But the trading day was not all about mere rumors. It was also about hearsay, hype and giddy optimism…

Meredith Whitney, “The Woman Who Called Wall Street’s Meltdown,” according to the Fortune Magazine cover of August 18, 2008, upgraded the shares of Goldman Sachs to a “Buy,” and predicted the stock would rise 30% from current levels. “Goldman has all the benefits of the capital markets in general,” said Whitney, “Without the ‘junk in the trunk’ as I like to call it.” Goldman shares jumped 5.3%.

Based on Whitney’s upgrade, and the subsequent market action, gullible investors could have deduced that the credit crisis has ended. The rest of us could have deduced that the credit crisis took a day off.

Lost in the celebration of Whitney’s upgrade was a smattering of bad news “below the fold.” For starters, Whitney did NOT upgrade any of the other seven banks she analyses. To the contrary, Whitney damned the other seven banks – and the economy in general – with her faint praise for Goldman.

“Our more bullish outlook on Goldman Sachs shares is deeply rooted in our sustained bearish stance on the U.S. economy and the state of U.S. financials at large,” said the influential analyst. “Specifically, we expect a tsunami of debt issuance from federal/sovereign, state, and local governments to fund woefully underfunded budget gaps. In addition, we expect corporate debt issuance to be at least 60% as strong as peak cycle levels, reflecting sizable debt maturity rolls. What’s more, given fewer players in the market, not only is GS benefiting from market share gains on these products but more widely in the derivatives products.

“To be clear, our reasons for liking GS stock today are drastically different from any we have had recommending the stock on and off over the past decade. In the past, GS shares were a great play on equity markets and expansive global gross domestic product. While that may still hold true down the line, our thesis today is that we expect GS to be the key competitor in some of the most unpredictable markets: government, corporate, and municipal debt.”

As if on cue, the U.S. Treasury disclosed yesterday that the U.S. federal deficit has already topped $1 trillion for 2009…and the year is barely half over! Sure, that might seem like bad news. But it’s actually GOOD news…for Goldman Sachs. More debts mean more Treasury bonds, which mean more trading profits for Treasury bond dealers like Goldman.

Whitney, who probably possesses more intellectual honesty than most equity analysts, probably possesses legitimate reasons to fancy the shares of Goldman. But a relatively promising outlook of one company is hardly a reason for investors to chase after all the other stocks in the market.

We would be surprised to discover any correlation whatsoever between the fortunes of Goldman Sachs and the fortunes of a bakery in Des Moines or a florist in Fargo. On the other hand, we have no trouble whatsoever imagining that Goldman might flourish while bakeries and florists are going out of business from coast to coast.

The only essential point here is that Goldman, circa 2009, is hardly General Motors, circa 1954. What happens in Goldman stays in Goldman. This company is not a bellwether for the economy at large.

“We’d suggest that whatever Goldman did to goose earnings is probably not going to be possible for the rest of corporate America,” observes Dan Denning, our insightful colleague at the Australian Daily Reckoning. Furthermore, Denning points out, most other American financial institutions are continuing to play “hide the bad asset.”

“A New York Times story from yesterday,” Denning remarks, “suggests that government capital injections and loan guarantees, along with new equity offerings, have allowed banks to evade the inevitable consequences of the popped credit bubble.

“‘The capital provided by the government through TARP, etc. has allowed the banks to continue holding deteriorated assets at values far in excess of their true market value,’ says Daniel Alpert of Westwood Capital in a note to clients, according to the Times. ‘It is unrealistic to believe that home or commercial real estate values are destined to recover any meaningful portion of bubble-era pricing.’

“This means all the new equity raised by banks after the stress-tests has merely papered over capital adequacy and solvency issues for now,” Denning continues. “The banks have simply refused to revalue loans on their books and continue to carry them at unrealistically high valuations. If they sold them, they’d got a lot less for them, forcing them to raise more capital (or wiping out their capital and revealing them to be insolvent)…

“The default and foreclosure data coming out of the U.S. housing market suggest the banks are kidding themselves, or misleading shareholders, or both!” says Denning. “It’s the sort of calculated mis-truth that can cause a short-term crisis to last years and years. The correction is postponed through phony accounting. It leads to an ‘Ushinwareta Junene,’ or ‘lost decade,’ as the Japanese say.”

