trivia night in Elwood. Your editor sat across from Australian Wealth Gameplan editor Kris Sayce. Between questions about how many venomous snakes there are in Australia and whether New South Wales is larger than South Australia (it’s not), we found the time to query him about whether buying inflation indexed bonds from the Australian government was a good investment strategy.

“The problem with them,” he said, “is that you’re relying on someone else to tell you what the rate of inflation is. That someone else is the government. And they are probably lying about it. It doesn’t really offer you a hedge against inflation of they are under-reporting the real inflation rate.”

“Right. Liars. Elitists. Oligarchs. Maybe we’ll be lucky and the current lot will be like the French aristocracy in the revolution and go mad with self-destruction.”

“Uhhh….Wouldn’t you rather be in gold? I think you’d also rather be in common stocks that pay a dividend. At least there you have the chance for some capital appreciation too, greater than the real rate of inflation even. At least that’s the plan.”

It is the plan. And it’s a good plan. It’s not without critics. But everyone is a critic. The problem is the same for all of us: what assets are going to beat inflation in the coming ten years?

Of course, that presupposes that inflation will be a bigger problem than deflation. And as Dr. Steve Keen mentioned at our Debt Summit, there is a whole lot of bad debt to write off still. Debt deflation, he reckons, is going to last a whole lot longer. Years, not months or weeks.

But in the financial markets, everything appears to be going up. The Aussie dollar is up against the greenback. The Dow is up. The All Ordinaries are up. And oil keeps on charging up as well. It is a bull market in complacency.

We’re on the Diggers and Drillers beat today, working on the weekly update. So we’ll have to cut today’s notes short. But the mail box is full of readers who think your editor is an idiot. There are some other insightful comments as well.

–Dear Dan,

Anyone who took your opinion seriously would have shorted Australian banks long ago and been dead, stony broke by now…there’s only one opinion that counts…Mr. Market…and he says the banks are incredibly good buys…it’s obvious to me, at least, that you have no ability to spot a trend…if there’s one thing I have learned it’s that trading against the trend will devastate your funds…so, how are you still standing?

Tim Bullen

On two legs. We don’t trade at all. We leave that to the Swarm Trader. And we don’t recall advising people to short the banks. We simply said don’t buy them because it will be hard for them to grow earnings in a Credit Depression. But each to his own.

–“You must be kidding. Banks are the only business that pays virtually nothing for the inventory it resells, then charges people for the privilege of withdrawing it. We’d be better off with self-storage vaults for our $$. Banks deserve low margins. Except today where the central banks are larding them with $$. Banks add no economic value to the product they handle. Period”

–Dan,

This is the first recession in history where balance sheets have liabilities on both sides. Banks, many companies, gov’ts, show investments as assets, but if those investments are toxic, like mortgages or gov’t debt, then at the moment they’re really liabilities.

Cheers,

Charles

Good point. Gold is not anyone else’s liability. That’s why it’s been so useful as a medium of exchange for so long. You can’t counterfeit it either.

–Dear Dan,

You said that: “The great variable in all this is the price of the underlying commodity itself. That changes based on both supply (other producers) and demand (economic growth, or the variables that drive individual commodity prices, including investment demand and speculation).”

I understand that all these things you’ve mentioned are important to individual commodities, however, what about the Unit of Account in which the commodity is priced in. Does that not also have an effect? Especially in today’s climate, I would suggest that the question of the instability of the Unit of Account, the US Dollar, has a very significant effect on prices.

Not accounting for the instability of the US Dollar in commodity prices at the current time, is a lot like not taking into account the Sun Cycle in the “Climate Change” argument. Which most folks who “believe” in “Climate Change” tend to do. The Sun is 99.87% of the mass of our solar system (according to wiki). How can “Climate Change” enthusiasts NOT take into account something which is such a large percentage of the mass in our solar system?

The US Dollar is the world’s reserve currency, in which everything is priced in. How can people not take into account something which has such a large percentage of the “Unit of Account” Market for ALL global commodity prices?

Kind regards.

Jack.

Well said. We did leave that out in our focus on valuing individual shares. But you’re quite correct that the decline and collapse of the U.S. dollar is a massive factor behind rising commodity prices. That and the industrialisation of China and India.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Dear Dan,

    Inflation indexed bonds! Is this the latest nightmare. I wonder who will pay to keep their value in line with inflation. Can you imagine what will happen if inflation is fueled by a Zimbabwe style money printing frenzy. I don’t believe that consequences of inflation will have to match those of Zimbabwe for the scheme to be a total disaster. I suppose, I’m just a dumb investor trying to make money by selecting the right shares for investment, so what do I know?

    Kind regards

    Doug Norris
    August 14, 2009
    Reply
  2. A worthless scrap of paper, being a promise to pay more worthless scraps of paper, a good investment?

    I’m surprised you’re even asking the question.

    Reply
  3. Nice article in the SMH. Linked as ‘my’ website

    I quote:

    “On the currency front, Paulson prefers gold to any paper. His thesis is that the global increase in money supply will cause a general debasement of paper currencies. Since he initiated long positions in gold and gold-mining stocks earlier this year gold has been range-bound. Some pundits believe he is two to three years early. But prescience has always been his hallmark.”

    Reply
  4. Eradicate the Reserve Banks – there is no need for them. Then implement a gold standard. Every nation who has ever adopted a fiat currency such as Australia and most of the world, has collapsed. It’s a fraudulent system. People should learn how money is created out of debt. I invest in physical gold.

    Reply

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