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ig0r


Total Posts: 164
Joined: Jun 2007
 
Posted: 2009-01-26 22:20
This has been an issue I've been trying to figure out with my personal account for a little while know -- whats the best way to protect against USD inflation? I've been short the bond for a while, but am afraid they will let the dollar fall in order to keep rates low.

A few months ago, Seth Klarman did an interview where he mentioned:

"We think inflation could become out of control in 3 to 5 years. Yet, we might not wait for that position. Hence, perhaps early, we have a large inflation hedge. We don’t own gold as a commodity. We won’t disclose our inflation hedge, yet with enough work, you can find true inflation hedges."


I have the same views.
No gold as a commodity , no TIPS, owning other ccys will likely not do much as they will be experiencing similar effects (except maybe yen to lesser extent). So what do you guys think he's got in mind?

My current best guess is commodity producers (so buying something like IGE) but for some reason I think Klarman could come up with something more clever. Perhaps water (there are some co's tied to this, but its imperfect); ideally you want some sort of asset thats available for purchase in large $ that is relatively unaffected by economic cycles and who's real price is largely constant over time.

bendlikon


Total Posts: 2
Joined: Feb 2008
 
Posted: 2009-01-26 23:22
Buy real estate (if you are comfortable with current prices) to hedge against inflation. Finance the purchase with a long-dated fixed rate mortgage rate to benefit from higher than expected inflation.

P.S. Why wouldn't you buy TIPS?

ig0r


Total Posts: 164
Joined: Jun 2007
 
Posted: 2009-01-27 06:26
Buying actual real estate could get messy but REITs should give you the exposure you want I think; I already have some at these levels. Doing some quick math, http://www.brandes.com/NR/rdonlyres/43BFC152-ABC8-4DAF-8210-F95006F7B7A4/0/BI_LongTermRealEstate.pdf shows 6.6% annualized capital return on real estate between 1976-1985 inflation spike, http://www.measuringworth.org/uscpi/ shows inflation running at around 8%. So overall not bad. My main concern here would be a reliance on long term US prosperity. What happens if we enter a long period of decline (and inflation) and/or war at home? This could kill real estate.

I’ve considered TIPs, specifically synthetic long on the ETF for leveraged exposure. My main concern is that in a serious inflationary environment it would be very possible that CPI-U understates inflation on the ground (for whatever reason, including manipulation).


Martinghoul


Total Posts: 869
Joined: Oct 2008
 
Posted: 2009-01-27 08:51
Why not TIPS?

Alternatively, aren't equities really the best inflation hedge (i.e. just being long the stock mkt)? I remember someone making this argument in some paper or another...

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

SimJimons


Total Posts: 198
Joined: Aug 2007
 
Posted: 2009-01-27 09:46

I agree with Martinghoul, buy equities (and short bonds). Might be a little early though. Equities have performed about 30-40% worse than their 200 year average during the last 20 years while bonds have outperformed with more than 100% during the same period (annual returns). This is not sustainable. Serious inflation will speed things up.

/Sim


Sounds great...keep me out!

SimJimons


Total Posts: 198
Joined: Aug 2007
 
Posted: 2009-01-27 13:22

...and of course commodities, the classic inflation hedge!

/Sim


Sounds great...keep me out!

ig0r


Total Posts: 164
Joined: Jun 2007
 
Posted: 2009-01-28 02:05
Sure equities will go up with inflation, but that's a pretty imprecise hedge. The whole point of a hedge is to as closely as possible replicate the payoff of the original asset :)

cronian


Total Posts: 53
Joined: May 2006
 
Posted: 2009-01-28 04:41
I would ask the question inflation in what? For example, is it possible to hedge real living expenses? If we started with basic living expenses such as food, housing, transportation, and taxes, what would be the best hedge? In other words, what correlates most strongly with the real costs of the basics.

Have there been any academic studies of this? Basically, what is the easiest way to create an investment, which is equivalent, or will perform better than a future on personal expenses. One approach I think would be to consider the items purchases, consider the input-output analysis of all the companies that profit in such expenses, and try to construct a portfolio of companies based on that. Would something like that actually work?

SimJimons


Total Posts: 198
Joined: Aug 2007
 
Posted: 2009-01-28 10:17

ig0r, then i'd say TIPS (boring, I know). But why would you want a "perfect" hedge in this case (PA)? Isn't it all about increasing purchasing power over time, which is what equities have done for you pretty much in all weathers (over the long term anyway)? Or are you strictly referring to the Seth Klarman question?

/Sim


Sounds great...keep me out!

NeroTulip


Total Posts: 1081
Joined: May 2004
 
Posted: 2009-01-28 10:45

Isn't it all about increasing purchasing power over time, which is what equities have done for you pretty much in all weathers (over the long term anyway)?

That is a widespread misconception, you may want to check what would have happened to your purchasing power if you bought the S&P in 1965 and sold in 1980. In nominal terms you would have been flat, but in real terms you would have been pretty much wiped out.


