Protect Your Investment Portfolio Against Inflation And Stagflation
The Dynamic Wealth Report
May 30, 2008
What's Going On Here?
The results are in . . . and the results are surprising to say the
least. Economic data posted this week shows that the US Economy grew
during the first quarter at 0.9%. I was totally surprised, and I’m sure
you were too. Given the deteriorating credit markets and the collapse of
the housing industry I thought we’d be in a recession.
So where’s the recession?
The Commerce Department’s GDP numbers originally called for a growth
rate of 0.6%. For those of you who don’t know, GDP or Gross Domestic
Product, is a measure of the value of all the goods and services
produced in the United States. A positive number is good. A negative
number means recession.
The GDP number was helped along by exports . . . which are growing by
2.8%. The weak Dollar is making US made goods cheap. Because of this
exports are increasing. Despite that good news, unemployment
numbers are rising.
Housing’s still a problem though.
The housing industry is holding back growth in the economy. By every
measure housing is hurting. Many of the key housing indicators are
sitting at multi-decade lows. Just this week we learned home builders
were slashing spending by more than 25%. The biggest cut in almost
30 years.
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So the economy continues to limp along . . . what’s the point?
Right now, the biggest threat to the American way of life isn’t the
economy, or terrorism. It’s inflation.
Look across the pond (aka the Atlantic Ocean) and you will notice
something interesting. Tough talk on inflation. The European Central
Bank has done nothing but talk about the risks of inflation for the last
several quarters. Everyone thought they’d lower rates to drive economic
growth. But they didn’t. They held tight on their interest rates in
order to combat inflation.
The British are facing the same problems. Their housing market is in
trouble. Home values are falling, mortgage applications are down, and
the economy is softening. Yet the Bank of England refuses to drastically
cut interest rates. The reason? Inflation.
What’s the Fed think?
Now I’m not the only one here who thinks inflation is a problem. Our own
Federal Reserve hinted that they were done cutting interest rates. This
means they may raise rates in the near future. The biggest reason they would
do this? To combat inflation.
Other Proof.
Don’t take my word for it. Inflation is here. Just look at this week’s
announcement from Dow Chemical. They’re raising prices across the board
– 20%. Look at food prices. Despite a recent fallback in commodity
prices, we are trading at levels not seen in years. Have you
filled up the gas tank lately? Gas now costs over $4.00 per gallon.
To the point.
The economy is slowing and prices are climbing. This is the textbook
definition of stagflation. Stagflation is deadly folks. It means your
costs are going up but the value of your money and your investments are
falling.
What’s the solution?
You only have a few limited options when it comes to stagflation. The
first one that comes to mind is moving to another country. I realize
this isn’t really an option for most people. So I looked back to see
what assets performed well in this kind of environment. There were a
number of them. Two well known ones were commodities and real estate.
It’s hard to argue that the real estate industry is the place to be
investing now. Commodities are another story altogether. Investments
like gold and silver are known to hold value in inflationary
environments. Make sure your assets are well diversified, and consider
establishing a meaningful position in commodities.
• Marvel (MVL) received upgrades from JP Morgan and Oppenheimer.
The strength of the Iron Man movie is clearly driving the stock higher.
• Citigroup and Wachovia both downgraded J Crew (JCG) this week. The
downgrades were posted after J Crew management lowered 2008 guidance.
• Kaufman rolled out coverage on a number of solar companies. These
stocks include Evergreen Solar (ESLR), First Solar (FSLR),
Sunpower
(SPWR), and Akeena Solar (AKNS).
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