While Goldman is busy kicking butt, everyone else is busy kicking the can down the road – hoping that if they keep kicking the can long and far enough, the crisis will end without further incident.

In a CNBC interview last week, Bryan Marsal, CEO of Lehman Brothers Holdings, remarked, “One of my partners said yesterday that we are going to call this phase the ‘extend and pretend’ phase in our economy. Which is you extend someone’s maturity – because they are going to default – and you pretend that business will come back…Then we’ll enter phase two, which he said is the request to extend or ‘amend.’ Then ‘send.’ In other words, send the keys.

“Those are the phases we are in right now.” Marsal concluded. “Everyone is trying to buy time, as opposed to dealing with the leverage, they are trying to buy time. Whether you are a banker or a company, they are all trying to buy time.”

Maybe all of this can-kicking will produce the desired outcome. But the more likely scenario is that the U.S. government will continue to throw newly printed dollars bills at the problem until eventually something that looks like a lot like a recovery will appear. Shortly thereafter, the recovery will yield to something that looks a lot like debilitating hyperinflation.

Source:  Gold…if Not Now, When?

The deflationist view, which makes some compelling and elegant arguments, maintains that the credit losses in the U.S. financial system far surpass the size of the government’s monetary and fiscal stimulus. All those trillions in bad loans – plus the yanking of credit from consumers and businesses – overwhelm new money creation. The Fed, in other words, is trying to fill a swimming pool with a Dixie cup. This might take a while.

Therefore, this reasoning goes, the greater risk is that asset prices continue to fall. This is the classic debt-deflation point of view. I don’t dismiss these arguments lightly. I’ve spent some time going over the arguments of some of deflation’s most persuasive and sophisticated advocates – like the successful Treasury bond investor, Van Hoisington and the insightful economist, David Rosenberg.

Still, I think the endgame is for inflation — which is when paper currencies buy less. Given the choice of holding U.S. dollars or real assets (such as gold or iron ore or land), I’ll take real assets.

Over the weekend, Thomas Donlan at Barron’s presented a good analogy for it all. He asked what you would rather own as store of value, bananas or corn? The obvious answer is corn, because you can store it for months. Corn lasts longer than bananas. Fruit rots. You can also use corn for a lot of different things — corn flour, animal feed, etc. You can also arrange to sell corn into the future, say, by arranging to deliver corn so many days from today.

Corn can lose value, obviously, as can any real asset. But it is a better choice than holding the bananas.

Donlan likens paper money to bananas and natural resources to corn. “In the modern economy,” he writes, “a barrel of oil is much like a bag of corn… Paper money and bank balances are more like the bag of bananas.” When currency rots, we call that inflation.

The problem with the deflation arguments long term, it seems to me, is that you are betting against a government’s ability to destroy its own currency. Governments are seldom good at anything, but one thing they are undeniably good at is destroying their own currencies. The dollar has lost 95% or so of its value since 1913, the year the United States established the Federal Reserve. Enough said.

Long-term, betting that a government will safeguard its currency seems like a very bad bet. Deflation – or at least symptoms of deflation – may prevail today, but the real question is for how long. My own crystal ball is frustratingly cloudy on the issue. But the great rewards in investing are always with the out-of-consensus view.

The upside from holding Treasuries seems hardly worth the risk of being wrong, for instance. On the other hand, if we are right about currency rot, then we’ll make multiples of our money on natural resource stocks.

The downside on many commodities seems low, because the prices have already corrected. In several instances, as with oil and natural gas and iron ore, we are already below the marginal cost of production for much of the industry. So unless we don’t need these things at all anymore, the simple economics of the businesses involved help support a certain price structure.

And anyway, as far as the case for gold is concerned, I’ve been arguing that it is less about inflation or deflation than it is about creditworthiness in general. Gold does well during times of credit troubles. It did well in the 1930s, for instance, even though that was largely a deflationary era. Banking troubles made investors turn to gold.

