Sense on Cents

In the midst of the massive government intervention in the economy and markets, the Federal Reserve is providing measures of liquidity that are truly “off the charts.”  This liquidity, in the form of U.S. dollars, is flooding the economy. If and when the economy gains a little traction and the money multiplier kicks in, the growth in our money supply will skyrocket. What happens in the face of any market with increasing supply? Prices decline. In this case, the price decline in the value of the U.S. dollar spells INFLATION.

Many investors are questioning how to best position themselves for a potential increase in inflation. Various analysts are recommending commodities, real estate, and precious metals. However, while each of those assets can be a great store of wealth in the face of rising inflation, an investor is faced with a mix of fundamental and technical variables in determining the value of the asset. As a result, the correlation between rate of inflation and the performance of assets within those classes is not perfect. Is there an asset perfectly correlated with inflation? Come closer, I will give you a tip as to the asset class correlated to inflation.

 Treasury Inflation Protected Securities, yes TIPS, are U.S. government securities indexed to the rate of inflation.   (more…)