Porter Stansberry: The easiest way to track inflation
Tuesday, March 09, 2010
Tuesday, 9 March 2010
By Porter Stansberry in the S&A Digest:
How can you track the risk of significantly higher inflation?
Simple. Just follow the government long-bond market. If the market gets a whiff of double-digit, or even high single-digit, annual inflation, the U.S. bond market will collapse.
There's an ETF that makes it easy to follow the U.S. long bond market – TLT.
Here's the chart:
What you can see is that the government long-bond market peaked at the height of the banking crisis, just after the failure of Lehman Brothers, the near collapse of all of the investment banks, and the bankruptcy of Fannie, Freddie, and GM. Investors were scared to own anything other than government paper. Nobody was worried about inflation because the economy had come to a standstill.
Now, all of those forces are working in reverse – and Washington is pulling all the strings. The government can print as much money as it likes. But the dollar will fall in value. And its creditors will begin to demand much higher interest rates. You can bet on it. As interest rates rise, the value of existing government bonds – which have fixed coupon payments – will fall.
I'm not a chart reader. I don't put much stock in so-called "technical" analysis. On the other hand, I have seen that markets tend to bounce off certain prices a few times before making a big move – like a shark bumping its prey before eating it. TLT seems like it wants to break through that 90 barrier. It keeps "bumping" it.
I'd keep my eye on it.
Crux Note: The S&A Digest comes free with a subscription to Porter Stansberry's Investment Advisory. Tracking inflation is useless if you don't know how to protect yourself from it... and a risk-free subscription to PSIA is a great place to start. Click here to learn more.
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