On that front, we’ve got plenty of banking troubles on the way. Yesterday’s Wall Street Journal headline, buried in the middle of the paper, hints at what’s to come: “Pick-a-Pay Loans: Worse Than Subprime.” The piece begins:

“For the third straight month, option adjustable-rate mortgages are generating proportionately more delinquencies and foreclosures than subprime mortgages, the scourge of the U.S.”

These loans require only partial-interest payments each month. So the loan balances on many of these loans have actually gone up while housing prices have tumbled. Bad combination. As of April, 36% of these loans were at least 60 days past due.

These troubled loans will mean more large losses for banks — in particular for Wells Fargo, J.P. Morgan Chase and others who were active in these markets. Wells Fargo, the WSJ points out, has a mountain of this stuff — $115 billion of it.

So as long as we have banking troubles, we have the potential for fear to return in a big way. And that is when gold does well…with or without inflation. But I’m not counting inflation out just yet.

I’d use the market weakness in the gold price and in gold shares to pick up your favorite gold miners.

Source: Gold…If Not Now, When

“Inflation is coming, inflation is coming.”

The world knows it. Even the guys at the switch – the Fed – can’t deny it.

Last week, Philadelphia Fed President Charles Plosser warned inflation could heat up much sooner than expected.

Here’s the problem. Everyone and their second cousin keep piling into the predictable hedge – investing in gold. The World Gold Council reports investment demand in the first quarter increased 248% to hit a record level.

Forget the contrarian implications. Such overcrowding, to an extent, means the profit pie will keep getting sliced up in smaller and smaller pieces. Moreover, when we get to the end of the inflation road, it implies the selloff will come fast and furious. I mean, look what happened last summer when the fire alarm sounded on oil. Prices collapsed 80% before anyone knew what hit them.

Here’s all I’m suggesting. If everyone’s clamoring for gold like they did last summer for oil, why not consider a road less travelled, especially if it promises equal, and possibly better, protection?

Yes. Such an investment exists. It’s art investing.

Art Investing: More Than Art for Art’s Sake

I crunched the data on gold, art and inflation since the end of the Bretton Woods system. For art, I used the Mei/Moses Fine Art Index, which tracks the prices of art based on repeat sales at auction, and captures 90% to 95% of the market.

Here’s what I found:

• Art’s correlation with inflation rivals gold’s.

• Since 1997 art actually tracked inflation a tad better than gold, sporting a 0.26 correlation versus 0.24. (Remember, correlations range from 1 to -1, with 1 meaning prices move perfectly in tandem.)

• And during the last bout of out-of-control inflation, from 1977 to 1982, art prices jumped a healthy 130%.

Now, I know what you’re thinking…

Art’s highly illiquid. Transaction, transportation and insurance costs can be excessive. Diversification can be difficult to achieve unless you’re a billionaire. And most problematic of all, many of us probably don’t know the difference between a Monet and a Manet!

The good news is you don’t have to let these obstacles stand in your way…

Enlist The Help Of Art Investing Professionals

You can enlist the help of art investing professionals:

• Like longtime friend of The Oxford Club, Mike Kuschmann, President of Fine Arts Limited in Winter Park, Florida.To get in touch with Mike, call Fine Arts Ltd. at 800.229.4322 or 407.702.6638, or email him at mkuschmann@cfl.rr.com and ask for his free brochure pack.
• Or renowned money manager and art expert, Debra Diamond, who I had the pleasure to speak with and hear present at this year’s Investment U Conference.

Both can provide you with personalized art advisory and even discuss the potential tax advantages of investing in art. (Hint: gold does not offer the same advantage.)

Of course, some of you might be looking for a quick, cheap, no hassle art fix. Thankfully, one exists.

Track the Mei/Moses Index By Owning Sotheby’s

It stands to reason we can track the performance of the Mei/Moses Index by owning the auction house, the company that will facilitate the sale of each piece of artwork that will eventually become the data for the index.

