Should You Fear Inflation in 2011?

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Marietta, Georgia, United States of America (Free-Press-Release.com) January 13, 2011 --

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Should You Fear Inflation in 2011?

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2010 was much like any other year when it come to happenings in the economy and financial world. There was a lot of uncertainty. As usual, there were many volatile moments this year where the majority, or the herd, got excited and jumped in and out out of asset classes. In May, we saw what is now being called the flash crash in stocks. Then to finish up 2010, we saw the herd all of a sudden move out of the long bond, and we saw a huge crash in the long term government and municipal bond at the end of 2010. There was some excitement in 2010 just like any other of the previous hundreds of years before us in the financial markets. Nothing new under the sun. As Ron Blue told his clients for decades, “Economic uncertainty is certain!”

As we look back and get into some of the asset classes and how they performed in 2010, we want to start by looking at the 30 year bond which is one of the most important asset classes to watch to gauge what economic cycle we’re in. During the week of December 26, 2008, the 30 year Treasury bond peaked out when interest rates and the yield on that particular bond hit 2.62 percent. That was the high in bonds going back for decades. Since then, of course, interest rates have been moving up, and now we’re around 4.4 percent on the 30 year bond. However, for 2010 the 30 year bond once again went up which means that interest rates went down. In 2010, the 30 year bond interest rate went from 4.6 percent down to 4.4 percent which is about a 4.19 percent decrease in the yield on the 30 year Treasury, while the bond price itself went up around 2.09%.

While we’re talking about bonds, one of the strategies that I have for my clients is a strategy that is designed to help clients make more interest than they could in a CD. Our goal, in this particular strategy, is earn 2 percent more, than the 12 month CD, a given calendar year. To start 2010, our goal was to earn 3.1 percent because the average 12 month CD rate was paying around 1.1 percent in January. We once again met our goal and exceeded our goal by clocking in a performance of being up 4.47%. Even during the great bond crash of the fall of 2010 - - the long term bond crash started on August 26 and ended on December 16, and it was down about 24%. However, during that bond crash, this safe and sound strategy only decreased by about 1%.

So for two years in a row, both 2009 and 2010, as we have, in general seen interest rates go up – this conservative strategy has fulfilled its goal of beating CD’s by at least 2% per year.

Then, as we talk about inflation and whether or not we had inflation, many of the pundits out there have been talking about inflation really since 2007, 2006. They’ve been predicting hyperinflation now for who knows how long, but obviously, since 2007 we’ve seen deflation because prices dropped so much in ’08. As for 2010, interest rates were down on the 30 year bond, which is not inflationary. In an inflationary environment, typically you will see interest rates go up.

However, in 2010 we did see commodity prices (Dow Jones-UBS Commodity Index) go up, on average, around 16%. And so that would be inflationary. Commodity price movement is the number one gauge that I look at when I’m trying to determine “what is the value of the currency that my family is spending?” I believe commodity prices are the best way to reveal the level of or lack of inflation. Why?

Because the way people are hurt by inflation, and the primary reason people fear inflation, is that it causes citizens to lose their purchasing power. They can’t buy as much with their currency as they could the year before…so they have to make more money to keep the same standard of living. Commodities are what my family is out there buying with our dollars. Commodities include: crude oil, natural gas, heating oil, unleaded gas, copper, aluminum, nickel, zinc, corn, soybean, wheat, soybean oil, cotton, coffee, sugar, live cattle, lean hogs, gold, and silver. [Gold to a lesser extent.] So basically, my family (and yours) lost 16% of its purchasing power in 2010, versus 2009.

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30 Year Government Bond     commodities     hyperinflation     inflation     interest rates     investing