While it seems everyone on the planet is fixated with the impending US Debt crisis/default quietly beneath the scenes inflations are beginning to rise rapidly. You need to position your portfolios for rising inflation.
There are a number of ways to guage inflation expectations. Let us look at three:
- The bond market (inflation protected treasuries relative to non inflation protected treasuries)
- Precious and base metals
- Currencies.
The Bond Market. Let's look at the difference in yield between the US 10yr and US 10yr TIP. This is commonly referred to as the 10 yr Breakeven. In essence this gives the expectations for inflation over the next 10 years. Note how close the 10yr Breakeven is to trading at a multi-month high. This is very significant because above 2.65 (which means that the yield on the US 10yr is 265 basis points above the yield on the US 10yr TIP) inflation expectations will be at the highest level in at least 5 years. This looks like a tipping point.
Precious and base metals. Gold has taken the limelight as of late by trading at record highs (at least in nominal terms). But beneath the scenes there is also strength in other precious metals and also base metals. Look at how close Palladium is to breaking to multi-week highs:
And perhaps more significantly is the behavior of base metals. The Journal of Commerce Metals Index (copper, zinc, lead, tin, steel, aluminum, nickel) is not far from a multi-week high:
Currencies. The USD is in trouble. While most pundits are focused on the Euro or USD Index in the background many currencies are trading at multi-week/month/year highs against the USD. Below is the JPMorgan Asian Dollar Index (emerging Asia currencies against the USD):
The press of popular opinion would have us believe that financial markets are about to fall into the abyss over the US debt ceiling impasse. It is difficult to turn-off when the banter being delivered by the press is deafening. But turn-off you must. Because the market appears to be looking straight through all this noise and is suggesting on no uncertain terms that you need to position investment portfolios for inflation.