Article Index

Inflation

Investors Turn to TIPS as Warren Buffett Warns on Inflation

Warren Buffett last week did more than warn investors on the dangers of low interest rates and inflation.

The Oracle of Omaha also had harsh words for traditional bonds.

In a Fortunearticle Buffett went so far as to say, "Right now bonds should come with a warning label."

"They are among the most dangerous of assets," Buffett wrote, "Over the past century these instruments have destroyed the purchasing power of investors in many countries."

To prove his point Buffett labeled inflation as the primary threat to bond investors, noting it takes no less than $7 today to buy what $1 did in 1965.

Instead of bonds, Buffett recommends "productive assets," including farmland and real estate.

But he saved his highest praise for stocks, especially the stocks of companies like The Coca-Cola Co. (NYSE: KO) and International Business Machines Corp. (NYSE: IBM), that consistently deliver inflation-beating returns.

But what if you're not comfortable betting most or all of your chips on stocks? And if traditional bonds are out, where else can investors turn for inflation beating returns?

TIPS Insure Wealth Against Inflation

Enter Treasury Inflation Protected Securities, or TIPS.

Unlike regular bonds, TIPS are designed to protect your principal against the ravages of inflation.

In fact, TIPS zig when other securities zag, providing diversification and safety to your portfolio.

TIPS are considered to be an extremely low-risk investment since they are backed by the U.S. government, and their par value rises with inflation while their interest rate remains fixed.

Here's how they work.



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Not Much of a Debate: Inflation is Part of the Plan

Forget about lost decades. Forecasts that we'll be turning Japanese couldn't be further from the truth.

Here's why.

It's simple, really. Deflation is not in the interest of anybody in power, so it's very unlikely to happen.

The U.S. Federal Reserve's policy move to target inflation last week just re-emphasizes this point.

That's not to say deflation is a bad thing for everybody.

For savers and those living on fixed incomes, deflation would be a very good thing indeed.

Their income would gradually increase in real terms, and their savings would become steadily more valuable. Holders of Treasury bonds would also gain mightily from deflation.

However, the very people who would gain from deflation are not in power.

The People's Bank of China can't vote in the U.S. (yet!), Ron Paul is not president, and there is not an organized and powerful savers' political movement. After all, this is not Germany or Japan!

Meanwhile, in the real world, the U.S. government is spending far more than it takes in, and its debt is rising to dangerous levels. This has been happening on a bipartisan basis since at least 2001.

The Tea Party may have elected a Congress committed to reducing spending, but none of the battles of 2011 actually reduced spending - they just slowed the rate of growth somewhat.

Since much of the debt is borrowed long-term at low interest rates, the best way to reduce its burden on future generations is to encourage inflation.

Savers may lose out on the deal, but to those in Washington, the idea of inflating our way out of debt is irresistible.

Of course, sometimes we can depend on an independent central bank to resist this temptation. But at present, Fed Chairman Ben Bernanke is committed to near-zero interest rates in his fight against deflation.

Now you don't have to be a conspiracy theorist to realize that, if the power structure is committed to at least moderate inflation, inflation is what you are going to get.

In fact, it is already brewing.



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Why Warren Buffett Is Buying – And You Should Be Too

Legendary investor Warren Buffett recently made news with his purchase of International Business Machines Corp. (NYSE: IBM), though I can't say I'm surprised.

Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.

And guess what, it's exactly what I've been counseling investors to do since this crisis began - bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").

According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).

In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.

Buffett Pulls the Trigger

As a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.

Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.

There are technical similarities, too.

For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News and YahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.

Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.

Coke is up tenfold since then. Enough said.

Here's what I think Buffett sees:



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Helicopter Ben is at It Again: Four Ways to Protect Yourself From the Fed’s Next Flyover

The circus known as the debt-ceiling debate may have left town - at least for the time being - but there's still one sad clown left standing squarely in the center of the ring.

I'm talking about U.S. Federal Reserve Chairman Ben S. Bernanke - otherwise known as "Helicopter Ben."

Bernanke got the nickname "Helicopter Ben" from a speech in 2002, in which he announced that deflation was a real worry (this was just when house prices were taking off) and that one possible solution would be to fly around the country dropping $100 bills from helicopters.

Strange as it sounds, that might actually have been a better approach than the one he ended up taking.

