Good reads from around the web.
I have feared inflation [1] ever since the credit crisis began. Interest rates at multi-century lows, quantitative easing [2], and the UK government taking on the liabilities of RBS and Lloyds only added to my desire to guard against the erosion of my wealth [3].
Unlike most inflation paranoiacs, however, who cover their windows in the silver foil and bury gold bars in their basement, I’m pretty optimistic about the global economy and stock market, at least in nominal terms.
This means I’ve been able to meet my fears by being extremely long equities and very light on bonds, together with buying NS&I index-linked certs when available. I am usually a fan of private investors holding a big slug of cash [4], but outside of the cash-equivalent linkers, my cash allocation is near its all-time low [5] of March 2009.
This stance has been a reasonable one overall – who a decade ago would have thought we’d see inflation breach 5%, yet the Bank of England keep rates at 0.5%? – yet there have definitely been hiccups along the way.
Last year, for instance, was a terrible year to not hold any government bonds. They were the best performing asset class, yet I have long considered over-valued in light of my inflation concerns.
Oops!
Those of you with pure passively managed portfolios that include a good slug of gilts probably beat the majority of active traders in 2011. Not unusual, and why passive approaches are our central recommendation here at Monevator, not my off-piste active shenanigans!
As The Accumulator has reported, gilts saved most of our Slow & Steady Portfolio’s bacon [6] in 2011.
Currency debasement is a long-term game, however – it happens over decades, not quarters. The UK government has every reason to be happy seeing the real value of its debt watered down, provided creditors don’t get the willies. So I’m not running up the white flag just yet!
If you’re not familiar with why massive government debt and inflation so often goes hand in hand, you might want to read How Sneaky Governments Steal Your Money, on The Psy-Fi blog [7] this week.
As author Timmar states, eroding debt through stealthy inflation:
“…relies on the sleight of hand that lies behind money illusion – the idea that people focus on nominal interest rates rather than real ones. Unfortunately, this seems to be hardwired into people.
Of course, if financial repression was on the cards then we might expect to see abnormally low interest rates, stubbornly high inflation rates and governments imposing all sorts of new capital holding requirements on banks and pension funds.
We’d better keep an eye open for those, then…”
For more evidence that inflation is the likely endgame, see this PDF [8] from the Bank of International Settlements on The Liquidation of Government Debt.
I don’t expect we’ll see hyperinflation, or small boys pushing SIM cards around in wheelbarrows in lieu of pocket money.
But I do suspect real interest rates will continue to be low for years.
Note: Don’t take my suspicion for anything other than what it is – a best guess! Nobody knows what interest rates will do next, and the vast bond markets represent huge amounts of money being put where traders’ mouths are.
Still, with the FTSE yielding near 4% and 10-year gilts near 2% – especially against the backdrop discussed above – I know what I think is better value.
Of course, I said something similar last year. Roll on 1% gilt yields, then!
From the money blogs
- The shockingly simple maths behind early retirement – Mr Money Moustache [9]
- Are ETFs growing for the wrong reasons? – Canadian Couch Potato [10]
- Accepting your risk tolerance – Oblivious Investor [11]
- A new 1% RPI index linked 10-year retail bond – Fixed Income Investor [12]
- How do you value income? – The Munro fund blog [13]
- Is it time to sell Tesco? – UK Value Investor [14]
- Comparing UK housebuilders [15] – ValuehunterUK [16]
- The Abbey National perpetual bond – DIY Income Investor [17]
- How to use Sharesave Save As You Earn Schemes – Simple Living in Suffolk [18]
Book of the week: Having worked with a few in my time, I’d suggest Jon Ronson’s hilarious yet insightful The Psychopath Test [19]
Mainstream money matters
- Who exactly are the 1%? – The Economist [20]
- Why Spain’s bond market ignored the downgrade – Swedroe/MoneyWatch [21]
- Generation Y: Lots of time, little risk appetite – Vanguard [22]
- Developing world’s oil consumption about to surpass OECD’s – CityWire [23]
- The risks of linking employment with investment – FT [24]
- Rental yields are key to buy-to-let equation – FT [25]
- Mimic a trendy commodity hedge fund via an ETF – FT [26]
- Mortgages at their most affordable for 14 years – Telegraph [27]
- Six million UK householders have less than £250 in savings – Telegraph [28]
- Average shareholding is held for just 22 seconds – Telegraph [29]
- Can stamp collecting deliver profits? – Telegraph [30]
- How you can finance an enjoyable retirement – Independent [31]
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