More Inflation Expectations

Posted on April 9, 2010 , filed under Stocks | Print This Post

I’ve been writing about the subject of inflation for years, but it only seems like mainstream media is focusing on the topic as the Dow looks to retake the 11,000 level. Since 2005, I’ve posted over 420 articles with a consistent investment thesis. I’ve continued to post my picks and invest steadily in the same fashion through the crash. In fact, the crash only made me hungrier to purchase additional shares of the same great companies I’ve invested in at lower prices. A flood of excess monetary supply and possible prolonged low interest rates have only bolstered my view that inflation/hyperinflation will be the inevitable outcome, as this has been the post outcome of every crash since the Great Depression.

Savers needed to prepare themselves for getting very hurt by inflation. Common sense dictates that the bigger the crash, the bigger the recovery. This is a part of human nature that we want to feel healthier and stronger as we recover after being sick.

I don’t buy into the idea that our children will have a lower standard of living than previous generations. In fact, our children will invent the necessary tools, policies and rules to improve their standard of living, just as we have. Remember how easy it was for our current generation to create paper instruments like swaps and derivatives to inflate wealth. Financial regulation is still under reformed and new instruments to create massively inflated wealth will be invented by the current generation. This is the drug of paper number growth. Seemingly positive growth is politically acceptable and is a feel good message to main street. It’s a vicious cycle and the only loser is the responsible saver.

To beat inflation, get into hard assets that will keep up with the rate of inflation. Currently money is flowing into the stock market, but I believe property is your best investment prospect as property prices have lagged the increase in stock prices. My top locations to invest are Las Vegas, Nevada and Miami, Florida. Condo and condo-hotel prices are still down over 60% from 2007 levels. You can buy a condo in the above markets for .25-.40 on the dollar that is less than 5 years old and has a chance to generate an after tax income yield of 3-7%. Like a dividend paying stock, you benefit from an increase in the asset price and may have a predictable income with the right tenant. For condo-hotel units you don’t have to worry about tenants, maintenance or management.

Taken from this article: Pray For Inflation — It’s Our Only Hope

Everyone thinks the Fed’s job is to fight inflation, but right now the Fed is actually doing everything it can to cause inflation.

Why?

It part to help the economy get cranking again. Inflation provides an incentive for people to spend cash rather than saving it, because if they save it, the cash will lose value rapidly.

Inflation also helps solve another problem, though–our debt problem. The more inflation we have, the less our dollars will be worth. Because our debts are based on a specific number of dollars and not a specific value, the less our dollars are worth, the easier it will be for us to pay off our debts.

(Imagine owing someone 100 Zimbabwe dollars at a time when the currency is collapsing. If you wait a week, the value of the Zimbabwe dollar will have collapsed, and you’ll be able to pay off your 100 Zimbabwe-dollar debt with currency that is only worth half as much as it was the week before).

The Fed can’t admit that one reason it wants high inflation is to reduce the real burden of our debt, but you can bet that that’s one of its objectives. What’s more, says Nobel-winning economist Paul Krugman, inflation should be one of the Fed’s objectives. Because that’s how we’ve gotten out from under debt burdens in the past.

Further into the article:

So inflation is an important tool in getting us out of this mess. It’s painful and unfair–those who have been responsible and saved money will pay the price for those who borrowed money, racked up huge debts, and spent more than they could afford. But it’s what the Fed is (quietly) aiming for.

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