Well, only one trades on a U.S. exchange – Sotheby’s (NYSE: BID). Granted, the current fundamentals leave much to be desired. But that will change.

As inflation draws nearer I expect well-heeled investors to bolster their art collections, especially while prices are depressed. And as inflation cools, they’ll inevitably look to cash in on their hedges. In both instances, Sotheby’s stands to profit.

At the same time, I’m encouraged by the highly cyclical nature of this stock. As the GDP growth resumes – and it will eventually – history dictates the stock will, too. If you have any doubt, check out this chart:

No Perfect Hedge Against Inflation Exists…

The fact remains, no perfect hedge against inflation exists. Not one investment sports a correlation of one with inflation. So let me issue a word of caution – don’t invest in only one hedge.

Or more simply, don’t be a John Paulson.

The famed hedge fund manager who successfully predicted the subprime market collapse is piling into gold. Based on the latest SEC filings, his total position size in gold-related assets soared to 23.16%, or roughly $6 billion.

Let me assure you betting the farm, no matter how strong your conviction, leads to ruin, not riches, more often than not. Not to mention, once you lose it all, it’s hard to make it back.

Bottom line, inflation is coming. But that doesn’t mean you need to follow the narrow-mindedness of the herd into the most obvious and overcrowded hedge, gold. Instead, I recommend you diversify across the five options David and I have provided. And position size!!!

Good investing,

Lou Basenese

Source: The Inflation Hedge Nobody’s Talking About

“You ain’t seen nothin’ yet!”

Actually, we’ve seen so much already that it’s hard to believe there’s more coming. But there’s sure to be more… and we have a feeling it will be worth the wait.

Yesterday, for example, GM filed for Chapter 11 bankruptcy protection. It couldn’t pay its bills. GM was once the strongest corporation on the planet. But it has been around for nearly 100 years. Heck, everything wears out eventually… even a ’55 Chevy.

“Obama Nationalizes GM,” says a triumphant headline in France’s “La Tribune.”

Triumphant?

Yes. According to the papers, Obama may have been handed the keys to GM… but the old jalopy is worn out. The French say the whole US economic model is ready for the junkyard. More on the French – and the French model, below…

First, let’s stick with the USA. The Dow rose 221 points yesterday – to 8,821. Investors think the worst is over.

Everything is going up. Copper is up 65% so far this year. Oil is up 53%. Soybeans are up 22%. Stock markets are up about 30% worldwide. And gold is up 12%. In this company, gold is a laggard!

Copper has risen so much, say the papers, because China is buying all it can get. What it is doing with the stuff we don’t know; maybe it is stocking up at what it believes are low prices.

Maybe it is hedging its bets. China has the biggest pile of Treasury bonds in the world – $768 billion of them. That’s 768 billion reasons to worry. That’s because each T-bond is denominated in dollars… and while everything else is going up, the dollars is going down. Yesterday, the dollar touched a new low against the euro for this year – at $1.42.

T-bonds are down too – minus 5% for the year. It would not be at all surprising for the Chinese to be stockpiling oil, gold, copper and all the other inflation hedges they can get. Their dollar-denominated bonds may go down… but their commodities and gold would go up. Overall, they’d come out even.

This week, Mr. Tim Geithner – the big banks’ main man in Washington – is in China trying to reassure the Chinese that America takes its financial obligations seriously. That’s something we never expected to see either. America may have the strongest economy on earth. But if the commies stop financing it, we’re out of business.

So Geithner is in China, hat in hand, like a major debtor called into the banker president’s office. Geithner, of course, has no choice. He has to go and say what he has to say. He will use all the right words. He will show the appropriate seriousness… he will smile when it is called for… and put on a grave face when he needs to.

The trouble is, there’s little he can do to help the Chinese. They want him to protect the dollar and the bond market. That’s something he can’t do.

“It will be helpful if Mr. Geithner can show us some arithmetic,” said Yu Yongding, a former advisor to the Chinese central bank.

Yes, we’d like to see that arithmetic too. How do you add $1.75 trillion in deficits, pay for it with funny money from the Fed… and still come out even on the value of the dollar? There’s no arithmetic we know of that works in the Chinese favour.

