Dollars, it seems, aren’t going as far as they used to in the acquisition of hard assets, real estate or business assets.
Is there any risk that asset inflation could turn into wage inflation and generalized price inflation? That this process could feed on itself? The ministers at the Fed say there is nothing to worry about.
What that means, explains ECRI co-founder Lakshman Achuthan, is that the inflation rate is likely to trend up, not turn back down, over the next six months.
A 2.4% annual inflation rate is not horrible, at least not in comparison to the damage to the dollar during the 1970s.
The ones that are most likely to counteract a jump in the CPI tend to be the ones whose long-term returns are least promising.
The letter grades, based in part on history and in part on what’s in the air, represent author’s hunches.
Funds organized like this one are positively toxic in a taxable account, since they turn gains into ordinary income and make losses into something that can be neither deducted nor carried forward.
Debtors get a windfall when the inflation rate delivers an upward surprise.
The negative 1.1-point spread, shown in the table as an expense burden, reflects the frictional cost of mortgage loan officers, deadbeats and so on.
If you have a choice, selling off bonds from a portfolio is usually a better strategy than incurring or maintaining a mortgage debt.
Do you have a mortgage and also have a retirement portfolio that includes bonds? Then you may be on the losing end of an arbitrage—simultaneously earning 2.2% on your Treasuries and paying 3.3% to the bank.
It’s probably not practical for you to buy 10 acres of southern yellow pine, but you could easily buy 1,000 shares of a lumber producer that owns timberland.
Add to this loss the 0.4% expense ratio on the fund, and you can expect to be out 1.15% per year if the dollar/franc exchange rate stays put.
Real estate investment trusts own assets like office buildings, warehouses, malls, apartments, cell towers and timberland.
The house you live in is an inflation hedge, in the same way that a Reit is.
Moreover, the rent you’re not paying reflects not just the economic return on the asset but also the frictional cost of the landlord-tenant relationship—the cost of lawyers to evict bum tenants and property managers to oversee plumbers and so on.
That makes gold inferior to houses in total return: Houses pay a dividend in the form of living space, while gold has a negative dividend in the form of storage costs.
The good: Long-term prospects for commodity producers are as robust as for any sector of the stock market—and better than for commodity futures.
Still, there’s a case for cash.
I graduated from Harvard in 1973, have been a journalist for 45 years, and was editor of Forbes magazine from 1999 to 2010.