Attack From the Sky

Small towns in the Midwest and the working poor of such downtrodden urban environments as Cleveland and Detroit could certainly use a visit from the kindly flying Santa Claus. At least those Americans would have put the money to good use.

But so far, Bernanke's helicopter has only hovered over Wall Street, and his generosity has had a negative effect on the U.S. economy as a result.

His first two rounds of quantitative easing had three major consequences:

  • Higher inflation.
  • Higher unemployment.
  • And higher borrowing costs for average Americans.
In fact, the only thing Bernanke's policies have managed to suppress is economic growth.

U.S. gross domestic product (GDP) increased by just 1.3% in the second quarter - an indication that an already wobbly economic recovery could tip completely over in the second half of the year.

But if you think that means we'll get a reprieve from Helicopter Ben's razor-sharp rotors, you're wrong. To the contrary, he's gearing up for another flyover - a third round of Treasury purchases (QE3).

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Profit From Inflation: These Six Stocks That Will Add Punch to Your Portfolio

If there's one skill you need to learn, it's how to profit from inflation.

Thanks to the cheap-money policies of Team Bernanke at the U.S. Federal Reserve, the escalating levels of global sovereign debt, and other recent developments in the world economy, it's clear that we're headed for a period of steeply rising prices - inflation. If you know how to navigate this tricky stretch, you'll be fine. But those who don't are going to really feel the squeeze.

Learning how to profit from inflation is actually an easier assignment than you might expect. First, you have to invest in certain classes of stocks that have historically performed exceptionally well when inflation has raged across the land. And, second, you will enjoy maximum profits if you invest in those stocks before inflation really takes hold.

Let me use six specific stocks as examples to show you what I mean.

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What the Looming Inflation Tsunami Means for the U.S. Housing Market and Commodities

A few weeks ago, Money Morning Contributing Editor Martin Hutchinson warned readers about the looming inflation tsunami threatening the United States.

Easy money policies like those of the U.S. Federal Reserve and other central banks have helped raise prices in emerging markets, as well as the United States, and sent the commodities sector surging.

"[W]e can expect inflation to be with us for several years, too," said Hutchinson. "In fact, expect it to get worse for the next three to four years, while Ben S. Bernanke remains at the helm of the nation's central bank."

As inflation threatens to eat away at the value of stocks and bonds and cut into investors' returns, Hutchinson said one of the best investments to make ahead of rising prices actually is a house.

The housing market is at or near its bottom and rates on 30-year mortgages are desirable for buyers. Investors who find the right neighborhood, strike a good deal and don't financially overextend themselves could find a sound housing investment as the best store for their money.

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Core Inflation Numbers Will Allow the Fed to Stay the Course – For Now

Even though the cost of living in the United States jumped higher in December, the way the government calculates inflation will give the U.S. Federal Reserve enough cover to maintain its loose money policy.

The consumer price index (CPI) rose 0.5% in December, the largest increase in 18 months, the Labor Department reported Friday. About 80% of the increase was due to an 8.5% rise in the gasoline index, also the sharpest increase in 18 months. Food prices rose by 0.1% in December.

The CPI is the broadest of three monthly price gauges from the Labor Department, because it includes goods and services. Almost 60% of the CPI covers prices consumers pay for services ranging from medical visits to airline fares and movie tickets.

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U.S. Inflation Set to Soar as the Country's Chief Export Boomerangs Back Home

While prices for food and energy have been rising, inflation in the United States has remained relatively subdued.

One common explanation for that phenomenon is that U.S. inflation has been "exported" to China and elsewhere through the U.S. Federal Reserve's monetary policy. And given the perennial U.S. balance of payments deficit, it's good to know the country has found something it can successfully export!

However, the bad news here is that inflation does not stay exported - and in 2011 it may boomerang back to make life on Main Street miserable.

Thankfully, there are precautions we can take to combat higher prices and preserve our wealth.



To find out what you can do to protect yourself from surging inflation, read on...

Buy, Sell or Hold: Brace for Inflation with Kraft Foods Inc. (NYSE: KFT)

Growing up in the 1970s, I remember seeing fears of food inflation affect the life around me.

My parents purchased a small farm and put in an

organic garden so that we would always have food. My mom was always canning food and my father was riding the tractor. They had grown up in the 1930s and remembered the key to surviving tough economic times was to be able to feed yourself when you needed to.