Right now, the numbers and the logic of the situation are telling us that feds aim to create inflation. Instead of trying to keep prices under control… they’re trying to get them to go up. That’s yet another thing we didn’t expect to see!

The US government is less concerned with protecting foreign lenders than it is with getting the US economy back to its old E-Z money ways. Cheap money is what people want. Cheap money is what the feds are trying to give them.

Today – will wonders never cease! – the US is pushing its phony money all over the world. The Chinese, meanwhile, are champions of financial integrity. Just wait until they give up on US bonds… then, we’ll really seen something we ain’t seen yet!

And more thoughts…

*** The French think they were right about everything. Iraq, for example. The French have deep ties to the Arab world. They knew Iraq would be a tar baby for the US – just like Algeria had been for them. You pick it up… you can’t put it down.

But Congress and the administration not only ignored the French (as they had when Charles DeGaulle advised against intervention in Vietnam in the early ‘60s calling it a “rotten country”) they accused France of cowardice, dumped good bottles of Bordeaux down the drain and renamed French fries ‘freedom fries.’

Remember the jokes? When a bomb blew up a Spanish train, France raised its colour-coded Terror Alert system… from mauve for “Collaborate” to chartreuse for “Run and Hide.”

And remember what Anglo-Saxon economists said about the French economy? It was ‘sclerotic’… it was a ‘museum’… first, it was tied up by labor unions and then the socialist politicians did kinky things to it.

But every dog has his day, and now the French are enjoying a delicious moment of schadenfreude.

The frogs stayed out of Iraq… avoided a housing bubble… and side-stepped a credit crisis.

And now, the “French model” for managing an economy is the envy of the world. At least, that’s what you might think if you read ‘The Economist.’ A recent issue has Sarkozy on the cover… looking confident and pleased with himself. By contrast, Britain’s Gordon Brown and Germany’s Angela Merkel look as though they needed a drink.

What’s the ‘French model?’ It’s a system where the state meddles heavily in the economy. Health care, education and public transport are all government enterprises. And political cronies, rather than entrepreneurs, run key businesses. Heck the French don’t even have a word for “entrepreneur” as George W. Bush pointed out.

It seems to work fairly well. The health care system functions fairly well – while taking a smaller percentage of GDP than in the US. The trains run on time (except when there is a strike). Grammar and secondary schools are probably better than in the US; the universities are probably worse. And many of France’s private businesses are world leaders – Air Liquide, Danone, LVMH, to name just a few that come to mind.

And so far, France has suffered less from the worldwide financial meltdown than any of its rivals. The last time we were in Paris, the restaurants seemed as full as ever; taxi cabs were as hard to get as ever; and Paris property had barely come down at all – at least, officially.

“I’m not so sure… ” said a colleague in Paris. “I’ve been looking for an apartment for the last year. A year ago, there was almost nothing available in my price range. Now, I’m seeing lots of places. I looked at one last week. It is listed at $340,000 – about what it would have been a year ago. But the agent told me that the seller would probably take $275,000. If they’re telling me that right off-the-bat, I figure it might go for $250,000”.

Source: The US is Pushing its Phony Money All Over the World

The environment we are headed into – and the view Mr. Market seems to (perhaps) be acknowledging now – is a classic combo of wearisome economic stagnation and creeping paper-fueled inflation. One acts as a fearsome headwind, blowing in the face of consumer-oriented names reliant on economic recovery to justify their newly bid-up valuations. The other acts as a powerful tailwind, further bidding up the price of inflation hedges and hard assets.

Justice’s trading service, Macro Trader, has a special recipe for this environment. If you’re interested in following Justice’s trading advice more closely, read on here.

It’s really easy to invest in timber too. You don’t have to go out and plunk down a few million dollars to buy a tree farm. You can simply buy stock in a company in the timber business! As timber prices go up, your stock price goes up! It’s that simple.

My article for Investor’s Daily Edge on 03/05/09 specifically recommended Plum Creek Timber Co. Inc. (PCL).

