Just a quick word on inflation. January’s CPI reading of 2.4% (2.5% ex-food and energy) has more convinced the Federal Reserve is in midst of “sticking the landing” in returning inflation to their 2.0% target.
The trend is undoubtably good news for stock and bond investors as well as more ammo for monetary doves arguing the Fed news to be more aggressive in cutting rates.
In an era of increasing reliance on debt and money printing—and money printing to fund debt—inflation is the Achilles heel, the only limit to unlimited financial alchemy. I’m skeptical the world can peddle prosperity this way forever (but it can go on for a long time).
Regardless, inflation is the principal threat to long term investors and maybe society as a whole, no? Nothing has brought down empires and governments so much as when money’s value inflates away. It makes sense to take measures, especially when protection comes cheap and even free.
And why not? With sanguine views on inflation, protection comes virtually free.
The market’s longer term over/under for inflation is about 2 ¼ percent for the next 10-years and 30-years. In other words, the market has absolute confidence inflation will stay on target permanently.
Great news if it does. But if it doesn’t, assets of various kinds will be re-priced, some harshly.
Insuring against the over today seems as sensible as buying term life insurance in your twenties. Perhaps all longer-term bond holdings should be inflation-protect ones today.
10-Year Breakeven Inflation Rate
About the Author
Neil Rose, CFA, is the founder and CEO of Regency Capital Management.
