Hedge for Inflation while Bidding Up Safety

Everybody’s got a different opinion about what’s happening with world economies, the prognosis for the future, and how markets will react. A big bet in the right direction could mean big profits, but this doesn’t seem the time to place such a bet.  Consensus is to duck and play it safe.

Take bonds, for instance.  After the financial crisis, smart money went quickly into bonds, even as bailouts and quantitative easing promised rising inflation.  Inflation has been low and bond yields continue to fall as bond demand remains strong. The USD, which seemed sure to weaken, instead strengthened, relative to most other currencies.  Commodity prices fell and equities recovered much of their losses.  Going forward, should we expect more of the same?

There does seem to be less complacency now then there was say a year ago, even though volatility hasn’t spiked nearly as much or as often.

Last week the S&P 500 bounced off the near level indication of a tumble into bear territory.  The bailout of Spanish banks is by definition inflationary, so the upward bounce could continue.  Even the Euro could strengthen, propped up short-term by an anticipated Moody’s downgrade to the big five US banks.  Commodities could get a bounce.  All this is possible, but I don’t see bond yields increasing anytime soon.  Why not, if the market wants inflation?

My economics training tells me that government intervention isn’t going to work.  Business investment – not consumer demand – is necessary to stimulate growth, and signs of new investment are scarce.   Even were there more business investment, distortions introduced by interventionist policies would misallocate resources, so that we could expect a disconnect between goods produced and goods for which there an equal demand.

It’s just possible that markets will continue to hedge for inflation while bidding up safety.  At some point, it seems to me, safety concerns are going to raise fundamental questions about money .  How these questions are addressed will have a tremendous impact on the quality of all our lives. I don’t think we’re going back to textbook solutions from a pre-2008 world.

Keeping with a balanced, cautionary approach, on Thursday and Friday I closed at a loss my position in Lundin Petroleum (LNDNF) @ 17.72 and opened a new position in Sysco (SYY) @ 28.64 .  I also opened new trades in RIC @ 6.42, NGD @ 9.95 and SGOL @156.16.