I hope you took my advice because PCL is up over 18% in just a few weeks. Now that is a nice short-term gain. Our staff here at Investor’s Daily Edge strives to give you information that you can profit from, that is our passion.

If you missed this opportunity to get into PCL, don’t worry-it’s not too late. I still think timber is one of the best places to put your money. Let me explain why.

The Earth currently has 6.76 billion people and the world’s population is expected to hit 9 billion by 2040. All these extra people are going to consume timber in a variety of uses from home construction to wood pulp used in paper production. Demand will greatly exceed supply, and this will drive timber prices much higher.

Timber tends to outperform inflation and the stock market over the long term. In fact, timber usually performs quite well in times of economic stress like we are experiencing these days. When we finally exit this economic crisis, you should see timber prices rocket higher due to construction demand increases and inflationary pressure.

Source: The Ultimate Inflation Hedge – Invest in Timber and Protect Your Wealth

This from Eric:

The flaming embers of inflation have already landed atop the thatched roof of American finance. And yet, investors can still buy inflation insurance on the cheap. In the next 1,373 words, we’ll examine a few of these “insurance policies”to assess their virtues and drawbacks.

Since a powerful new inflationary trend is very likely to occur, the prudent investor should probably take steps to guard against it. “But wait a second!” some readers be saying. “What if a powerful deflationary trend occurs first?”

Good question. It might. But we’d begin preparing for inflation anyway. Why not prepare for the near-certain arrival of inflation, rather than the uncertain timing of it.

If an infallible clairvoyant told you that your house would burn down in one of the next five years, would you say to yourself, “Gosh, maybe I should try to figure out which year it will be and not buy fire insurance during the other four years.”

You might actually guess correctly, in which case you would have saved yourself four years worth of insurance premiums. But you might guess incorrectly, in which case you would have lost your house.

Your call.

To this market observer, inflation seems like a near-certainty. Not an absolute certainty, mind, you, just a near-certainty, sometime within the next three years. So why not beat the rush to buy inflation insurance? Why not buy some now?

The nearby chart displays a sampling of inflation hedges, and how they performed during the last eight years of the infamous 1970s. Gold was clearly the standout winner. But we’d put an asterisk next to this result, due to a performance-enhancing assist from the U.S. government. During most of the preceding four decades, the US government had been artificially suppressing the gold price, while also forbidding private citizens from owning it. Therefore, once the government stopped its meddling, the gold price partied like a teenager whose parents had just left town.

Aside from gold, very few assets managed to keep pace with inflation, as measured by the Consumer Price Index (CPI). Hard assets like the CRB index of commodity prices and the Swiss franc did outpace the CPI, but stocks and bonds both lagged miserably.

Skipping ahead about 30 years, we can see that the modern versions of the 1970s inflation hedges have performed quite poorly during the last 14 months. Clearly, inflation is not a widespread concern. But that’s part of the reason it concerns us, and also part of the reason why we’d be inclined to take action now, while inflation hedges remain relatively cheap.

Our contrarian instincts lead us –rightly or wrongly – to distrust the consensus, especially when the consensus trusts in an idea as stupid as deflation…just kidding. We don’t think deflation is stupid, just unlikely. (More precisely, we suspect that deflationary indicia will be seasonal, like daffodils. For a while, they will seem to be everywhere. Then, just as suddenly, you won’t be able to find a single one).

So with that biased and unscientific preface, let’s sweep through a Reader’s Digest review of ETFs that might provide some kind of hedge against inflation:

