Bet on Inflation?

Discussion in 'Economics' started by amigasearch, Jan 2, 2009.

  1. Hello. I am a long time lurker, and enjoy the forums very much - collectively, there is a wealth of information here, and i thank everyone here for making me a better person by understanding the world - which is heavily dependent on the markets.

    I am not a trader - rather, a software guy (in the trading world though, so i at least understand the tools you use). Therefore, I am lost with my thoughts, and could use some help. Please excuse my lack of any understanding of economics - i make it clear i am not bright!

    I hate to continue with pessimistic outlook - but will anyway.... I believe 09 will bring more bailouts (which are disgusting) and continued borrowing (my wife just showed me an advertisemtn for a 500 dollar baby monitor /flat screen that i know someone out there will purchase on a CC - too much of this insanity!). This I believe leads to inflation, something the guv has avoided for so long, but i think its inevitable. Therefore, i would like to put up a hedge - meaning, I am willing to put up a sizable amount (relative to my means), betting on inflation. If the year ends, and inflation does not rear itself, i am ok with parting with that money - as to me that means the economy sustained itself and all will be ok (am i wrong?)...

    Anyway - what is a good instrument for this? Is gold a good hedge for inflation still?

    By the way - why has inflation not reared its head, and do others predict it here?

    PS Dont flame me! Just need insight. Thanks.
  2. If you think inflation with rise, interest rates will also rise. So go long an instrument like TBT.
  3. harkm


    It appears all nations are trying to devalue their currency. The only currency without a central bank is gold. If you believe in sharply rising prices then gold should also rise sharply.

  4. Think of 'stuff' versus 'debt'.

    Category #1 - Owning debt (cash currency, risk free treasuries) is the best place to be when in a deflation trend. Corporate debt not as good since businesses are at cashflow risk in a deflationary environment.

    Category #2 - Owning stuff: Gold, farms, businesses, oil and gas wells, houses/rental properties are a great 'inflation hedge' since they index you to the buying power of the currency.

    Category #3 - To owe debt is the worst place to be in a deflation trend. Your earning power decreases while what you owe remains the same. Past debts become unpayable and sink you.

    Category #4 - To owe debt is the best place to be in an inflation trend. Your future higher earnings will make your present debts easily repayable.

    long TLT = owning debt (Category #1). Owning cash is in the same category, but without principal appreciation potential (unless you count levering against other currencies in this category). Interest rates go down, this goes up.

    Long TBT = what others suggest. That is inverse to a category #1 bet - a category #2. It is a short TLT on leverage proxy. Interest rates go up, this goes up. You'll get a lot more mileage out of commodity plays - more beta than even a TBT position ... Interest rates of developed countries have confounded all of those who embrace common knowledge of economics for the last decade - We had an inflationary trend this past few years all without interest rates moving up. It tells that there are other factors we are not grasping - ie possibly excess cash in the system holding rates down, perhaps done by central banks who buy indiscriminate of returns.

    In conclusion, buy some silver, rhodium, gold, buy some commodities stocks (FCX, ABX, GG). Stay away from the gold futures tracking ETFs (DCX, DXO) since contango tends to erode their value over time. Buy oil and gas producer stocks (or actual partnership interests) instead. And don't forget agriculture -- buy the Deere, Potash, Agrium, Monsanto, and maybe a few bags of rice. You might want to build a swimming pool in your backyard and move to a sunny place, just so you have a source of water to grow crops if the shit really hits the fan. I think after a few weeks all of the chlorine disippates...

    And if you're really willing to bet the house, literally bet the house. Borrow all you can against your house to buy this shit, because if you are right, category #4 will help increase your wealth in real terms even more.

  5. INSIGHT: Stop trying to predict the future. Ever. It is a random exercise. No one knows WHAT will happen - deflation, inflation, hyperinflation, normalcy.

    Learn to trade what you see, or get a job.
  6. 15rms


    I just moved some dollars into a ETF called UDN. It is the inverse of the dollar * 2. Since I personally moved 71% of my dollars I am favoring the devaluation of the dollar.

    Not advise just my personal play.
  7. Been holding oil positions for a while ( In diffrent instruments). Legged in over 4 month period or so. The majority of all free capital was thrown into oil at average price of 39 or so.

    There are plenty of reasons to expect inflation and a oil spike.

    1. The idiots are not yet talking about.

    2. Oil blew past the 30, 50, 70, 100, key resistance levels to reach 147 and it blew right through the same key levels of support 100, 70, 50 30, key levels, in a much faster timeframe.
    IMHO, super over extended on the "Rubberband".

    3. I doubt the "Gov" and the rest of the so called "talking heads" truly know where demand is going. Sure, they think they know with their models and their "Forcasting", but the same ass clowns never thought it would hit 147, nor predicted. I don't trust what is being said about demand. Sure it has come in some, but to what levels? Its been to short of a time frame to really conclude. Thus, panic on the downside pushing oil to near 30 over 4 months or so.

    4. No matter what demand is saying now, OPEC nations will continue to make historical cuts. All these cuts in such a short amount of time is definitly setting up for some "Shortage" situtations going forward.

    5. Uncle Obama and his infastructure plan. Steel and Oil. enought said. (Looking at some steel futures now, not looking to buy stocks US steel etc. I doubt the stocks will react compaired to the underlyer)

    6. Global Conflict, sure enough will be a topic of 09 and Oil Supply interuptions are definitly good odds.

    Inflation is coming and its gona hit hard.

    Our firm made a record year last year drilling wells. We expect this year to trump last year. Private Equity is flowing into Exploration Projects. Plenty of cash on the sidelines that may never re-enter the stock market, will flow into hard assets and continue that trend for the next decade, IMHO.

    It took those from the great depression erra, a generation or more before "Stocks" where on their minds again.
  8. Take a look what happened during the Great Depression. Banks closed. People lost their jobs. Commodities plunged. Deflation reigned

    Take a look what is happeneing even to the BRIC countries. People hoped that China would help pull the world long. Now, it is going in the other direction.

    There is LITTLE reason to suspect Inflation more than anything else.

  9. The answer to why no "inflation" (yet) is simple - we are in a recession, by definition a deflating event - job losses, earnings shrink, rates lowered, etc.

    But you have to take that with a grain of salt. For example, go through a McDonald's or Burger King and try telling me that food costs have not inflated. The price of a lousy combo meal is up about 50% over the last few years, at least in my area (AZ).

    In other words, the Gov.'s inflation figures "less food and energy", the two things you really have to have besides air, are pretty misleading.
  10. Take out debt. The best way to capitalize on hyperinflation is owing money to some poor son of a bitch that you pay back a fixed interest amount.
    #10     Jan 3, 2009