{"id":74,"date":"2012-03-31T14:04:56","date_gmt":"2012-03-31T18:04:56","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/03\/worried-about-inflation-im-not\/"},"modified":"2012-03-31T14:04:56","modified_gmt":"2012-03-31T18:04:56","slug":"worried-about-inflation-im-not","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/03\/31\/worried-about-inflation-im-not\/","title":{"rendered":"Worried about Inflation? I\u2019m not."},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

I know in advance that I\u2019ll get hate mail for writing this article, but I\u2019m going to do it anyway. \u00a0\u00a0It\u2019s a subject important enough to justify the inevitable abuse.\u00a0 You bet the wrong way on inflation, and it may cost you your nest egg.<\/p>\n

Inflation is one of those topics best not discussed at the dinner table or in polite company.\u00a0 Like politics and religion, it tends to get a heated response.<\/p>\n

In fact, inflation tends to have quite a bit in common with politics and religion.\u00a0 It\u2019s remarkably hard to prove one\u2019s views on any of the three empirically.\u00a0 Truth is accepted as an article of faith.\u00a0 For example, it is accepted as dogma that loose monetary policy causes inflation.\u00a0 The great prophet Milton Friedman said so himself: \u201cInflation<\/em> is always and everywhere a<\/em> monetary phenomenon.\u201d<\/em><\/em><\/p>\n

Not shockingly, Mr. Friedman\u2019s disciples have been on edge for the past three years, waiting for inflation to come roaring back.\u00a0 True enough, there has been inflation in energy and food prices\u2014the two consumer segments most global in nature and most subject to increased demands from emerging markets (and in the case of energy, the segment most susceptible to geopolitical risks).\u00a0 But overall consumer prices have been flat since the onset of the 2008 meltdown, and most retailers find they have little pricing power.\u00a0 If they want to move the merchandise, they have to keep their prices low.<\/p>\n

Don\u2019t expect this to change any time soon.\u00a0 The Financial Times<\/a> reported this week that the world\u2019s major banks would be shrinking their balance sheets by a trillion dollars over the next two years.\u00a0 Yes, \u201ctrillion,\u201d<\/em> with a \u201ct.\u201d<\/p>\n

It\u2019s not the amount of money created<\/em> that causes inflation; it\u2019s the amount of money that actually enters the financial system.\u00a0 And right now, the banks of Wall Street and London\u2019s City are not particularly interested in getting it there.\u00a0 In fact, their attempts to shrink their balance sheets have had precisely the opposite effect, actually removing liquidity from the system.<\/p>\n

Housing continues to be a drag on money creation as well.\u00a0 Even though the housing market is showing signs of life, American homeowners are far more interested these days in paying down their mortgages than extracting equity with new debt.\u00a0 (As an aside, I continue to recommend rental housing as an investment for those readers willing to be patient and get their hands a little dirty; see \u201cHere\u2019s the Catalyst for a Housing Rebound<\/a>\u201d).<\/p>\n

Someday, we will have real inflation again.\u00a0 But it might take a lot longer than you think.\u00a0 Japan has struggled with on again \/ off again deflation for much of the past two decades. (see \u201cJapan\u2019s Endgame<\/a>\u201d for a longer explanation of Japan\u2019s woes).<\/p>\n

Japan had a unique and deadly cocktail of high debt, aging demographics, and bad policy that led to its 20-year stagnation, and the United States is certainly not Japan.\u00a0 Still, my point stands: even in a modern economy, high inflation is not the inevitable outcome of loose monetary policy.\u00a0\u00a0 And given the continued deleveraging of the private sector, inflation in the United States and Europe is likely to be mild at worst.<\/p>\n

So, with that said, how should investors position their portfolios?<\/p>\n

In recent articles, I\u2019ve had a heavy focus on high-quality, dividend-paying stocks, and I would reiterate that recommendation today.<\/p>\n

Consider a company like Wal-Mart (NYSE: $<\/span>WMT<\/a>).\u00a0<\/strong> At current prices, Wal-Mart sports a dividend yield of 2.6%, materially higher than the 2.2% being paid by 10-Year Treasury notes.<\/p>\n

But Wal-Mart, unlike the Treasury note, has a long history of increasing its payout every year.\u00a0 In March of 2002, Wal-Mart paid a quarterly dividend of $0.075 per share.\u00a0 In March 2012, ten years later, that same share pays a dividend of $0.398 per share\u2014an increase by a factor of 4.\u00a0 Not a bad run.<\/p>\n

A company like Wal-Mart has the power to wring savings out of its supply chain during periods of mild or flat inflation.\u00a0 My recommendation is to build a portfolio of rock-solid dividend-paying machines like Wal-Mart.\u00a0 If I am right about inflation being mild, a conservative dividend-focused portfolio should massively outperform a riskier growth-focused portfolio.\u00a0 But even if I am wrong and inflation ends up being higher than expected, the growth rate of the dividends should guarantee that you outpace inflation and that your standard of living continues to rise.<\/p>\n

 <\/p>\n

Disclosures:\u00a0 Sizemore Capital does not currently have a position in any security discussed in this article.<\/p>\n

 <\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter I know in advance that I\u2019ll get hate mail for writing this article, but I\u2019m going to do it anyway. \u00a0\u00a0It\u2019s a subject important enough to justify the inevitable abuse.\u00a0 You bet the wrong way on inflation, and it may cost you your nest egg. Inflation is one of those topics … <\/p>\n

Continue reading “Worried about Inflation? I\u2019m not.”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-74","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/74","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/comments?post=74"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/posts\/74\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/media?parent=74"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/categories?post=74"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/forex-news\/wp-json\/wp\/v2\/tags?post=74"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}