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D. Frank Norton: How to survive inflation

It’s Your Money

Posted: July 2, 2009 7:09 p.m.
Updated: July 3, 2009 4:55 a.m.
We may be on the cusp of inflation raising its ugly head again. How so? Our government is spending trillions of dollars using a broad swath of initiatives to fight deflation, which is the opposite of inflation. Herein lies the rub. If government were to succeed in stopping deflation, the huge new debt issuance that's supporting them could lead to a spike in inflation that we have not experienced since the 1970s.

What will be required of government is to act, with deftness and agility, to pivot from fighting deflation to fighting inflation. In effect, the government has to provide enough monetary stimuli to get the economy firmly on the growth path, while standing ready to reverse course without stepping on the recovery. Historically, government has not been very good at reversing courses quickly.

Government right now is turning on the money printing presses and will soon be swamping our country with dollars. Within a relatively short time horizon of six months to a year, we may see way too many dollars chasing too few goods and services.

How do we protect our investment dollars in this type of economic environment?

n Common stocks overall have had no correlation with inflation since 1926. Some companies may benefit from inflation such as commodity-based companies and export driven companies.

n Real estate has been positively correlated with inflation, as both rent and value tend to go up along with rising prices in other portions of the economy. Timing may be especially good now given the significantly lower real estate prices we are finding right now.
A good alternative to directly buying real estate may be real estate investment trusts (REITs). You can buy shares of these trusts which generally own a diversified portfolio of real estate.

n Energy stocks and direct energy investments in oil and gas production and drilling programs tend to do well in inflationary times.

n Gold and precious metals are correlated with inflation. Gold also acts as a currency substitute that would rise in the face of a falling dollar. Precious metals, including gold, can be purchased directly. Another way to take advantage of the price movement of precious metals is to by stocks of mining companies.

n Commodities have a relatively strong correlation to inflation, and are especially good for inflation caused by excessive demand.

Commodities are also a powerful diversification tool since they are negatively correlated with both stocks and bonds.

n Bonds tend to suffer because inflation eats into the purchasing power of both income and principal repayment. There is one particular type of bond called "Treasury Inflation-Protected Securities" or "TIPS."

TIPS have been around since the late 1990s. Having the combination of Treasury backing and inflation protection may make TIPS especially attractive in times of rampant inflation.

Even though we see no signs of inflation as of yet, government actions suggest that inflation should be making itself very apparent in the mid- to long-term.

Now where did I put that silver dollar my grandfather gave to me years ago?

D. Frank Norton is a money manager and financial planner in Santa Clarita. "It's Your Money" appears Thursdays and rotates between a handful of the Santa Clarita Valley's financial professionals. His column represents his own views and not necessarily those of The Signal.


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