Inflatable trader

Martinghoul


Total Posts: 869
Joined: Oct 2008
 
Posted: 2009-01-28 11:11
Let me refer you to this (I am in no way affiliated with the bank in question and sincerely hope I am not breaking any copyright rules)...

Attached File: GlobalSpeculations20Jul2008.pdf

Insofar as I may be heard by anything, which may or may not care what I say, I ask, if it matters, that you be forgiven for anything you may have done or failed to do which requires forgiveness...

SimJimons


Total Posts: 198
Joined: Aug 2007
 
Posted: 2009-01-28 13:47

Nero, that is actually not correct (if you believe in the data provided by David Dreman in his latest book). While real returns didn't make you rich during the 65-80 period (maybe it was 69-82?), they actually added some (more or less 0) to your purchasing power when including dividends. Had you invested in bonds though you would have been "wiped out", in real terms. Having said that I guess you would have been better off owning commodities than stocks back then. Anyway, I get your point about equities.

/Sim


Sounds great...keep me out!

SimJimons


Total Posts: 198
Joined: Aug 2007
 
Posted: 2009-01-28 14:00
Martinghoul, interesting paper. Thx...

Sounds great...keep me out!

Dynamic Turtle


Total Posts: 165
Joined: Sep 2006
 
Posted: 2009-01-28 18:41

I'm personally plumping for gold & grains, via a deeply unsophisticated mixture of ETFs and equities.

I'm wary about any other parts of the commodity complex that are tied to anything other than general population growth. Put simply, the sheer amount of capital invested over 1999-2007 in mining & energy and subsequent overcapacity in those industries will put a dampener on any inflation-driven rally in the underlying commodity.

Gold is the exception for obvious behavioural reasons and also because I anticipate CBs will begin hoarding the stuff to deleverage their collapsing currencies. It might not seem logical to some, given the sheer amount of physical gold that will need to be purchased to render a fiat currency like USD even remotely "hard", but I'm making the bet that they'll try. Technically, gold is "underowned" by most CBs on historic measures and it should go some way to alleviating concerns about the quality of their balance sheet, what with all the McJob financed Vauxhall Nova car loans that they now consist of.

Comparatively little investment was made in agriculture and cyclical/technical analysis is also painting a strong picture for me. This sector is highly inelastic and any sort of supply disruption, be it political/weather/disease related will have a massive impact on the price. People also forget that farms need capital. Crunch related reports coming out of South America are disturbing. Various intelligence reports we receive also mention the US gov making strategic enhancements to their DOMESTIC food security. Yep, the national guard is guarding.......grain elevators! Furthermore, it was the last sub sector to rally and the weakest of them, so I anticipate it will lead the charge this time round.

Those like me buying into a high inflation trade at this point, are pulling the trigger very early. This will take time to manifest itself, if indeed, it ever does. Central bankers aren't complete idiots and are well aware of the unprecedented monetary and fiscal stimulus underway. They'll be watching M0 (and LIBOR, which has fallen steeeeeeply) like hawks and working their polyester socks off to ensure that only a fraction of the stimulus makes its way into the wider economy. A lot of it will be moped-up when balance sheets are sufficiently repaired and normalised lending patterns resume.

DT

Those worried about TIPS/CPI understating inflation shouldn't worry too much. I think the sheer magnitude of the move will be large as to negate any hard feelings. What's a few percentage points between friends?


ig0r


Total Posts: 164
Joined: Jun 2007
 
Posted: 2009-01-29 19:08
PCL (Plum Creek Timber Co. Inc.) current market cap of $5.4bn, enterprise value ~$8bn. Owns 8 million acres of timberland, 1.7 million of which they consider high quality/higher use (2008 sales at $3000+ per acre), the rest we can consider lower quality to be safe (2008 sales at $1000+ per acre). Debt maturities couple years off, no liquidity issue here.

1.7 million at a conservative value of $2000 and 7.3 million at a conservative value of $700 gives us a very conservative $8.5 bn in timber assets. Theres a couple hundred million more in buildings/road improvements/etc. So we're buying this at way below market prices, and getting a 5% dividend (they're paying out all their income from harvesting timber/selling land as dividend right now).

Probably a good inflation hedge at these levels. Combine that with DT's suggestion of food commodities and maybe some TIPS and we're in good shape?

Bayerisch


Total Posts: 2
Joined: May 2021
 
Posted: 2021-05-11 18:05
Re: "My main concern here would be a reliance on long term US prosperity. What happens if we enter a long period of decline (and inflation) and/or war at home? This could kill real estate."

If one assumes US workforce productivity will continue to fall while German workforce productivity will stay strong, what trade makes the most sense?

Possibilities I'm considering:

Long German stocks (which industry has the best sales growth fundamentals? Battery electric automotive?)
Long German residential real estate (around Munich or Stuttgart)
Long EURUSD
Short US bonds
Short US manufacturing stocks

I'm currently over-weighted in US equities and real estate but can't decide what to sell first.
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