Are You Ready For Stagflation?
The Dynamic Wealth Report
October 17, 2011
by Robert Morris, Editor
Stagflation... the very word strikes fear into the hearts of anyone who
lived through the 1970s. It conjures up images of low economic growth,
surging inflation, sky high energy prices, and of course, crippling
unemployment.
Although I was just a young boy in the 1970s, I remember the effects of
stagflation well.
Unemployment hit my home town, which relied on the auto industry for
most of its jobs, like a ton of bricks. Long lines at the gas station
were a regular thing. And all the adults were constantly complaining
about inflation, high interest rates, and horrible stock market returns.
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But what exactly is stagflation?
The term describes a specific set of economic conditions. On one hand,
economic growth slows down dramatically... in a word, the economy stagnates. On the other hand, inflation and unemployment both skyrocket,
and each remains at high levels for some time.
Here's the problem...
If the government pursues an economic policy designed to lower
inflation, it could inadvertently hurt economic growth. And if the
government implements policy crafted to boost growth, it could drive
inflation even higher.
It's a horrible dilemma for policy makers.
But stagflation's impact is felt most heavily by ordinary citizens.
In the 1970s, real GDP growth plunged from 4.4% to an annual average
rate of just 3.3%. Meanwhile, inflation surged from 5.5% to an annual
average of 7.4%, with a peak of 13.3% in 1979. That's never a good
combination.
Slow economic growth also led to another problem... unemployment, which
jumped as high as 9% in 1975.
No question about it, the stagflation of the 1970s left many people out
of work and drove the prices of most goods and services into the
stratosphere. It was a difficult time for many to say the least.
The scary thing is one legendary investor thinks we're heading straight
toward another nasty bout of stagflation...
On Friday, Jim Rogers said the US is likely to experience a period of
stagflation worse than the 1970s.
Right now, the inflation rate stands at 3.8% and unemployment is 9.1%.
But Rogers thinks the Fed's money printing marathon over the past few
years will send inflation soaring even higher this time around.
And Rogers' opinion is not one to be taken lightly...
In 1973, he co-founded the Quantum Fund with another legendary investor,
George Soros. Over the next ten years, the fund gained a whopping
4,200%. That compares to just a 47% return for the S&P 500 over the same
period.
Clearly, Rogers knew how to profit in a stagflationary economy.
And in the late 1990s, Rogers gained fame once again with a bold
prediction. At a time when technology stocks were all the rage, Rogers
was saying it was time to get into commodities. Most people thought he
was crazy to recommend anything other than stocks.
But as it turns out, Rogers was spot on...
As stocks plunged in the early part of the new millennium, commodities
entered a multi-year bull market. All kinds of commodities soared in
price as China went on a global commodity buying binge.
Rogers' history of success is what makes his stagflation prediction so
scary.
If Rogers is right, we're in for much higher inflation this time around. While in the 1970s only the US Fed was printing money, today we have
many central banks around the world running their printing presses
non-stop. With so much monetary stimulus going on globally, the combined
effect should eventually drive global inflation through the roof.
The big question then is how to prepare your investment portfolio for a
potentially crippling round of stagflation?
The simple answer is to add investments that will do well in a
stagflation impacted economy. Investments that perform well in periods
of stagflation are your hard assets... things like real estate,
commodities, and precious metals.
From 1973 to 1981, the Goldman Sachs commodity index posted an average
annual return of 12.1%. That's 6.2 percentage points better than stocks
and 7.3 percentage points higher than the Treasury bond. But most
importantly, commodities outpaced inflation by 4.7 percentage points a
year.
Clearly, investors who had exposure to commodities during the 1970s did
better than those focused solely on stocks and bonds.
So, how can you protect your portfolio if Rogers is right and we're
heading for a stagflation nightmare?
The simplest way is to add a broad-based commodity ETF to your account. The one I like best is
PowerShares DB Commodity Index Tracking Fund
(DBC). This ETF invests in futures contracts on 14 of the most heavily
traded and important physical commodities in the world.
Through this ETF, you can gain exposure to oil, natural gas, industrial
metals, precious metals, grains, and many others. These are all key
commodities whose prices would likely soar if the economy enters a phase
of stagflation.
Believe me, if stocks and bonds both enter bear markets simultaneously,
you'll be glad you have a small part of your portfolio in DBC.
And DBC doesn't just do well in stagflationary environments.
In fact, DBC has been outperforming stocks for several years now. Over
the past five years, DBC has gained 5.8% annually on average. That's
more than double the S&P 500's return of just 2.7% over the same time
period.
Take a closer look at DBC for your portfolio. The fund is a simple, cost
effective way to gain broad exposure to the commodity markets. And it's
a great way to hedge against the colossal damage stagflation can deal to
your stocks and bonds.
***Editor's Note*** Tomorrow is a big day.
We’re set to release the next two ETF recommendations in our Sector
ETF Trader. If you’d like to learn how you can get all the
research on these two ETFs,
all the
details are uncovered here.
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