1. Gold – The “Old Faithful” of hedges. It’s always worked before. Enough said. ETFs like the SPDR Gold Trust (GLD) provide easy access. With a $30 billion market capitalization, this is the “go-to”gold ETF. The next largest entrant is the iShares Comex Gold Trust (IAU) with a market cap of $2 billion. Both ETFs enable an investor to buy gold with a mouse-click. No muss. No fuss. But purists may wish to buy bullion coins like Krugerrands or Maple Leafs. As a gold investment, bullion coins have the advantage of being shiny, pretty and portable. But they have the disadvantage of costing 6% to 10% more than bullion itself, while also being so shiny and pretty that someone might want to steal them.
2. Gold Stocks – The bastard brood of gold and the stock market. As inflation hedges, gold stocks can be somewhat unpredictable and capricious. Over a multi-year span of time, they tend to reflect that gold side of their heredity. But during shorter time spans, gold stocks can behave much more like stocks than like gold…and that’s not always a good thing. That said, ETFs like the Market Vectors Gold Miners (GDX) provides a handy way to buy a basket of gold stocks.
3. Commodities –Like gold, a basket of commodities that includes crude oil, copper, wheat, gold etc. tends to provide a very reliable hedge against inflation. Unlike gold, a basket of commodities provides diversification across multiple assets and therefore, much lower volatility than gold. The largest commodity ETFs available are the PowerShares DB Commodity Index Tracking Fund (DBC) and the iShares S&P GSCI Commodity-Indexed Trust (GSG). DBC holds only six commodities: Crude oil, heating oil, aluminum, corn, wheat and gold. GSC holds a much broader collection of commodities.
4. Commodity-focused stocks. See comments on #2 above. The iShares S&P North American Natural Resources Sector Index Fund (IGE) provides broad exposure to commodity-focused stocks. Alternatively, the DWS Global Commodities Stock Fund (GCS) is a small closed-end fund that holds a similar portfolio. But GCS is selling 12% below its net asset value, which means that a buyer at the current quote controls one dollar worth of resource stocks for only 88 cents.
5. Non-Dollar Bonds – The Swiss Franc performed quite admirably during the last Great Inflation in the United States. But we are hesitant to bet on a repeat performance. Indeed we are hesitant to bet on ANY foreign currency as a way to hedge against US inflation. The Swiss economy, for example, no longer features a bunch of pocket-watch-toting gnomes guarding vaults full of gold bullion. Instead, the modern Swiss economy features pocket-watch-toting gnomes masquerading as hedge fund managers. The predictable result is that Switzerland’s two largest banks have amassed questionable derivatives exposures that exceed the GDP of the entire country. Many other bankers speaking many other languages have achieved equally enormous feats of stupidity. No one knows how these feats of stupidity will influence the values of their native currencies. Not knowing, therefore, we are disinclined to guess. But those readers who suspect that the dollar will be one of the first currencies to go down in flames, rather than one of the last, might be interested in the one of the many ETFs that hold foreign currencies. The CurrencyShares Swiss Franc Trust (FXF), for example, holds Swiss francs. Alternatively, the dollar-phobic investor could purchase the SPDR Barclays Capital International Treasury Bond ETF (BWX) that holds a basket of bonds issued by foreign governments. Its largest allocations include a 23% weighting in Japanese government bonds, 12% in Germany and 12% in Italy.
6. TIPS –No discussion of inflation hedges would be complete without mentioning TIPS, short for Treasury Inflation-Protected Securities. [To learn more about how they work, check out the November 26, 2008 edition of the Rude Awakening]. Investors may purchase a basket of TIPS by buying the iShares Barclays US Treasury Inflation Protected Securities Fund (TIP). In theory, TIPS provide a direct and reliable hedge against inflation. But like so many other seemingly brilliant ideas, TIPS work better in theory than in practice. The first risk is an overt one – deflation might persist for longer than expected (by us). In which case, the principal value of a TIP could decline below par. And even though the holder of the TIP would receive par at maturity, the interest payments that the holder would receive between now and maturity would decline in concert with the declining principal value. The second risk is a covert one: the federal government controls the calculation of the Consumer Price Index (CPI). Therefore, if the CPI, as currently constructed, were to get out of hand and produce very high inflation readings, the government’s bean counters would probably spring into action to create a “new and improved”CPI that would deliver much lower inflation readings. It has happened before.

Thus concludes our review of inflation hedges. We hope all readers will utilize the delightful deflationary interlude we are now enjoying to prepare for what may lie ahead. Hostile inflationary forces may be amassing their forces at the borders of our economy at this very moment. In short, we think it’s a good time to risk being paranoid about the threat of inflation.

Source: Inflation Gestation