Today, we have a generation of fast food buyers. But the problem with that diet - besides its impact on your health - is that it is not as cheap as it once was. People will have to change their spending habits if they're going to cope with inflation.

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Question of the Week: U.S. Consumers Squeezed by Inflation, Worry About Middle Class Pinch

The U.S. Federal Reserve has made one thing very clear: It views deflation as public enemy No. 1, and it will do everything in its power to keep that ruinous downward spiral in prices from taking hold.

But is the U.S. central bank focused on the wrong threat? And if that's the case, are U.S. policymakers setting the stage for a consumer-crippling inflation spike?

While the Fed has announced more quantitative easing to pump more money into the U.S. economy - hoping that would encourage lending and spending - a cadre of cash-strapped consumers is worried the stimulus measures will actually ignite long-term inflation.

There is a precedent: The current policy is similar to one taken in 2003 - 2004, when the Fed kept rates near a record low and inflation rose faster than initially predicted.

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Fed's "QE2" Could Fuel Inflation in U.S. & Deflation in Europe

The U. S. Federal Reserve's latest round of quantitative easing (QE2) may further escalate the currency war by producing a crippling bout of deflation in Europe and conversely, another period of inflation on the domestic front.

The diverse results are possible because further Fed purchases of debt are likely to re-ignite economic growth and increase prices in the United States, while a surging Euro will make it more difficult for European countries to pay off debt.

Fed purchases of Treasuries to stimulate the U.S. economy could send the euro rising against the dollar, sparking deflation in Europe, Nobel Prize-winning economist Robert Mundell told Bloomberg News.

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Is the U.S. Federal Reserve Setting the Stage for Hyperinflation?

The U.S. government wants to stimulate growth in the moribund economy by stoking the fires of inflation. But by leaving interest rates low and buying up bonds - a policy known as quantitative easing (QE) - the U.S. Federal Reserve risks debasing the dollar, which could lead to a prolonged period of hyperinflation that would send prices skyrocketing.

After their most recent meeting on Sept. 21, Fed policymakers said low inflation warranted looser monetary policy. Minutes from the meeting said central bankers were prepared to ease policy to boost inflation expectations "before long."

The Fed is seeking ways to boost the U.S. economy after keeping interest rates at record lows and buying in $1.7 trillion of U.S. securities. The next move may be another round of quantitative easing that would expand the Fed's balance sheet even further.

But as it feeds more and more money into the financial system, the central bank may very well be sowing the seeds of hyperinflation.

Federal Reserve Policy Pushes the Dollar Ever Closer to Collapse

Much of the content of the latest U.S. Federal Reserve statement, released on Sept. 21, echoes the central bank's previous post-credit-crunch pronouncements: There is still too much slack in the economy, interest rates are still going to be near-zero for an "extended period," and the Fed will continue to use payments from its Treasury purchases to buy yet more Treasuries.

But this recent statement uses a new turn of phrase that should have Americans very upset. The Fed says "measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate." Though the wording treads lightly, it should not be taken lightly. It may signal the final push toward dollar collapse.

The Fed's dual mandate, since an amendment in 1977, has been to promote "price stability" and "maximum employment." While often discussed as if both goals are complementary facets of one mandate, they tend to have been at odds during every recession since the Great Depression.

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Five Ways to Profit as Coffee Prices Soar

Coffee prices have zoomed over 54% in the last year, including 44% since June alone. Retired hedge-fund manager sees the potential for coffee prices to soar another 30%. Find out how to profit in this free report.

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Question of the Week: U.S. Federal Reserve Keeping Low Rates Does More Harm Than Good

After their meeting last week, U.S. Federal Reserve policymakers said they are more worried about deflation than inflation and vowed to look for ways to help along an economy that is experiencing worrisomely slow growth.

In fact, the central bank's rate-setting Federal Open Market Committee (FOMC) said it plans to keep the benchmark Federal Funds rate at its record-low level unchanged between 0.00% and 0.25% for the 20th consecutive month. And, using its go-to line - central bank policymakers said rates could remain that low for "an extended period."

In the near term, that appears justified. Core inflation is running at only 0.9%, below the Fed's comfort-level target of 1% to 2% - where it says the inflation rate needs to be for price stability. Fed Funds futures at the Chicago Board of Trade (CBOT) now show that traders believe there is a 54% chance the Fed won't increase short-term rates until its November 2011 policymaking meeting.

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