The dip in the U.S. Dollar prompts a look at inflation-fighters
The markets have a way of not letting you in to a good idea. In other words, the investment world gets a whiff of a possible future scenario. And the “easy” gains are gone in a heartbeat. That is happening again when it comes to the topic of inflation.
Inflation, or rising prices of goods, services and general cost of lifestyle, has been quiet for many years. While there have been bouts of price spikes in oil or food, a more coordinated lift of prices across the consumer “basket” of things we buy has been dormant.
Inflation ran up to over 14% in 1980. However, since that time, it has rarely been above 6%. Inflation has run in the 1-3% range for the better part of the past decade.
What happens if inflation picks up?
Actually, for a consumer that’s the right question to ask. You will have to adjust to an environment of higher prices, one that only the most senior investors can remember having to do (back in the 1970s).
However, the right question for investors to ask is not about inflation. It is about market expectations for inflation in the future. Because as I alluded to in the opening lines of this article, that is what is starting to happen.
The inflation concerns are still tame. But some parts of the market are already acting as if inflation is right here, right now. Here are 4 market areas that are starting to show this inflation scare.
Inflation? Show me where.
Gold and gold-related investments (gold stocks, etc.) have been on a tear. This was the earliest signal that inflation expectations are creeping up. However, as I mentioned above, once everyone knows this, the proverbial cat is out of the bag.
For all but the most nimble investors, they must make a decision. Are they entering a long-term trend that offers significant profit? Or, are they just late on a momentum trade?
For instance, gold was up about 17% in 8 weeks through August 1. The yellow metal has finally eclipsed its 2011 high.
Treasury Inflation Protection Securities (TIPS) are U.S. Treasury bonds that are tied to the official U.S. CPI inflation rate. The interest rate paid by TIPS is constant and determined when the bonds are issued. If inflation rises, the bond’s price rises to keep pace. TIPS prices were on the rise before the market disruption in February, but re-accelerated in March. The TIP ETF is up over 8% so far in 2020.
Inflation expectations are just one reason the U.S. Dollar is under pressure. Others include sustained economic weakness as we continue to battle Coronavirus, nervousness prior to the November election and the fact that our once-premium interest rates have come down toward those of other developed countries.
Commodity prices – gold is not the only commodity on the rise. The price of a broad basket of commodities plunged to start the year, but has been climbing quickly since April.
Inflation investing ideas
For me, it always comes down to 2 things: what is going on in the real world, and what parts of that reality are reflected in securities price patterns. In the case of inflation, it does not appear we are on the precipice of a spike in prices. However, that is just water-cooler chatter (not that there’s any of that for a while).
What really matters is that market prices are starting to call attention to a change in inflation expectations. Right now, it is more about scouring the markets to identify what is “priced to move” in response to that, beyond the sharp bounces in prices noted above.
However, as this year continues, and again in 2021, my hunch is that the inflation/weak U.S. Dollar theme will go from fringe investor issue to front and center. This has not been the case for a long time, so it will probably take many investors by surprise. Don’t be among those folks.